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Zombie stocks (like AIG, WaMu, Lehman Bros.) just refuse to die
By Matt Krantz, USA TODAY

http://abcnews.go.com/Business/zombie-stocks-aig-wamu-lehman-bros-refuse-die/story?id=8805384

October 11, 2009

Halloween is weeks away, but on Wall Street, it's already like a night of the living dead.

A number of the stocks at the center of the financial crisis that had been practically left for dead, including Lehman Bros., Washington Mutual (WaMu), American International Group (AIG), Fannie Mae and Freddie Mac, have posted strong percentage gains amid the stock market's recovery.

Lehman and WaMu, for instance, were booted from stock exchanges and filed for bankruptcy protection. Yet on the lightly regulated Pink Sheets markets, this year their stocks are up 500% and 1,050%, respectively.

Meanwhile, AIG, aig Fannie fnm and Freddie fre are still listed on the New York Stock Exchange, but must repay massive debts to the government. Even so, the shares are up 41%, 88% and 134%, respectively.

While it's impossible to lump all the stocks together, market observers say the jumps are a sign of rampant speculation and false hopes creeping into corners of the market that investors are better off avoiding.

"These gains are like the white static noise in the background that I tend to let go," says Robert Maltbie of research firm Singular Research. "People are playing these as the next penny stocks."

Fans of these stocks point to many reasons why the rallies are justifiable. But experts who study financial stocks and severe economic distress call the moves questionable and a case of dead stocks walking because:

•Severely battered stock prices magnify gains.

It's easy to be dazzled by the percentage gains in these stocks, but they're exaggerated by their low levels.

For instance, WaMu's more than 1,000% gain this year is just a function of the stock trading on the Pink Sheets for 23 cents, says George Putnam, publisher of The Turnaround Letter, who tracks corporate bankruptcies.

Some less-informed investors figure large stock moves by beaten-down stocks such as AIG and Fannie Mae that still are listed on major exchanges, mean firms such as Washington Mutual and Lehman that have filed for bankruptcy protection must surge, too.