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Lehman Brothers: All his own Fuld

Updated Wednesday 9th September 2009

How much responsibility should Richard Fuld take for the collapse of Lehmans' - and the knock-on effect on the global economy?

Tragic heroes always give film-makers and novelists a richer tapestry than the ultimately triumphant ones. There is a morbid fascination with weak-willed people in positions of power who, like King Lear, are slower than the audience to see the looming disaster their mistaken choices led to. But even more compelling are those of stronger will, buoyed and emboldened by past successes, who take on greater and greater challenges until the inevitable, fatal over-reach.

The Tommy Simpsons and Ayrton Sennas, pushing the limits until they overstep one too many, ultimately engage us far more than the Buster Mottrams or Luca Badoers who just couldn’t rise to the biggest occasion. Lehman Brothers UK HQ Creative commons image Icon Danny Robinson under CC-BY-SA licence under Creative-Commons license Lehman Brothers' UK Headquarters in Canary Wharf

Richard Fuld, the last chief executive of Lehman Brothers, clearly emerges from the first Love of Money (and the Last Days of Lehman drama) as a character of immensely strong will, with commensurate past successes. He cannot believe that his bank is heading for the rocks, because he is recognised – deservedly – as the man who turned it from a near-shipwreck into hammer-hulled icebreaker. He is equally stunned that none of his rival bank chiefs intends to come to his assistance.

It’s true he’s crossed swords in the past with these fellow masters of the universe, and spurned their takeover offers in better times. But in banking circles, that’s supposed to kindle respect for the warrior, not deny them the lift from the White Knight in their moment of need.

Some of the top bankers whose institutions collapsed into government-backed rescue in 2008 were victims of a new financial universe, in which they were genuinely out of their depth. They had channelled the assets to smart investment-banking teams whose exotic trades in complex products were beyond their understanding, but whose years of high profit told their own story. They could plead a genuine ignorance of the bank-breaking risks that went with those high returns, having been brought up in a world of simpler products and more restrained competition, where complicated bets and split-second trading weren’t essential for good quarterly results.

But Lehmans’ downfall was, as the Love of Money’s eye-witness accounts confirm, the result of much more ordinary mistakes with traditional, straightforward financial products. Under Fuld’s watch the bank ran up too much debt, and pushed too much of its assets into house construction and purchase in the United States. Compared with JP Morgan – a big winner in the acquisitions bloodbath of 2008 – its exposure to derivative contracts was tiny. But its leverage ratio – of loans to the realisable assets they were secured against – was over 40 to 1, far above its major competitors’. When banks started raising the cost of credit, even to other banks, Lehman quickly slid into the same situation as many of the homeowners it had dealt with: unable to pay the interest out of its much-diminished income, waiting helplessly for foreclosure.

Investment banks routinely use leverage to multiply the profit when an asset rises in value. It’s the same technique that households use when they buy a house with a mortgage. If you buy it for cash and the price rises 10%, your capital’s made a 10% return (plus a little bit extra if you count the rent you avoided paying). But if you pay for only 20% and borrow the rest, that 10% price rise gives you a 50% return.

The downside of leverage, which many have experienced in the past year, is that it also multiplies the loss when prices fall. That needn’t hurt, if you can afford to hold on to the house until its price recovers and the capital gain returns. But for banks, which must regularly mark their assets to market and face margin calls from their creditors, it isn’t always possible to wait for good times that may be round several awkward corners.

Fuld, determined that Lehman should eclipse Wall Street’s other investment banks, had additional reasons for high leverage. Although he’d overseen substantial growth, his bank was still substantially smaller and less well capitalised than the giants it was taking on. It’s also possible that, as a master of grand strategy, he hadn’t been watching the accounting details and wasn’t fully aware how overstretched the balance sheet was. Visionary bosses usually work best when they’ve got a trusted, methodical second-in-command who can fill in the details and administer the reality-check. In Fuld’s case, it isn’t clear that anyone was close enough to play Baldrick to the runaway Blackadder.

Tragic heroes are rarely felled by circumstances alone. There is usually an opposing player who, if not actually plunging the knife, at least arranges the sword so the protagonist can fall on it. In the case of Lehman, two vultures were circling: Bank of America, run by the affable Ken Lewis; and Barclays, led by the quiet-spoken Group boss John Varley and the hard-driving investment banker Bob Diamond.

Did their rescue plans, on which Fuld was counting, genuinely come to nought, after genuine struggle for an eleventh-hour solution? Or did they, as some Lehman insiders suspect, deliberately withhold assistance until the bankruptcy allowed them to cherry-pick the assets at a fraction of the cost? Could Treasury Secretary Henry Paulson genuinely see no way to stop Lehman sliding into bankruptcy? Or was he still smarting from an earlier rivalry, when he was running Goldman Sachs and Fuld’s resurgent bank was threatening to eclipse it?

Commercial confidentiality, and the survivors’ code of honour, mean it may be a long while before we know the answer. But a character who does so little to be liked, by his rivals or his regulators, is almost certainly hiding many more cherubic chief executives in his long shadow.

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