“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days.”

-Richard S. Fuld Jr., Lehman Brothers former chief executive (NYT)

>

The fantasy world inhabited by Lehman Brothers CEO Richard Fuld was given a surprisingly sympathetic ear from an unexpected forum yesterday: The Financial Crisis Inquiry Commission.

This is a deeply disturbing development, as it leads to the unfortunate suspicion that the FCIC does not have the slightest clue as to the causes of the housing collapse, recession and and market crash.

There are two issues here: The first is “why did Lehman collapse?” The second is “Why didn’t the Fed rescue them?” Let’s look at both.

I’ve spilled far too many pixels explaining why Lehman crashed and burned, but for those of you who may have forgotten:

1. Under-capitalized, over-leveraged: Lehman Brothers was the biggest bankruptcy in US history. To avoid that fate, LEH mneeded to be sufficiently capitalized, and use only moderate leverage (LEH embraced 40 to 1 leverage). Rather than have a sufficient capital base, the bank chose instead to chase profits: A greater capital cushion meant less underwriting activity, smaller gains, greater risk. The downside of having a de minimus capital structure is when bad investments are made, there is no room for error.

2. Bad Modeling Assumptions: LEH made numerous false assumptions in their econometric models: a) Residential RE never goes down; b) The derivatives market is always liquid, with ready buyers available; c). We can always borrow short and lend long with no liquidity concerns;  There was substantial evidence and warnings that ALL of these assumptions were false, but they were ignored by management as a risk to profits.

3. Excess RE Exposure: Lehman was the biggest securitizer of mortgages on Wall Street. They underwrote more mortgages than any other bank on Wall Street. By 2004, LEH was originating $40B per year in mortgages to feed their own CDO machine (which as Roger Lowenstein has pointed out, was more lucrative than the stock and bond business).

4. Reliance on Ratings: Lehman’s entire business model was predicated on the ratings of Moody’s and S&P being reliable. However, LEHMAN was one of the prime purveyors of credit rating payola — they were paying the NRSROs a fee to slap a Triple AAA rating on junk paper. If they did not know the credit ratings were utterly worthless, they sure should have.

5. CDO Ownership: Lehman kept the senior-most layers of CDOs they created for themselves, but bought credit default swaps on them “for safety.” Consider that they were not confident enough of the models which forecast the solvency of those tranches, yet they used the same models to determine AIG was a credit worthy counter party to insure them.

That’s why LEH collapsed, and it was apparent (at least to us) back in June 2008 they were in trouble.

Why did the Fed not save them? There were several reasons:

1. One off: The Bear Stearns bailout was supposed to be a “one of a kind,” not the start of a series of rescues. The Fed hoped to hold the line at only one such taxpayer backed rescue. The fear was if they did a 2nd, they could not say no to the rest of the Street. Lehman was in effect the Fed’s Maginot Line (it also was out flanked and rendered strategically useless).

2. Fed Overreach:  Bernanke was widely criticized for the Bear rescue as a huge overstep of authority. Even former Fed Chair Paul Volcker overcame the inherent reluctance of formerFOMC chairs to to criticize sitting Fed heads to express his concern about the over reach and power grab.

3. No to Private Rescue: Dick Fuld turned down a private rescue just months earlier. Warren Buffett offered Fuld billions, plus the equivalent of the Berkshire Hathaway Good corporate Housekeeping seal of approval. FULD TURNED BUFFET DOWN. How could the Fed, in good conscience, bail out a firm that refused to accept a Buffett rescue? Indeed, his terms for LEH were far more generous than what BRK ultimately offered Goldman Sachs and GE.

4. Insolvent: Lehman books are why a loan never happened. LEH was essentially insolvent, with liabilities that vastly outweighed what few assets there were. This insufficiency is why a loan was simply not possible — it was  considered a guaranteed loss.

5. Moral Hazard: How much of a clusterfuck must any financial firm be before a rescue is deemed an outrageous moral hazard? For the 3rd and 4th reasons above, Lehman was believed to be “Beyond rescuing.” And it was due to the specific choices Lehman’s management made.

To think that Fuld’s brand of psychopathic revisionism was given a sympathetic hearing is deeply disturbing.

I haven’t written this before, but now I am compelled to: I now fear the FCIC report is going to be an ideological farce. The nightmare report scenario is a collection of false statements, half truths, misunderstandings, confirmation biases, and rhetorical nonsense.

