How Wall Street squandered its capital base

A fun fact from Fun Floyd Norris:

During 2006 and 2007, Lehman spent $5.3 billion — a lot more than it is now raising — repurchasing shares at an average price of almost $72 per share. The shareholders who sold out did well. Those who held on were the losers.

When Lehman repurchased shares that made the number of shares outstanding go down, which made earnings per share go up. It also reduced (or, really, slowed the increase in) stockholder's equity, thus increasing Lehman's return on equity--a much-watched measure of profitability on Wall Street. To quote from a Bloomberg report back in the long, long ago (Dec. 2006):

Bear Stearns reported a 19.1 percent return on equity for the year, up from 16.5 percent a year earlier. Lehman's return rose to 23.4 percent from 21.6 percent. Goldman, the most profitable firm in Wall Street history, had a 32.8 percent return on equity in fiscal 2006.

"Both of these companies are in a cyclical and secular sweet spot," said Tom Jalics, an analyst in Cleveland who follows securities firms at National City Bank, which holds shares of Lehman and Bear Stearns on behalf of clients. "Bear did deliver the blowout quarter."

Ah, Bear. Blowout, wipeout--what's the difference, anyway?