In one hour the 100+ year old giant
of Lehman Bros forever Falls..."
September 16, 2008
SLAM.
Slam. Slam. Slam. Like a scene from a gathering of Mafia dons, the doors of 30 black Lincolns slammed shut as their besuited
occupants stepped out into a Manhattan downpour – and into a global financial storm.
That storm broke yesterday,
with stock markets tumbling around the world. In London, the FTSE 100 plunged almost 4 per cent to 5204.2. Scotland's
banking giants were among the biggest victims. HBOS slumped 17.5 per cent; Royal Bank of Scotland lost 12.2 per cent. In the
US, the Dow Jones industrial average suffered its biggest fall since 9/11.
The collapse effectively began at 6pm last
Friday. The place: the offices of the New York Federal Reserve. The occasion: an emergency meeting of the most powerful figures
in American banking and finance aimed at staving off a massive bank collapse.
Those who stepped from their limousines
to be present included Richard Fuld, the chairman and chief executive of Lehman Brothers; John Mack, the head of Morgan Stanley;
Jamie Dimon, of JP Morgan Chase; Vikram Pandit, of Citigroup; Lloyd Blankfein, of Goldman Sachs; Bob Diamond, the head of
Barclays Capital; and senior representatives from Mellon Bank and Royal Bank of Scotland.
"We are the biggest overseas
bank in America", explained an RBS spokeswoman. "There was an 'all points bulletin' from the Fed and they
called us in".
Awaiting them along one side of the boardroom table was the United States Federal Reserve chairman,
Ben Bernanke – nicknamed Helicopter Ben for having slashed interest rates and showered Wall Street with money earlier
this year to avoid the very disaster that was about to unfold.
Flanking him was Hank Paulson, the US treasury secretary,
and Tom Geithner, chairman of the New York Fed. It was Geithner who opened the meeting – and presented Wall Street's
finest with the fright of their lives.
Either there was a Wall Street rescue for Lehman, or the investment bank would
have to face the consequences. An eerie silence ensued.
An analyst at RBS Greenwich in New York summed up the most dramatic
meeting of America's top bankers thus: "I thought last weekend was crazy, but this one was even more chaotic.
"Everyone
expected to hear by early Sunday evening that the Fed/Treasury had managed to arrange a shotgun wedding for Lehman with someone
– Bank of America, Barclays, private equity. A funny thing happened on the way to a deal.
"The New York Fed
called in all of the head honchos and said that they had a great deal for them. One lucky participant would get to buy Lehman's
business and their 'good' assets for a bargain price.
"The others would get a consolation prize: a chance
to contribute their own precious capital to fund a bank of Lehman's 'bad' assets. The Fed and Treasury were said
to be 'adamant' that public money would not be involved in any bail-out.
"No government money? OK, no
deal."
The meeting set the tone for the weekend. By Saturday morning, more than 100 bankers were involved. Paulson
refused to budge on pleas for government underpinning of the Lehman "bad bank" proposal: $41.8 billion (£23.3
billion) of property and up to a further $40 billion of "toxic" assets that had been infected by subprime mortgage
loans or derivatives.
Cookies and coffee arrived. Then ghoulish crowds began to gather, reminiscent of those that had
assembled in Wall Street 80 years ago as the stock market crashed.
The last of the meetings broke up late on Sunday,
by which time there were no fewer than three separate frenzied huddles of investment bankers. One comprised credit traders
trying to agree an orderly unwinding of Lehman's default swaps to avoid utter mayhem yesterday morning.
Another
room was full of regulators trying to put a floor under AIG, the world's biggest insurer, whose shares had crashed the
previous week.
The third was putting together a massive $50 billion rescue takeover by Bank of America of Merrill Lynch
– the investment bank to broking giant that is famous for its "raging bull" logo.
The United States
is now in the throes of its biggest banking crisis in 70 years, stirring terrible memories of panics, bank failures, bankruptcies
and mass unemployment. First Bear Stearns had to be rescued. Then the government had to take over Fannie Mae and Freddie Mac,
the two largest US mortgage providers. Now Lehman Brothers.
Dick Fuld, who threatened to break the legs of any partner
caught shorting Lehman stock – gambling on the value of shares falling – is now just another name on a lengthening
list of the "Masters of the Universe", a phrase made famous by Tom Wolfe in his 1987 novel of Wall Street ambition
and greed, The Bonfire of the Vanities, who have crashed to earth.
AND as Fuld crashed, his personal shareholding in
the bank tumbled by more than $500 million. The list of the investment banking world's fallen giants already reads like
a Who's Who of money: Charles "Chuck" Prince, the chief executive of Citigroup; Jimmy Cayne, the chief executive
of Bear Stearns (RIP); Peter Wuffli, the UBS chief executive, and Marc Ospel, its chairman.
How has it come to this?