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Previously:
Financial Sector: Beware LEH, CIT (June 3rd, 2008)

Understanding Lehman & AIG (March 22nd, 2009)

Bear Stearns, Lehman Execs Kept Billions . . . (November 23rd, 2009)

Grading Financial Regulatory Reform (June 25th, 2010)

>

Update: September 4, 2010, 9:18am

Barron’s has the caricature of the imperial, sneering Lehman CEO that is picture perfect to my post:

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Category: Bailout Nation, Bailouts, Credit, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Dick Fuld’s Fantastic Revisionism !”

  1. ACS says:

    Lehman made Fuld RICH. Fuld is STILL rich, and free. Any chance that will change? How many commissions over the past few decades have actually solved the problems they were created to fix? Did you expect anything else from a corrupt system? F. Scott Fitzgerald said “The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” Keep that in mind Barry as you try to change the unchangeable.

  2. super_trooper says:

    This is how children argue. It’s Henry’s fault.

  3. Maybe I’m being naive, but why allow this to go unchallenged? Get in touch with the commission and demand/request the right to testify. It’s not to late to see some justice done.

    Please

    Best regards
    Mark
    http://blog.mdwoptions.com/options_for_rookies_home/2010/08/options-education-for-individual-investors.html

  4. jjay says:

    Whatever the reason they were not bailed out, I am glad Lehman is gone.
    It is a step in the right direction for sure.

  5. constantnormal says:

    If the FCIC were to embrace these views, it would cast aspersions on a lot of other administration behavior … in particular, the lack of any attempts at effective financial reforms.

    The likely FCIC report will be in line with the party line that the passed financial reforms have “fixed the problem”.

    Keeping the charade going is all that the goobermint cares about.

  6. ACS says:

    The old saying about prison,
    For selling what ain’t his’n,
    Is only believed by the naïf.
    When you work at a bank,
    The fraud you can crank,
    And your bonus is perfectly safe.

  7. drewburn says:

    You can comment on this and your comments will become part of the public record.

    The roundtables are part of the FDIC’s overall effort to bring transparency into the process. Earlier in the month, the FDIC announced that it was seeking input from the widest audience possible by encouraging the public to submit views via email on how the FDIC should implement the new law. These comments will become part of the record and will be posted on the FDIC website. Interested parties can send comments to FinReformComments@fdic.gov.

    I commented some time ago on the debate about elliminating 12b-1 charges on mutual funds. Sure enough, a law firm in NYC picked it up and publicized it to their clients. I will be commenting on Fuld.

  8. drewburn says:

    There, I just made this page part of the public record!

    I recommend anyone and everyone comment. It’s an easy email.

  9. destor23 says:

    Barry do you (or anyone else here) think that Buffett made a mistake by making that offer to Fuld and that Berkshire really dodged a bullet when Fuld refused?

  10. ashpelham2 says:

    Hearing Fuld’s opinion on why Lehman failed just turns my f-ing stomach. This is still the attitude of a person who feels entitled, like he and his manangement were not possibly capable of making mistakes, and that the government singled them out to fail while saving all the others. It’s the attitude that permeates through the land of the corporate wealth class. I bet Rockefeller would take him over his knee and spank his ass for even letting his opinion roll off of his tongue. Whatever Dick Fuld believes, at this point, most of America doesn’t care. He’s gonna walk with more money than the Almighty God Himself, while me and my family keep working like we always have, and consider ourselves fortunate to be able to even do so.

  11. Expat says:

    I understand Fuld perfectly well, though I don’t sympathize. Most of his competitors were handed hundreds of billions directly and trillions indirectly to save them from collapse. So in a sense Fuld is correct: Lehman failed because the government did not bail them out. That’s Wall Street for you, which is why we need to knock it all down and start all over.

  12. tt says:

    barry,

    a fantastic synopsis. unfortunately, you have some integrity it is apparent. but you are living in a country that lies to the public about wars, has offshore illegal penal colonies, tortures prisoners to death, bombs civilians for oil conquests, and believes itself to be the greatest democracy to ever exist in the history of the known universe.

    the country of the usa is now a corporatist military land. to think that the most powerful corporations on wall street will ever police themselves is unfortunately a bygone era.

    it’s over barry. there is no accountability. we have outright corporatism. aka fascism. fuld is just a cog in the wheel.

  13. tt says:

    didn’t lehman also have the idea to become a bank. they were rejected and than the fed gave goldman and morgan banking charters. or do i have this wrong.

  14. solanic says:

    @Mark and @BARRY:

    I haven’t written this before, but now I am compelled to: I now fear the FCIC report is going to be an ideological farce. The nightmare report scenario is a collection of false statements, half truths, misunderstandings, confirmation biases, and rhetorical nonsense.

    This is EXACTLY why I started screaming back in January for people like you to keep the pressure on so at the bare minimum, they release all the docs/testimony they’ve collected.

    Transparency is the only way.

