Lehman's Problems, Continued

I'm still mining the Examiner's Report that I discussed yesterday, looking for the good nuggets.

I found this: On page 480 of the second pdf in the series, the Examiner is discussing Lehman's efforts to sell itself to Warren Buffett. Fuld and Buffett spoke on Friday, March 28, 2008.

"They discussed Buffett investing at least $2 billion in Lehman. Two items immediately concerned Buffett during his conversation with Fuld. First, Buffett wanted Lehman executives to buy under the same terms as Buffett. Fuld explained to the Examiner that he was reluctant to require a significant buy-in from Lehman executives, because they already received much of their compensation in stock. However, Buffett took it as a negative that Lehman executives were not willing to participate in a significant way. Second, Buffett did not like that Fuld complained about short sellers. Buffett thought that blaming short sellers was indicative of a failure to admit one's own problems."

Buffett was of course wise in this. And the short sellers were right to believe that Lehman was over-valued as Einhorn explained in May 2008.

The vulture doesn't kill. The vulture feeds on the flesh of the dead. And, in so doing, said vulture performs a service. Though he is led to perform that service by his regard for his own self-interest, it is a genuine service. Bring out your old Adam Smith neckties!

Lehman's Problem was ... Lehman???

You mean it wasn't a conspiracy of short sellers?

I see from Sorkin's book that back on April 2, 2008, Dick Fuld had a breakfast meeting with Jim Cramer and sold him on the theory that Lehman's real problem was "a cabal of shorts," and the abolition of the uptick rule in 2007, which had presumably empowered said cabal.

Many have echoed Fuld's views. Indeed, in September 2008 the SEC halted the short selling of stocks in the financial sector altogether. That didn't last long, and it didn't seem to have any impact while it lasted, but the geniuses in Washington thought they had to show that they could collectively be a tough sheriff coming into Dodge.

Now there is a bounty of new evidence for what those of us who were skeptical of the anti-shorting cause have suspected all along. The problem with Lehman according to a report by the bankruptcy court's examiner just released was Lehman's own management, compounded by overly creative accounting and its enablers at Ernst & Young.

The report is available in full here. It's more than 2,000 pages long, and accordingly each of the links on the Jenner & Block page to which I've just linked you represents a separate volume. (The examiner is J&B's chairman, Anton Valukas.) But let's just stick to the Executive Summary, which appears at pp. 58-70 of the first volume/PDF.

Lehman failed because it was unable to retain the confidence of its lenders and counterparties. Why was it unable to retain their confidence? Because "a series of business decisions had left it with heavy concentrations of illiquid assets with deteriorating value...." Those decisions, misguided though they were, were within the business judgment rule -- i.e. they were legal. What may not have been legal, though, was the use of accounting trickier to obscure them.

The short sellers, then, were right. They accurately perceived the rottenness that Lehman's accounting trickier was designed to hide. Short sellers are the heroes of this examination, not the villains. Of course, they are well-compensated heroes, so there is no need to cry over their underappreciated character., Still, the short sellers were doing a valuable job, doing it well, and were made the scapegoats by the real malfeasors.

Who'd a thought?

A Tale of Two Dick Fulds

Gasparino or Sorkin. Who are you reading this Fall? about last Fall's ... um, fall. Gasparino is the author of The Sellout, a new book outlining what Gasparino sees as the 30 year long history behind the financial meltdown of 2008, finding fault in both Wall Street greed and government mismanagement. Sorkin is the author of Too Big to Fail, a bigger book that offers more of an "inside story" on the crisis and the bailout efforts it inspired. Or, like me, you may be obsessively reading both.

Dick Fuld, I'm guessing, is reading both. He's the former CEO of the now defunct broker-dealer Lehman Brothers, and Time magazine gave him a spot on its list of "25 People to Blame for the Financial Crisis," here.

Both Sorkin and Gasparino give an account of a certain dramatic incident in Fuld's rise up the corporate hierarchy at Lehman, from his days as an impatient young trader. Here is Sorkin:

One day he approached the desk of the floor's supervisor, Allan S. Kaplan (who would later become Lehman's vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signalling loudly that he was ready for Kaplan to do his bidding.

Kaplan, cupping the receiver with his hand, turned to the young trader exasperated: "You always think you're the most important," he exploded. "That mothing else matters but your trades. I'm not going to sign your fucking trades until every paper is off my desk!"

"You promise?" Fuld said, tauntingly.

"Yes," Kaplan said, "Then I'll get to it."

Leaning over, Fuld swept his arm across Kaplan's desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly, "Will you sign it now?"

-----

A version of that story has been published before, but Sorkin in his notes assures us that his own reporting is responsible for the level of detail with which he tells it. Curiously: Sorkin lets the story expire and moves on to later incidents in Fuld's career -- he doesn't close out that anecdote by telling us whether Kaplan actually signed off on the deal or not. Here it is Gasparino, who gives the matter only four sentences, who is more informative.

Fuld, as most people knew, even early in his career, was among the most aggressive traders at the firm, something he cultivated to bully his way through the management ranks. When the loan officer said he 'needed to clear' his desk before approving the trade, Fuld took matters into his own hands and cleared the man's desk for him -- literally by shoving the papers to the floor.

The officer was stunned, but he approved the trade. And Lehman made money on it.

So never make the mistake of using the expression "I have to clear my desk" while in the presence of a Type A personality.

The compare-and-contrast exercise here is worthwhile, I think. Sorkin gives to Kaplan a bad-guy characterization, so that we understand and even sympathize with Fuld's rudeness. Sorkin for example has Kaplan "deliberately ignore" Fuld when Fuld first approaches his desk. And then he has Kaplan telling Fuld off before he gets to the "clear my desk" remark. For Sorkin, I think, the men (and a few women -- such as Erin Callan, Lehman CFO) at the center of the crisis were facing grave challenges and doing the best they knew how to save their companies in the face of those challenges. Heck, if Kaplan had been more central to Sorkin's story he might not have been fitted for the Snidely Whiplash moustache in the telling of that Fuld-as-young-man anecdote.

For Gasparino ... well, did I mention that his book is named "The Sellout"? He is looking to assign blame. They weren't facing challenges in 2008, they were working through a disaster of their own creation. Since Fuld is a prominent recipient of blame, there is no need even to give Kaplan's name. The story is only meant to show that the Gorilla routine was a deliberately adopted tactic whereby Fuld bullied his way through management ranks.

I prefer Gasparino as a writer, for both precision and concision; I think they both are sadly deficient as analysts, though if I were to write such a book I think I'd adopt something more akin to Sorkin's tone.