What caused America's fourth-largest investment bank to crash and file for Chapter 11 bankruptcy? It is unctuously described
by some as a "venerable, 158 year-old" institution. In truth, there is nothing particularly venerable about Lehman
Brothers – and its elevation to "greatness" is recent.
It began in 1844 as a small shop in Montgomery,
Alabama. It developed as an investment company, had a rocky ride in the 1970s, and in the early 1980s was bought by American
Express, which sold it in 1993, when Fuld became chief executive.
Lehman floated on the stock market as a minnow boutique
bank, with earnings of only $75 million.
But Fuld, a Lehman lifer, was already getting used to life in the "bulge
bracket" (a group of investment banks considered the world's most powerful).
Before he took up the top post
at Lehman, he found himself in a Las Vegas casino when a bad gambler blew $4 million. The gambler was following a classic
strategy: when the cards go against you, double up the bet, because eventually things are sure to turn your way. Fuld took
notes on a cocktail napkin as the gambler imploded, reaching the conclusion that bad luck can always continue longer than
seems reasonable. "I don't care who you are," he wrote later. "You don't have enough capital."
How
prophetic that was to prove.
From 2004, Fuld's fortunes were transformed as Lehman's profits surged. The bank
rode what an earlier generation would have seen as a convergence of utter improbables: a wave of deregulation, typified by
the scrapping of the Glass-Steagall Act (which kept retail and investment banks separate); low interest rates; and a wave
of financial innovation that turned the most toxic loans into fancy credit products.
Sky-high bonuses and share-option
packages poured fuel on this fiery concoction.
Lehman embarked on massively leveraged property acquisitions and expansion.
Equity trading soared. And the bank plunged heavily into subprime lending. Indeed, just ahead of the market collapse, Lehman
underwrote more mortgage-backed securities than any other firm.
IT built up a staggering $88 billion portfolio, 44 per
cent more than Morgan Stanley and four times the $22.5 billion of shareholder equity the bank had as a buffer against losses.
But
losses? What were they? Mortgage lending had a low default record. And the bank was on a roll, creating ever more ingenious
financial products that bonus-driven salesmen sold to bedazzled clients. The group posted record profits, the shares soared
towards $70 and bonuses and stock options gushed forth.
Fuld joined the bulge bracket. He was paid $34.5 million in
2005, comprising a base salary of $750,000, a $13.8 million cash bonus, and stock and options worth $19.94 million.
So
how does his demise compare with the other fallen idols who have now fled the crashing debris in Wall Street? They may have
driven their banks – and their shareholders – into enormous losses. But the former Masters of the Universe will
never know what it's like to live in a subprime home.
By the end, 62-year-old Fuld was Lehman's biggest individual
stockholder. Despite the crash, he stands to leave with about $65 million, based on Lehman's Friday morning stock price
of $3.73. This tally includes 8.6 million unrestricted shares worth some $32.1 million as of Friday morning – though
they had been worth $582 million last November before the credit crunch hurricane struck.
Chuck ("I'm still
dancing") Prince left Citigroup with a package said to be worth $40 million. He also received a pension of $1.74 million
and another one million stock options – worthless at the time of his departure. Merrill Lynch's Stan O'Neal
spent much of last summer perfecting his golf swing, confident that his trusty lieutenants at Merrill could avoid those subprime
bunkers. It turned out to be a bad call.
HE WAS ousted last October as the first waves of the credit crunch struck,
with a retirement package reckoned at more than $160 million.
Jimmy Cayne, 15 years at the top of Bear Stearns, was
said to be on the golf course in June 2006 just as the bank dropped the first of many clangers, with a 10 per cent dive in
profits. Worse followed, with the bank having to put up $3.2 billion to try to rescue its imploding hedge fund.
By mid-March
last year, when the bank collapsed, Cayne, who would rush from Wall Street by chopper to the private Hollywood Golf Club in
New Jersey to play 18 holes before dark, had already relinquished the reins, handing over the chief executive's role to
Alan Schwartz.
When Schwartz went cap in hand to the New York Fed for a $30 billion bail-out, Cayne was said to be competing
in the North American Bridge Championship in Detroit.
Cayne and his wife, Patricia, sold all their 5.6 million shares
in Bear Stearns – worth as much as $1.2 billion in January 2007 – for $61.3 million at the end of March this year.
The couple recently bought two adjacent apartments in New York's plush Plaza building for $28.2 million.
He left
with a $30 million "golden goodbye" – enough to do up his Park Avenue property and a mock Tudor mansion in
Greenwich, Connecticut. But it emerged that the mansion, set in 2.3 acres of land, was surplus to requirements. "It no
longer meets his needs,'' said the local estate agent, trying to sell it for $6.15 million. He was forced to cut the
asking price.
That's how tough it gets at the top in Wall Street.
Scots bank giants shudder as shockwaves
cross Atlantic
SHARES in global businesses plunged and analysts warned of a prolonged recession yesterday after leading
investment bank Lehman Brothers filed for bankruptcy.