    You should set up a dedicated page to push the FCIC – and – get inspire other respected fin/econ bloggers to do so too. Lord knows this had -0- affect.

    And like Mark sez – you should testify too to get your ideas on the official record.

  15. Raleighwood says:

    If Moody’s can get off scot free why wouldn’t Fuld attempt a delusional narrative? The fix is in.

  16. Mark Down says:

    Can’t believe they couldn’t wait till mid Sept. till Mr Fuld finished his Mediterranean vacation.

  17. Mannwich says:

    Great point, Raleigh. I saw that one yesterday and couldn’t help but summon my best conspiracy theories (Warren….cough, cough, Buffet, cough, cought), despite trying my best not to…….

  18. ACS says:

    Delusional? Fuld has a perfect script to follow: Greenspan.

  19. tt says:

    lehman was also goldman’s fiercest rival. it was tossed under the bus, and teeth kicked in also.

    lehman was no dumber than most of the majors. they were all bankrupt. they got whacked by the wall st mafia.

    great theatre anyway.

    welcome to fascism amerika

  20. Greg0658 says:

    above “we need to knock it all down and start all over” .. wow .. happen’g little pieces at a time now .. I would prefer a non-neutron bomb approach tho

    tt beat me to my scream at the tv sometime over the last 24 .. Fuld was just broker’g the war for us via MEW .. cut him some slack ..

    cash is just green scratchy TP .. better to turn it into something real – the pretty’ier the better .. I know thats “if its & buts were candy & nuts we all have a merry xmas” … but but but

  21. Andrew Krone says:

    I can’t believe I’m saying this, but did Fuld have any other choice? Admit failure and incompetence? He’s just covering his ass, the real tragedy (as pointed out by BR) is FCIC complacency.

  22. Rescission says:

    Neo-corporatism
    In the post-World War II reconstruction period in Europe, corporatism was favored by Christian democrats, national conservatives, and social democrats in opposition to liberal capitalism. This type of corporatism faded but revived again in the 1960s and 1970s as “neo-corporatism” in response to the new economic threat of stagflation. Neo-corporatism favored economic tripartism which involved strong and centralized labor unions, employers’ unions, and governments that cooperated as “social partners” to negotiate and manage a national economy.
    Attempts in the United States to create neo-corporatist capital-labor arrangements were unsuccessfully pushed for by Gary Hart and Michael Dukakis in the 1980s. Robert Reich as U.S. Secretary of Labor during the Clinton administration promoted neo-corporatist reforms.

  23. DL says:

    By far the best decision that Hank Paulson made as Treasury Secretary was letting Lehman fail.

  24. obsvr-1 says:

    The Lehman bankruptcy examiners (Valukas) report indicated that Buffet turned down Fuld (Lehman) on what appears to be two occasions, 1) investment into LEH 2) invest into SPINCO a brainchild of Fuld in the last month of dying.

    BRs account of why LEH failed is a good representation of fact (truth) and as everyone knows LEH wasn’t the only bank in the situation of over leverage and dependency on short term financing through interbank repo facility that put them into a liquidity crisis when the multi-trillion house of cards collapsed.

    I didn’t hear anything in yesterdays FCIC hearing regarding Repo 105 , this was a critical factor in measuring Fulds integrity and how LEH hid their real problems from the investors, rating agencies and regulators. Nor did the FCIC press Fuld on the penetration of corporate risk thresholds and subsequent raising of those thresholds to take on more and more risk with illiquid res/com RE assets. Fuld took on the risk attempting to beat the market by what he thought was going to be a turn around in the housing market. Fuld bet wrong and he bet the company and he lost the company — the fact that he was the CEO and COB and chose not to inform the board of these actions were his decision and he should be held accountable for those decisions. His self serving revisionist testimony is just a ‘saving face’ attempt — much like H. Paulson’s book.

    Fuld had many oppty’s during the period of March (BS failure) through Sept to orchestrate equity investments or merger deals to save the company, instead he held out for better valuation and delayed corrective action likely with the h0pe that the market would stabilize so he would be able to live through the situation. All of the actions or inaction were all a direct result of Fuld’s decisions.

    Also, Fuld testified during the moral hazard discussion that he never believed the government would step in to assist LEH which would enable LEH to make risky business decisions knowing the gov’t would bail him out. Then he complains that the gov’t did not bail him out — a bit of hypocrisy at work there.

    At the end of the session Vice Chair Thomas laid into Fuld and the FED, FDIC folks with a venomous oratory — he has done this on numerous hearings when the exec’s come in with their line of BS and w/o accepting responsibility for business decisions that led to the need of gov’t bailout.

