“Everything’s ‘great’,” he added. “Why the hell does it not feel better? Why has the belly of America been ripped out?” Richard (Dick) Fuld Jr., CEO of Lehman Brothers, told a group of investors in 2015, telling them they need a new President. The subprime crisis wasn’t his fault, or the fault of other banks, according to Fuld. “[I]t starts with the government.”
Dick Fuld led Lehman Brothers into bankruptcy in 2008 and shocked the entire financial world, as it was the largest bankruptcy filing in history. Looking back to 2007, Lehman Brothers was on top of the world, and at the time rated the fourth largest investment bank in the nation. They were at the pinnacle of the financial markets, on par with such financial behemoths as Goldman Sachs, Morgan Stanley, and Merrill Lynch. Only nine short months later, its empire lay in ruins, and the U.S. economy experienced one of the most significant financial downturns in a generation.
Presiding over one of the worst financial collapses in history, Richard S. Fuld, Jr. was the top executive at Lehman, leading the company to record profits before its economic crash. It is hard to pin the firm’s disastrous decline entirely on Fuld, although he ultimately took responsibility for its demise.
By the time Lehman filed for Chapter 11 protection, Fuld had worked for Lehman for more than 30 years. He took over the role of CEO in 1994, helping the firm to weather the Asian financial crisis and an historic decline in share price.
At the time, Lehman was suffering annual losses of more than $100 million. Fuld led the charge out of insolvency and returned the firm to profitability each of the years he served as CEO. By 2007, Lehman accumulated 14 straight years of financial growth under Fuld and reported earnings of $4.2 billion that year. That run earned Fuld his nickname, “Gorilla of Wall Street,” along with the title of longest-tenured CEO on the Street.
According to Bloomberg, Dick Fuld was a strict loyalist, demanding the same from all of his employees. He demonstrated his dedication to the firm by taking and holding most of his compensation in company stock. During his tenure at Lehman, Fuld earned more than $500 million in total compensation, the majority of which paid in stock or stock options.
Fuld’s total compensation in 2007, the most profitable year in Lehman’s history, was just over $22 million. He was listed on Barron’s list of the 30 best CEOs and nicknamed “Mr. Wall Street” by the publication. In 2006, Institutional Investor magazine listed Fuld as America’s top private-sector executive. He seemed to have the world by the tail, and apparently, the world knew it.
The Beginning of the End
Nearly a decade has passed since the collapse of Lehman Brothers and the ensuing recession. The shocking bankruptcy filing by Lehman caught Wall Street by surprise toward the end of 2008 and riled markets. The subsequent loss of clients, drop in stock price, and sell-off of assets helped send the global economy into a tailspin and ushered in the worst housing crash in history.
Even as the war in Iraq raged on, the U.S. housing market and the economy were humming along. Housing construction was on the rise, and home prices had reached an all-time high, producing an enormous housing bubble. With loose lending rules and easy access to loans, homebuyers were able to secure more financing than they could afford (or even qualify for).
Looking to cash in on the boom market, many investment banks (including Lehman) moved assets away from stable government securities into higher-risk mortgage-backed securities (MBS) which offered better interest rates. Inevitably, these investment firms sought out higher and higher returns, taking on risky collateralized debt obligations (CDO) or MBS that helped inflate their book value and boost stock prices.
Lehman, like so many other Wall Street firms, was swept up in the excitement of capitalizing on the higher returns that came with subprime mortgage securities. But many of the MBS packages being bought and sold on Wall Street had questionable credit ratings.
As more subprime securities were being created, packaged, rated, and sold on Wall Street, more consumer financing was needed to fuel the boom. Lehman, and others, would leverage the vast amount of assets they were carrying on their books to borrow more money from the Federal Reserve and offer out to consumers in the form of “innovative” mortgage products.
As their mortgage business swelled, so did their stock price, and this effect brought in even more institutional-level investment to the investment banks that were betting on the housing market. It isn’t hard to see why the financial markets failed (or refused) to recognize they were feeding a bubble — the money was just too good to pass up.
After peaking in mid-2006, economists started to see a decline in the real estate market. Prices reached a high point and began to drop. In early 2007, the housing bubble had nowhere left to go and popped.
Fuld’s Crisis Leadership Role
So, what led to the decline of Lehman Brothers? During the run-up to 2008, Fuld was praised for his handling of the subprime mortgage crisis. But even this titan of Wall Street underestimated just how far housing prices would decline. While other Wall Street CEOs were shown the door by the end of 2007, Fuld kept his position and seemed to have the full support of his board.
As the firm’s share price began to drop, few board members envied the position Fuld was in and were hesitant to challenge his leadership. Well-positioned interested parties, including Warren Buffet and the Korea Development Bank, which would have saved the firm from bankruptcy, were offering partnership deals. But Fuld, a “lifer” at Lehman Brothers, believed the company held much more value than was being offered.
Although Fuld was criticized by some for not taking a deal that would rescue Lehman, others were quick to take the blame off of Fuld and place it on others. Some in the Wall Street inner circle said there was a management coup taking place at the firm, and in disarray, the company made poor financial choices.
New York magazine wrote an extensive piece at the time explaining that the head of Lehman’s Investment Banking Division, Skip McGee, had disagreements with the COO, Joe Gregory, forcing a meeting of the firm’s senior bankers in which Gregory was demoted and replaced by Bart McDade.