The move prompted Merrill Lynch, another of the top four US investment
houses, to agree a £28 billion takeover bid from the Bank of America.
And it came after insurer American International
Group approached the Federal Reserve for £22 billion of short-term financing.
The misery spurred the Bank of England
to pump an extra £5 billion into the markets to improve liquidity for frightened banks, and the Fed to accept stocks
in exchange for cash loans for the first time.
And MPs on the Treasury select committee said the Bank of England should
be given greater powers to call for failing banks to be nationalised in the wake of Northern Rock.
Analysts warned
the "whole of the international financial system" was at risk and, if it recovered, would be ensnared by far tighter
regulation than in the past.
The FTSE finished 4 per cent lower, the Dow Jones plunged by almost 4 per cent, or 500
points, and shares dropped across the board.
Edinburgh-based banking giants RBS and HBOS were among the worst-hit firms.
HBOS reached a yearly low when its stocks almost halved in value at one point in trading. They later rallied to end with a
17.55 per cent drop.
Lehman, a 158-year-old company with about 25,000 staff worldwide, including about 5,000 in the
UK, filed for Chapter 11 bankruptcy in the US, which puts its operations under the ward of the courts.
Its share price
tumbled 90 per cent last week after it reported a £2.2 billion loss precipitated by a £3.9 billion "hit"
from commercial property and subprime mortgage losses.
The collapse came after Barclays Bank pulled out of a buy-out
deal, reportedly because the US government had refused to issue guarantees.
The government's refusal to get involved
is seen by analysts as a turning point following the use of public money in high-profile bail-outs of failing organisations
including Bear Sterns, Fannie Mae and Freddie Mac.
Ten of the world's biggest banks committed to establish a £39
billion borrowing facility to bolster global liquidity.
Vince Cable, the Liberal Democrat Treasury spokesman, said the
situation was "very grave". He said there would be intervention to stop banks failing because the "whole of
the international financial system" was at risk.
"I think the least we are going to have to learn from this
is that the whole of the financial sector simply cannot return to where it was before. It is going to have to be much more
tightly regulated in the public interest."
When the markets opened in the wake of the collapse, UK banks were worst
hit.
However, Angela Knight, chief executive of the British Bankers' Association, said "no UK bank was in a
similar position to Lehman", which does not take retail deposits.
A spokesman for Gordon Brown, the Prime Minister,
said the Treasury, Bank of England and Financial Services Authority were in "very close contact" with their US counterparts.
The funds released by the Bank were almost five times oversubscribed by banks. The European Central Bank also made
undisclosed funds available to financial institutions. But the Fed refused to step in with direct assistance.
Professor
William Perraudin, of Imperial College Business School in London, said banks would again become suspicious of lending to each
other, leading to another plunge in the already fragile property market.
In the UK, administrators PWC said Lehman Brothers,
the principal UK trading company in the Lehman group, was one of four firms in administration.
Refugees of financial
storm flee with golf clubs and fine wines
CLUTCHING golf clubs, branded umbrellas and what appeared to be a box of fine
Languedoc wines among other office knick-knacks, bewildered ex-employees yesterday streamed out of the Lehman Brothers'
European headquarters at Canary Wharf in London.
Of the collapsed US investment bank's 4,500 UK-based staff, about
24 were made redundant immediately, with the majority due to find out where they stand today or tomorrow.
Staff were
sent e-mails telling them the bank was filing for bankruptcy and to report for work at 7am.
Watched by a row of security
guards, those who turned up were handed a printed sheet warning them not to engage in any financial transactions.
Tony
Lomas, a lead administrator for PricewaterhouseCoopers, which took over the financial firm after it filed for bankruptcy protection
yesterday morning, said the "extraordinarily complex" company could take six years to wind up and he was uncertain
whether they would be able to pay the £42 million monthly wage bill this Friday.
After staff were given the choice
simply to go home yesterday, some of them cried. Others were on the phone to headhunters and recruitment agencies. Elsewhere
in the building, employees tried to use up credit on their canteen cards and others consoled themselves with a drink in the
company canteen. Many spent the morning clearing their desks and swapping contact details.
Edouard d'Archimbaud,
24, from Paris, arrived in Canary Wharf for his first day of work but did not even make it as far as his desk. Mr d'Archimbaud,
who was due to start a £45,000-a-year job as a trader, said he was told on arrival that everybody had lost their jobs.
He said: " I've taken out a six-month lease on a flat and I don't know how I will pay for it."
Graduate
trainee Jack Reynolds, with the company for only a week, said: "My career has been halted at the first hurdle."
Kirsty
McCluskey, 32, who worked on the trading floor, said: "It is terrible. Death. It's like a massive earthquake. It's
final. Everybody is just finishing up."
One banker, who is expecting twins, was among the staff laid off. Marion
Guilbert, 36, said: "I have been there for seven years. It's even more emotional for a pregnant woman, but you have
to take the positives out of it."