    Fuld is in the same camp with the other TBTF bank executives — remember they all failed, they all needed gov’t assistance and bailout. The fact that these banksters are still on the street and have not lost their jobs is a crime left unpunished.

    I have more faith that FCIC will come out with a comprehensive report, there are enough folks on the commission that have taken a hard line throughout the hearings to keep the moments of sympathetic posturing in check.

  25. mcnet says:

    In Sorkins book, he noted more than once that Fuld was waiting for his ‘Jamie Deal”. I think the quote was “Where’s my Jamie deal?”

    My take is Fuld isn’t the delusion fool he’s playing at, rather he knew full well how bad things were and was staking everything on the blackmail the gov’t card. He knew he had no other cards to play, Lehman was toast, either through a sale or failure, so he went through the ludicrous pretenses of finding buyers, turning them down, and driving everyone to distraction to run out the clock. He played a game of chicken, and lost.

    He had nothing more to lose. It’s rich that he is blaming the govt for not protecting the financial system from him. Its chutzpa, not madness.

  26. rallip3 says:

    The issue is not ‘was Lehman bust?’, nor ‘why did they get a worse deal than some other institutions’ (lack of political pull). The issue is whether the less generous treatment of Lehman (and some WaMu) creditors worsened the crisis. Basically given all the other problems, plus the low happening six months later in March 2009, the suspicion is that the tougher treatment did not make a big difference.

    I would be asking Dick Fuld to explain how come CDS on Lehman debt settled at just 10 cents on the dollar. When a bank is levereaged 30 or 40:1, it is clear that insolvency is only one misstep away. But it is harder to understand how that portfolio of bank assets is not worth 40-60 cents on the dollar.

  27. [...] at yesterday’s hearing. “This is a deeply disturbing development,” Barry Ritholtz says at The Big Picture. “It leads to the unfortunate suspicion that the FCIC does not have the [...]

  28. Marc P says:

    BR’s post is short on facts. ALL the so-called “banks” (better said: speculators) were insolvent. Was Lehman more insolvent than the rest? Did the government draw a line and say “these companies are less insolvent and will be saved, and these others won’t”?

    Or did Paulson make himself a mortal god in Goldman history by capriciously axing Goldman’s rival?

    ~~~

    BR: No, not all. And YOU have the facts wrong:

    -JP Morgan had the strongest balance sheet — they had their subprime problem early (’03?) when it was manageable. People lionize Jamie DImon, but I think he just got lucky to get hit first.

    -Wells Fargo was fine,

    -Barclays was good

    -TD and all the Canadian banks actually came thru this great.

    -Morgan Stanley and Goldman Sachs were okay until very late in the collapse, when they were pushed to the edge. They too were overleveraged, but not nearky to the degree of BSC/LEH

    .

    Nearly all of the small and mid-sized banks were fine — they were adequately capitalized, and eschewed leverage.

  29. hammerandtong2001 says:

    Fuld has it precisely backwards.

    LEH lived by the law of the jungle. They did well for many years. Many of their leading employees were multi-millionaires many times over. LEH made horrific mistakes and also lied to the investing public about the nature of the assets they booked on their balance sheet. They were deemed insolvent. They died by jungle law: the same law that enriched them.

    Period.

    There is no further need or vaild reason to compare outcomes at AIG or Bear or GE or anywhere. None of them deserved taxpayer rescue either. They got it via a one-time jungle law exemption. But exemptions are just that and they’re not for all.

    Be a man. Take your medicine. The jungle has spoken.

    If you were a stud, you’d have restarted Lehman under a new name and recaptured the glory sullied by poor decisions. It was there for the taking. Fuld could have done it. But like a turtle, he cowered and hid.

    Winners get up after they get knocked down. Losers stay down.

    Dick Fuld is a loser.

    .

  30. steveds says:

    Lehman was a mess. However, it was not saved because it assured that AIG would be saved. Saving AIG saved Goldman. This was all about Goldman.

  31. Gaucho says:

    Barry,
    I am a big fan of your blog and I usually agree with your view of the world, but i have to disagree on this post.

    I’m a former financial institutions banker and I spent many years working with both regulated (banks) and unregulated entities (specialty finance) (I am now CFO of a tech startup, I believe I add more value to the world).

    Your assessment of why Lehman failed (and Bear) is absolutely correct. Their business model was deeply flawed and relied on the assumption of no liquidity risk but so was GS, MS, MER, GMAC, GE and AIG, the capital position of all and each of these entities was insufficient to some extent, but in any case, their liquidity positions were as weak as Lehman’s and Bear’s because of an over-reliance on overnight funding.

