The fall of Lehman Bros - Part 1

By Yalman Onaran, John Helyar

In the first of a five-part series, Yalman Onaran and John Helyar of Bloomberg chronicle the demise of investment bank Lehman Brothers and the fall from grace of its leader, Richard Fuld.

It was the afternoon of September 9, and tensions were rising in the 31st floor office of Lehman Brothers Holdings' chief executive officer Richard Fuld.

That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 pm, Lehman's already battered stock had plunged another 43 per cent.

Fuld was rat-a-tatting orders to associates seated at a table in his corner office.

Herbert "Bart" McDade, installed as president in June, vice-chairman Thomas Russo and chief financial officer Ian Lowitt had been in and out of Fuld's lair all morning.

Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.

"Here we go again," Fuld erupted at one point, the person recalled. "Perception trumping reality once more."

It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike.

He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest.

Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?

Fuld was grounded enough in reality to know one thing: "We've got to act fast," he said, "so this financial tsunami doesn't wash us away."

Six days later - 158 years after its founding as a cotton brokerage in Alabama - Lehman Brothers was gone. Treasury Secretary Henry Paulson said he didn't want to use taxpayer money to save Lehman, as the Government had done in March when it pledged US$29 billion ($50.5 billion) to facilitate the sale of failing Bear Stearns to JPMorgan Chase.

Federal Reserve Chairman Ben Bernanke insisted there was nothing the Government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.

Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought.

It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm.

Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.

The end came after months of frantic activity to find a solution - reaching out to, then spurning an offer from Berkshire Hathaway chairman Warren Buffett; meeting executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.

Then, on the morning of September 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched.

The Government persuaded a syndicate of banks to backstop a new entity that would take over US$55 billion to US$60 billion of Lehman's troubled assets, and London-based Barclays agreed to acquire the rest of the firm, according to people familiar with the negotiations.

When the US's Financial Services Authority refused to sign off on the Barclays purchase late that morning, US officials refused to take any steps to save the deal. At about 2 am on Monday, September 15, Lehman filed the biggest bankruptcy in US history.

"Wall Street was giving the impression that after some bloodletting the crisis would be over, and the Government bought that line," said Charles Geisst, author of 100 Years on Wall Street and a finance professor at Manhattan College in New York.

"The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line." The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world.

By Tuesday, Paulson and Bernanke had reversed course, agreeing to an US$85 billion bailout of foundering American International Group, at the time the world's largest insurer. The Government has since decided to make US$250 billion of capital infusions to bolster banks.

Only Lehman has paid the ultimate price of the financial meltdown to date - obliteration by bankruptcy.

It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three US attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.

Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy. In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.

When asked why AIG was saved and Lehman wasn't, he said: "Until the day they put me in the ground, I will wonder."

Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after giving evidence at a congressional hearing.

- BLOOMBERG

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