KEY POINTS:
Richard Fuld, a one-time international squash player accustomed to playing the angles, finally found one he could not master.
The longest-serving chief executive officer on Wall St battled for more than a year to contain the fallout from Lehman Brothers Holdings' bad bets on real estate.
Fuld's defence
of the 158-year-old firm ended yesterday when Barclays and Bank of America walked away from buyout talks, forcing the company to file for bankruptcy.
Over 14 years, Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. He won acclaim from Wall St leaders such as Lazard chief Bruce Wasserstein, who on June 4 called him "very able".
Fuld joined the circle of CEOs sought after by boards. He ultimately gambled almost four times the firm's shareholder equity last year on mortgage securities that he insisted were hedged by other bets.
"It makes me rather sad to see this organisation brought to its knees as the result of what I'll call a lack of control, poor management of internal risk and ultimate self-interest," said Walter Gerasimowicz, who worked at Lehman as an investment strategist and now heads Meditron Asset Management in New York.
Fuld's bets rewarded Lehman for a time, sending profit to a record US$4.2 billion ($6.4 billion) on revenue of US$19.3 billion in fiscal 2007, compared with a loss of US$102 million on sales of US$5.3 billion in 1993.
His own pay surged to US$40 million last year from US$12.5 million in 2002.
Events began to spin out of Fuld's control in June as Lehman reported US$6.7 billion in losses, mainly from its devalued real estate portfolio. He waited too long to write off bad debt, then failed to act quickly enough to sell a stake to raise capital, said Richard Bove, an analyst with Ladenburg Thalmann & Co.
In the third quarter, Lehman said it reduced its exposure to residential mortgages 31 per cent to US$17.2 billion and commercial real estate 18 per cent to US$32.6 billion.
Lehman's shares fell 77 per cent last week, as investors baulked at Fuld's plan to keep the firm independent by selling part of its asset management unit and spinning off commercial real estate assets.
"It's enormously painful for Dick," said George Ball, chairman of Houston investment firm Sanders Morris Harris Group and a friend. "He loves the people who work with him. And yet the marketplace is creating a very difficult outcome."
Fuld played squash for US international teams and has a court in his Connecticut home. He hated to lose, Ball said.
Lehman survived other financial crises and ownership changes. These included a loss in 1973 on wrong-way interest rate bets, the 1984 takeover by American Express, a capital shortage when the company was spun off in 1994 and the 1998 Russian debt default.
Fuld was named Lehman's first CEO after the firm became independent again. Following the cash crunch, Fuld had to pacify investors during the Russian debt crisis. He vowed to diversify Lehman to weather financial storms.
In 2004 he decided to join the rush into the mortgage market. Lehman bought BNC Mortgage at the epicentre of the boom in sub-prime loans made to the least creditworthy borrowers.
Lehman needed a steady flow of debt to fuel what was becoming a profit engine for many Wall St firms: packaging mortgage loans into bonds.
In April 2005, at the Lehman annual meeting in New York, Fuld began to voice doubts.
"There's a huge amount of liquidity, which I think has been covering up a number of ills in the market," he said. "Higher interest rates will cause more turmoil than I think we've seen."
By 2006, Lehman's own traders spotted signs of trouble in the housing market. After five straight years of gains, average US home prices had begun slipping.
Like others who bought real estate during the boom, Fuld is feeling the slump. In 2004, he and his wife bought a 1.3ha estate on Jupiter Island, Florida, for US$13.75 million. They also acquired a US$21 million, four-bedroom, four-bathroom Park Ave apartment last year.
Zillow, an online home appraiser, yesterday put the value of the Florida estate at US$9.1 million.
- BLOOMBERG