    Many can argue that BAC or C balance sheets were weaker than LEH or BSC, however their FDIC-guaranteed core deposit funding came handy in times of hardship. Warren Buffet’s $5 billion capital injection in GS has nothing to do with the survival of GS. What difference can $5 billion make in a $1 trillion balance sheet largely funded with overnight repos in the middle of a bank run?

    What saved GS and MS was the Fed’s quick decision to convert them into bank holding companies and give them direct access to the Fed, short-term FDIC-guaranteed funding and the suspension of mark to market accounting. and all for free. Fuld should probably be jailed for his reckless behavior but he’s no different than Blankfein or Prince or Mack or other Wall Street CEOs. Blankfein could have converted GS in a bank holding company many years ago and protect GS from a liquidity crisis. However the ROE of a broker dealer was 30%+ while the ROE of a regulated entity was 15%-20%. safety costs money. Blankfein made a conscious decision to run a riskier model to obtain bigger returns and when the market turned against him, the govt came to the rescue.

    There was a political decision of who should die and who should be saved, and nobody what the rationale was in each case. My sense is that the decision process was based on influence. Again, Fuld should go to jail, but singling out Fuld is totally unfair and won’t help heal our still ailing and corrupt financial system.

  32. Gaucho

    I appreciate your position — we don’t disagree on much.

    Lehman had two major hurdles to overcome in terms of solvency and rescue:

    1. They were bigger thna everyone else for most of the decade — in Residential RE, mortgage origination, securitization, retention of structured finance paper. From a management perspective, they were run more autocratically, with less concern for risk management when it put quarterly profits at risk,

    2. Bad timing: After Bear, the Fed and Treasury were still operating on the “one off” assumption. Had they collapsed after MER or C they might very well have been rescued, to the greater detriment of the taxpayer

  33. Richard Fuld’s Disinformation Campaign

    The former Lehman Bros. CEO wants us to believe that the largest bankruptcy in Wall Street history was caused by short sellers triggering a run on the bank in the summer of 2008. Two years after global financial markets were swept by panic, Fuld has not displayed an iota of self-reflection about the responsibility he and other senior Lehman senior executives incurred for their own self-directed disaster.

    As Forbes pointed out in August, 2008 Lehman was dangerously undercapitalized and holding assets greater than their equity capital that were highly radioactive and deteriorating in value every day. These suicide bombs included almost $30 billion of commercial mortgage backed securities– more than any of its better capitalized competitors like Goldman Sachs and Credit Suisse. Lehman also owned another $25 billion of residential mortgage backed securities and $12 billion in LBO loans. Alltold, $76 billion of garbage that might have been worth at best $50 billion. We’ll never know. All we know that when Treasury Secretary Hank Paulson called Fuld in March to hurry home from India because Bear Stearns was melting away fast, all Fuld could ask for was Paulson’s intervention with Russian authorities to allow his private jet to fly over Russia on the trip home. Paulson correctly demurred at this ego-driven nonsense.

    Unlike Goldman and Credit Suisse Lehman had not raced to liquidate this rotten paper but arrogantly thought it could finesse the crisis. And finesse the crisis it did by hiding $50 billion in debt at the close of each quarter so that Fuld’s dreaded enemies– the hedge fund community– would not see Lehman’s dire state. At the time Fuld fudged the firm’s precarious situation by telling the investment world “I’m comfortable with our valuations at the end of the second quarter. We have always had a rigorous internal process.”

  34. Danny Black says:

    What utter bullshit. LEH not only was long CDOs it was net short prior to the crash. It wasn’t a big player in the market in the dross years- in 2007 it had less than 3% market share – I can only assume the fact you are quoting irrelevent figures from 2004 is because you deliberately wish to mislead your readers. I would also note that 3% is less than half what your hero’s team at DB issued at the same time and virtually all of their issuance was Mezz.

    Where Fuld and LEH did screw up was managing their liquidity and by all accounts were particularly “aggressive” in their definition of liquid assets. They also made alot of bad commercial real estate bets. I know a bank failing due to bad loans collateralised by real estate is alot less sexy than blaming “financial innovation” and derivatives – and incidently less useful to the dimwits in Washington – but it does have the virtue of being the truth.

    By the way the recent figures for LEH CDO exposure is a matter of public record, so you and your fellow churnalists have no excuse:
    http://www.scribd.com/doc/34151646/Lehman-ABS-CDO-Exposure-Nov-1-2007

  35. Danny Black:

    2007? They were deep into the shitter by then, backpedaling furiously after a decade of RE exposure, pyramiding, and related CDO problems.

    Perhaps you would prefer if I issued this correction?

