Speaking of those big, bad short-sellers, Lehman Brothers is running to the Securities and Exchange Commission with what it says is evidence that hedge funds have conspired to drive its share price down, the FT reports on its front page, expanding on something the WSJ briefly touched on yesterday.

This comes after Bear Stearns execs whined about similar dark acts:

Lehman’s submission to the SEC follows private complaints by Bear executives that hedge funds conspired to spread rumors about the bank.

These executives say the rumors drove down Bear’s shares and caused creditors and counterparties to abandon the bank, pushing it to the edge of bankruptcy and forcing its sale to JPMorgan Chase.

Companies under duress often blame short-selling hedge funds for their problems but collusion cases are notoriously difficult to make.

Let’s hope the madness induced by their net-worth deflation doesn’t lead to Overstock.com-style depths.

We’ll put this one in the we’ll-believe-it-when-we-see-it column. Hey guys, when nobody knows what’s mixed in with that murky stew known as your balance sheet, people talk, rumors fly—yes, even false ones.

Clean up your act and you won’t have these problems.

Triumph of hope over experience

The WSJ puts its Heard on the Street column on C2 with a bearish lead that says “Everything indicates that financial stocks have bottomed. Except bank balance sheets.”

The paper notes that there are several reasons to be positive about the banks, most notably the Fed cash dump mentioned above. Our Quote of the Day comes in the second paragraph:

But all of that glosses over the ugliness of balance sheets and the damage that could be done by mounting bad-loan costs and higher-than-expected write-downs from assets that might not have been marked down enough.

“You get these bear market rallies, and they can be pretty sharp,” said Sean Ryan, financial-companies analyst at brokerage Sterne Agee. “This triumph of hope over experience occurs every few weeks—and then there’s another leg down for financials.”

The next leg down could come when banks start reporting first-quarter results later this month.

The Journal says concern is focused on Citigroup and Merrill Lynch, which are both expected to take more multibillion dollar hits to their balance sheets and thus need to raise capital yet again. That means diluting the value of their existing investors’ shares because it’s virtually impossible to sell assets at a decent price, but investors are so concerned that these companies are drowning in debt that they boost their shares anyway.

Merrill Lynch’s debt is thirty times its assets. There’s not much margin for error there.

CDO? RIP

The FT reports that the collateralized-debt obligation, that arcane enabler of the current mess, is unlikely to ever revive.

The complex debt securities used to repackage the less attractive parts of asset-backed bonds are likely to disappear entirely as a result of the ongoing collapse of the credit market bubble, according to a report from the Bank for International Settlements…

These deals were especially important in helping to inflate the subprime US mortgage market because they provided a source of ready demand for slices of US subprime mortgage-backed bonds.

However, both investors and ratings agencies severely misjudged the safety of the most highly rated bits of ABS CDOs and how drastic their losses in a housing market downturn would be.

The BIS report says the way such deals are tranched, or chopped into different bonds with different risk profiles, ensures that ABS CDO investors are exposed to an “all-or-nothing” risk profile where investors lose everything when underlying assets start to turn bad.

Pardon us while we bust out the sackcloth and gnash our teeth.

Nat City on the block

The Journal has a scoop on C1 about the troubled Ohio lender National City Corp. discussing a sale to fellow Cleveland bank KeyCorp., and a resulting infusion of capital from private-equity firm KKR.

Regional financial institutions are under enormous pressure as a result of the credit crunch. Many of these banks averted the initial subprime-mortgage problems last year, but now face enormous exposure from softening residential real-estate markets. The prospect of a downturn in commercial real estate also bodes poorly for them in coming months.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.