According to the article, Fuld was CEO in title, while McDade was actually running the day-to-day operations. At the same time, Fuld was secretly looking for a buyer during the summer of 2008 as a last-ditch effort to stave off insolvency. Apparently offering to step down as CEO, Fuld’s priority was the survival of the Lehman Brothers’ brand and saving as many jobs as possible.
Other Lehman Brothers insiders disagreed, contending that Fuld had ignored warnings from senior leadership before the crash, and continued warnings from analysts went unheeded during key management meetings.
Late in 2007, Lehman faced unprecedented losses from the effects of the subprime crisis. By then, the firm had shuttered its subprime lending division, BNC Mortgage, closing 23 offices and eliminating more than 1,200 positions. Now, Lehman was leveraged heavily in subprime MBS debt and was seeing substantial servicing losses.
As a result, Lehman was likely unable to unload the low-rated mortgage bonds, accruing steep losses through the end of 2008. For the year, Lehman reported $2.8 billion in losses, was forced to sell off $6 billion in assets, and lost 73% of its stock value.
By September 2008, it was clear that the rumored Korea Development Bank buyout was not happening, resulting in a massive selloff of company stock. On September 9, Lehman stock dropped 45% to $7.79 per share.
The next day, Lehman announced it had taken a loss of $3.9 billion and that it intended to sell a majority stake in its investment-management business. By this time, the writing was on the wall as Lehman’s stock price entered a slide that it would see it decline another 40%.
Lehman Brothers Holdings announced on September 15, 2008, that it would file for Chapter 11 bankruptcy protection, claiming bond debt of $155 billion and bank debt of more than $600 billion. At the time of the filing, the bank held assets of $639 billion.
Was the demise of Lehman Brothers and its ensuing economic calamity Fuld’s fault entirely? Well, he was the head of the company and oversaw the buying and holding of toxic assets that placed the corporation in a precarious position, ultimately imploding in early 2008.
Although Fuld took responsibility at the time, years later he had a long list of others (including the economy) with whom he was eager to share the blame. Speaking to a group of bankers on Wall Street in 2015, Fuld attempted to explain. When asked what caused the 2008 economic crisis, Fuld said that you couldn’t just point to “one single thing.” He went on to present a list of reasons that he felt, coupled with the “buildup of the U.S. bull-market mentality,” played a role in the “Great Recession.”
Fuld contended that much of the blame for the economic crash lies at the feet of the government. According to Fuld, government policy encouraged people (even those not qualified) to own homes and contributed to a record level of consumer debt that ultimately resulted in record mortgage defaults when values dipped, and adjustable rate mortgage payments increased.
“They wanted everybody to be able to fulfill their view of the American dream,” he said. “We had low rates, easy access to credit. That led to increased home values, household debt, people borrowed a record amount of money, and as rates went down further, people refinanced, they used their homes and the increased value in their homes as ATM accounts.”
Placing much of the blame on Americans who had easy access to credit seems easy enough, but what about the financial professionals who looked the other way as funded mortgages were being diced and sliced, and sold off to investors as highly-rated securities?
Fuld makes no mention of the Wall Street firms that created massive liabilities by packaging up subprime mortgages with conventional loans, creating securities that had the appearance of a triple-A rating, and sell them off to unsuspecting investors seeking to capitalize on the housing boom.
Fuld points to the economic growth of the early 2000s as swelling the reserves of Wall Street investment funds. According to Fuld, private-equity companies had $800 billion under management in 2008. That was a 70% growth from 2000, with the number of hedge funds rising from 4,000 to more than 10,000 and over $1.8 trillion in assets under management by 2008.
This glut of liquid cash, according to Fuld, fueled the growth in “innovative products” (subprime mortgages) that were offered out to consumers by investment banks such as Lehman. While Wall Street was more than willing to provide the capital, Lehman and others, went to work funding anything and anybody that could put pen to paper.
“There was very little regulation or market supervision,” Fuld said.
He also went on to blame the Federal Reserve for raising interest rates at a time when the housing market was booming, claiming that the policy prevented homeowners from refinancing their homes and drove up adjustable rate mortgages to the point that they were no longer affordable.
To Fuld’s credit, the rate hikes did curb bank lending, and the subprime debacle led to the elimination of “easy-qual” or “no-qual” loan programs (innovative products) that many homebuyers had relied on to finance their homes. Along with consumers, businesses faced reduced access to credit, restricting economic growth and resulting in less hiring and a rise in unemployment.
Facing the Music
As for the collapse of Lehman Brothers, Fuld still contends the firm was not a bankrupt company. He places part of the blame for its failure on the Treasury Secretary and the New York Fed Chairman for not offering a bailout, as it did for other “too big to fail” banks.
The fact remains that in 2008, Lehman was in no position to obtain a loan (not even a government bailout) that could save it from the ultimate demise it faced. Fuld’s loyalty, and possibly the shortsightedness caused by it, contributed to the failure of a 158-year old American institution.
Greed played a part for sure, and not an insignificant one, as Fuld and others fiddled with easy-access credit products and played the same Wall Street shell game that forced hundreds of other Wall Street firms to meet the same fate.
Fuld has held several other positions with Wall Street firms since leaving Lehman, but none that ever seemed to stick. His unique story of his rise to glory as a titan of Wall Street was followed by the tale of a calamitous fall from grace that ushered in one of the worst recessions our nation has endured.