    “Lehman Brothers was a well managed company run by men of leadershio and vision. They had little or no residential real estate exposure, was not one of the leading securitizers of mortgage debt, hardly used and leverage, and had excessive capital reserves. They did not crank CDOs for a decade, nor did they retain many of them. Its a mystery as to why they went belly up, other than short sellers and the Fed”

  36. Danny Black says:

    Well here is the breakdown of CDO underwriting for that decade:

    Underwriter 2002 2003 2004 2005 2006 2007 TOTAL
    Merrill Lynch 0 3 20 22 33 18 107
    Citigroup 3 7 13 14 27 14 80
    Credit Suisse 10 7 8 9 14 6 64
    Goldman Sachs 3 2 6 17 24 7 62
    Bear Stearns 5 2 5 13 11 15 60
    Wachovia 5 6 9 16 11 5 52
    Deutsche Bank 6 3 7 10 16 5 50
    UBS 5 2 5 10 16 6 46
    Lehman 3 4 3 6 5 6 35
    BofA 2 2 4 9 10 2 32
    TOTAL DEALS 47 44 101 153 217 135 697

    Assuming you are not innumerate it is easy to see that your claim they were in any shape or form leaders in CDO is clearly false. Maybe you’ll do better with the claims about mortgage backed bonds…

    3Q2008 total “problematic assets” are 61,500USD. CMBS and RMBS are a grand total of 22,400USD, direct exposure to bog standard bad loans – ie money that Lehmans lent directly – is over 30,000USD. This is of course the MBS exposure is **notional** exposure not taking into account hedged – as the report on LEH showed they were actually well hedged on the securitised exposure. But hey I guess facts don’t get the hits these days….

    PS this is publically available information. The fact that most churnalists are too lazy to bother checking presumably is not an excuse a premier expert on the market is going to use right?

    http://www.scribd.com/doc/28250623/Lehman-Brothers-Examiners-Report-11032010

  37. I appreciate that you are a former LEH employee and you feel upset or betrayed or what have you. But your selective usage of a small run of data makes you an obscurer of Truth — and that is not appreciated around these parts.

    Consider this more accurate discussion of LEH a year BEFORE they collapsed:

    Lehman Brothers Shuts Down Subprime Unit, Fires 1,200 (August 22, 2007 17:59 EDT)

    “Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs.

    Shuttering BNC Mortgage LLC will cut third-quarter earnings by $52 million, Lehman said in a statement today. Lehman, led by Chief Executive Officer Richard Fuld, bought Irvine, California- based BNC in 2004 and used it to expand in lending to homeowners with poor credit or heavy debt loads. The job cuts are equivalent to about 4.2 percent of Lehman’s workforce of more than 28,000 . . .

    Subprime mortgages, shunned for years because of the default risk, helped fuel the U.S. housing boom this decade as securities firms led by Lehman and Bear Stearns Cos. profited by packaging them into AAA-rated bonds. A surge in late payments on the loans has since eroded confidence in credit products and roiled global debt and stock markets as investors fled to safer assets.

    Fissures appeared in the subprime market during the fourth quarter of 2006, when delinquent payments from borrowers rose the most in four years. Prices of securities backed by their mortgages sank, ultimately forcing Bear Stearns last month to tell investors in two of its hedge funds, which bet heavily on home loans, that their investments had been wiped out.” (emphasis added).

    A full 13 months before LEH collapsed into America’s biggest bankruptcy, they were backpedaling from their over-emphasis of RE and structured mortgage products. They made an number of awful mortgage related acquisitions, which alone would have required restructuring. But their use of leverage, exposure to the RE sector, poor risk management, insufficient capital and reckless profit grab is what doomed them.

    Since you know all about me, and everything I’ve written — hence, you know my biases, and predilections — who are you? What is your background? Where did you work?

  38. Dewey says:

    and why are you so intent on kissing Dick Fuld’s ass ?

  39. You don’t trust Bloomberg? Here is the staff report from Investopedia:

    The Prime Culprit
    In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation). Lehman’s acquisitions at first seemed prescient; record revenues from Lehman’s real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion”

    Lehman’s Colossal Miscalculation
    In February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that rising defaults would affect Lehman’s profitability, the firm reported record revenues and profit for its fiscal first quarter. In the post-earnings conference call, Lehman’s chief financial officer (CFO) said that the risks posed by rising home delinquencies were well contained and would have little impact on the firm’s earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S. economy.

    The Beginning of the End
    As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman’s stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders’ equity. In the fourth quarter of 2007, Lehman’s stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.

    Hurtling Toward Failure
    Lehman’s high degree of leverage – the ratio of total assets to shareholders equity – was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to deteriorating market conditions. On March 17, 2008, following the near-collapse of Bear Stearns – the second-largest underwriter of mortgage-backed securities – Lehman shares fell as much as 48% on concern it would be the next Wall Street firm to fail. Confidence in the company returned to some extent in April, after it raised $4 billion through an issue of preferred stock that was convertible into Lehman shares at a 32% premium to its price at the time. However, the stock resumed its decline as hedge fund managers began questioning the valuation of Lehman’s mortgage portfolio.

    On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss since being spun off by American Express, and reported that it had raised another $6 billion from investors. The firm also said that it had boosted its liquidity pool to an estimated $45 billion, decreased gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about 25.

  40. Here’s another, via Devin Leonard of the NYT:

    How Lehman Brothers Got Its Real Estate Fix (May 2009)

    Until Lehman Brothers collapsed last September, Mark A. Walsh was considered the most brilliant real estate financier on Wall Street. In the ’90s, he pioneered the art of lending to office building developers and then slicing up and repackaging the debt for investors. Less risky pieces went to institutional investors; the lower-rated chunks to hedge funds and others hungry for juicier returns. Lehman pocketed a fee every step of the way, and it often retained a risky piece or two to give its own earnings a kick.

    “That was one of Lehman’s strengths,” says Brad Hintz, a former chief financial officer at Lehman who is now an analyst at Sanford C. Bernstein. “In fact, a lot of Wall Street firms tried to duplicate Lehman’s commercial real estate strategy.”

    Mr. Walsh, who wore rumpled Brooks Brothers suits and could be painfully awkward in front of crowds, was one of Lehman’s biggest profit producers. Former Lehman executives say Richard S. Fuld Jr., the bank’s chief, relied on Mr. Walsh to bankroll the firm’s swanlike transformation from a second-tier bond trading shop into a full-service investment bank. Former members of his unit, who requested anonymity because they were concerned about being swept up in lawsuits and investigations surrounding Lehman’s collapse, say it generated more than 20 percent of Lehman’s $4 billion in profits at the peak of the real estate boom in 2006.

    Many factors, of course, contributed to Lehman’s demise last fall. Near the end, it carried $25 billion in toxic residential mortgages. It was wildly overleveraged. And the federal government made the fateful decision not to rescue Lehman from its mistakes. But when real estate overheated in the years before Lehman’s implosion, Mr. Walsh made billions of dollars in loans and equity investments that also ultimately helped bring down the bank.

    Gee, what RE exposure ?

  41. Let us not forget the ruinous Archstone deal:

    Tishman, Lehman agree to buy Archstone

    Tishman Speyer Properties LP and Lehman Brothers Holdings Inc. agreed to buy US apartment developer Archstone-Smith Trust for $13.5 billion, expanding their residential assets as rents rise.

    Tishman, the New York real estate investor, and Lehman will pay $60.75 a share, 19 percent more than the May 24 closing price. The total value of the transaction including debt is $22.2 billion, the companies said yesterday. Archstone is the second-largest US apartment real estate investment trust…

    The acquisition would give Tishman and Lehman more than 86,000 apartments from New York to San Francisco as rental demand increases and home prices fall, according to forecasts from the National Association of Realtors. Rents may rise 6 percent to 6.5 percent this year in the urban markets where Denver-based Archstone operates, UBS AG estimates.

    See also:

    Lehman Brothers disappeared with Hank Paulson’s reputation. He wants it back
    Paulson began having his doubts about Fuld—and the future of Lehman—as early as October 2007, when Lehman made a big bet on commercial real estate even though there were signs the deal was unwise. Paulson remained dubious about Leh-man’s rosy earnings reports for the first half of 2008, and when the red ink began to show in June, he began urging Fuld to scale back Lehman’s leverage and find a buyer or a fresh infusion of capital. He was frustrated, say these knowledgeable sources, when Fuld stubbornly demanded terms that were too favorable to Lehman to attract any buyers or investors.

    And this:

    Archstone deal was one risk too many
    http://gulfnews.com/business/markets/archstone-deal-was-one-risk-too-many-1.132049

    The Archstone deal was also consistent with the high-risk, high-reward culture that had taken root at Lehman. With less capital than rivals such as Goldman Sachs and Morgan Stanley, Lehman was known for punching above its weight and being quicker than others to seize opportunities. Fuld, a former bond trader known to associates as “the gorilla”, was the embodiment of this culture. A man of military mien known for his direct management style, he was determined, having re-established the bank’s independence from American Express, to return it the pinnacle of Wall Street.

    He almost got there. In the months preceding Archstone, Lehman was worth $60 billion (Dh220 billion) and was seen as one of Wall Street’s best-run banks. Fuld had also showed himself very much aware of the storms gathering over the financial system. At Lehman’s 2006 Christmas party visitors noted his cautious outlook for the year ahead. A month later at last year’s World Economic Forum in Davos he talked openly about being “really worried” about the risks posed by property valuations, excess leverage and the rise in oil and commodity prices. “We’re taking some money off the table,” he said.

    But while Fuld may have been aware of danger and prepared to take precautions, within Lehman, as one insider remembers, “the acquisition machine rolled on”.

  42. Don’t forget: All of these really bad acquisitions were part of Fuld’s push for extremely leveraged profitibility:

    Fuld’s Subprime Bets Fueled Profit, Undermined Lehman
    Richard Fuld, a one-time international squash player accustomed to working the angles, finally found one he couldn’t master.

    The longest-serving chief executive officer on Wall Street battled for more than a year to contain the fallout from Lehman Brothers Holdings Inc.’s bad bets on real estate. Fuld’s defense of the 158-year-old firm ended yesterday when Barclays Plc and Bank of America Corp. 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 Street leaders such as Lazard Ltd. chief Bruce Wasserstein, who on June 4 called him “very able.” Fuld joined the circle of CEOs sought-after by boards, such as the New York Federal Reserve’s. Fuld 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 organization 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 waited too long to write off bad debt, then didn’t 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 percent to $17.2 billion and commercial real estate 18 percent to $32.6 billion. New York- based Merrill Lynch & Co. moved faster under new CEO John Thain, agreeing July 29 to liquidate more than half of its mortgage-linked securities at a fifth of their price and raising $8.55 billion in capital.

    Then Fuld decided to join the rush into the mortgage market. In 2004, Lehman bought Irvine, California-based BNC Mortgage, at the epicenter of the boom in subprime 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 Street firms: packaging mortgage loans into bonds.

    Lehman also bought Aurora Loan Services LLC, another Irvine lender that specialized in Alt-A loans, those made to borrowers without full documentation. Aurora was originating more than $3 billion a month of such loans in the first half of 2007.

    Record revenue from Lehman’s real estate businesses helped sales in the capital markets unit jump 56 percent from 2004 to 2006, faster than from investment banking or asset management, the company said in a filing. Lehman reported record earnings in 2005, 2006 and 2007.

  43. Here is another explanation:

    Lehman Report: The Business Decisions That Brought Lehman Down

    According to bankruptcy examiner Anton Valukas, the seeds of Lehman’s Sept. 15, 2008, bankruptcy were sown in 2006, aggressively fertilized throughout 2007 and 2008′s first two quarters, and harvested in the summer of 2008. Valukas concludes that although Lehman used its so-called Repo 105 to cook its books, what ultimately brought the firm down was bad business judgment.

    Lehman had traditionally pursued a relatively low-risk brokerage model, in which it originated or purchased assets primarily to sell them to the markets, rather than investing its own capital and adding the assets to its balance sheet as part of a higher-risk banking model. Valukas reports that after Lehman watched its competitors make strong profits by using their balance sheets for proprietary investments, in 2006 Lehman decided to aggressively adopt the same strategy.

    David Goldfarb, a former Lehman executive, explained in a 2006 Lehman document cited by Valukas, that Lehman sought “13% annual growth” in revenues, supported by “an even faster increase in the firm’s balance sheet, total capital base and risk appetite.”

    Lehman pursued three major types of investments: Commercial real estate, leveraged loans and private equity. While all three would lead Lehman to abandon its traditional risk controls, as Valukas has documented, bad commercial real estate investments ultimately brought Lehman down.

    Lehman’s Stress Tests Didn’t Measure Its New Risks

    Many of Lehman’s new investments were illiquid, which made them particularly risky for a firm with such high leverage and low equity base, according to Valukas. Having large volumes of illiquid investments complicated Lehman’s business in three fundamental ways: They cannot be sold quickly to raise cash, unless sold for far below face value. They cannot be sold easily, at any speed, so selling them isn’t an effective strategy to reduce leverage. And they cannot be easily hedged — indeed, Lehman didn’t hedge many of them, according to Valukas.

  44. I had a team of researchers pouring over this stuff for 2 years while I wrote Bailout Nation. I have 1000s of pages of LEH related research, 100s of footnotes, reams of data.

    I can do this all day.

  45. OK, last one:

    To give you a clue how utterly disinginous/trippin’ Fuld remains, consider this single quote:

    “Lehman was a sound company and was mandated to file for bankruptcy,” he told FCIC members
    -NY Post
    http://www.nypost.com/p/news/business/fuld_uncle_sam_saved_everyone_but_ovJynS9bAroJO6HSZVoDCI

  46. [...] Dick Fuld’s Fantastic Revisionism ! (September 2nd, [...]