Lehman Struggles To Shore Up Confidence
As Lehman Brothers Holdings Inc. stock teetered in recent weeks, Chairman and Chief Executive Richard Fuld Jr. called Wall Street executives to make sure they were still trading with his embattled firm and offering it credit. Rumors about the firm's health kept popping up, he groused to other executives.
'I feel like I'm playing whack-a-mole every day,' Mr. Fuld said, according to people familiar with the calls.
On Wednesday, Mr. Fuld stepped up his offensive. In an early-morning conference call, he said that Lehman, staggered by $6.7 billion in losses in the past two quarters, will spin off to its shareholders the 'vast majority' of its commercial real-estate assets. In an attempt to patch up the firm's leaky finances, Mr. Fuld also said Lehman plans to sell a substantial stake in its investment-management division and slash its dividend by 93%. By reducing balance-sheet risks and focusing on client-based businesses, Mr. Fuld said, Lehman will 'emerge clean.'
With its massive losses on troubled real-estate securities, the 158-year-old Wall Street firm has been subject to persistent rumors about its solvency, which it says are false. Mr. Fuld has presided over a stock decline of nearly 90% this year. As the rolling financial crisis claims other big players -- Bear Stearns Cos., which was bailed out in March, and mortgage giants Fannie Mae and Freddie Mac, taken over this past weekend -- Mr. Fuld has responded with a confident message that the firm can pull through.
Investors are growing increasingly frustrated. The firm's shares dropped 45% on Tuesday after word that talks with a Korean bank to provide more capital had fallen through. Following Mr. Fuld's comments on Wednesday, Lehman shares were down 6.9%, at $7.25, in 4 p.m. composite trading on the New York Stock Exchange.
During his 14 years at the helm of Lehman, the former bond trader has built a reputation for driving hard deals and guarding the independence of the company that he has run like a close-knit family. But those who have negotiated with Mr. Fuld in recent months say he may have played his hand too aggressively -- holding out hopes that his firm was buffered from continuing pain on the market, and seeking better deals from would-be investors only to see potential partners walk away.
Critics say the 62-year-old Mr. Fuld has been unable to take the steps necessary to shore up the ailing Wall Street giant. Amid the housing bust, they say, he has refused to drastically mark down the value of his firm's massive real-estate holdings. Mr. Fuld waited to raise capital until after many of his rivals. These critics say he has believed, mistakenly they say, that his access for the past six months to Federal Reserve bank-lending facilities would buffer the firm from continuing pain.
Lehman declined to comment. On Wednesday morning, a subdued-sounding Mr. Fuld, speaking to investors, acknowledged that losses from prior investments have 'clouded' the underlying value of Lehman's franchise. But he said he hopes the firm's actions will restore investor confidence.
'To have to tear down some of the businesses and discharge a number of the people and jettison the things he has built over the years is a terrible blow,' said George Ball, chairman of investment firm Sanders Morris Harris Group Inc., who is a friend and occasional squash partner of Mr. Fuld's. 'But the market has changed. And while that isn't Dick's fault, he has, as a result, been a step slow in carrying out things that the market says he has to.'
Lehman, the smallest of the remaining four giant firms of Wall Street, was founded in 1850 as an Alabama cotton trader. Mr. Fuld joined in 1967, as a college student.
A former competitive squash player with a court in his Greenwich, Conn., home, Mr. Fuld has often met with nutritionists and has said he believes physical fitness begets mental fitness. His passion for red meat is also known among Lehman executives. On business trips abroad, 'everyone knows to get the best steaks ready,' a former executive said.
Since taking the top job in 1994, Mr. Fuld has ruled with a firm hand. Employees often referred to him as 'Gorilla,' and now more often call him 'The Chairman.'
In 1998, Mr. Fuld fought off rumors about a cash crunch at Lehman that was triggered by the near-collapse of hedge fund Long-Term Capital Management. The firm faced another serious challenge in 2000 when the Internet bubble burst, throwing thousands of Wall Street workers out of work.
In late 2001, as investor pressure was mounting to cut costs, Mr. Fuld made a critical decision to pay Lehman employees less, and with firm stock rather than cash. He held its head count steady at about 13,000.
'While our competitors lose focus, we need to be strong,' he told the company's senior managers during a meeting in the auditorium of the firm's Park Avenue offices in December 2001.
From 2004 to 2007, the firm posted record profits, fueled by an expansion from its bond-trading roots into lucrative areas including investment banking. Like many of its rivals, Lehman had also piled up billions of dollars of securities, loans and mortgages tied to residential and commercial real estate.
In its fiscal first quarter of 2008, Lehman posted a profit. It also increased its holdings of so-called Alt-A mortgages, which aren't as safe as prime mortgages made to the most creditworthy borrowers but not as risky as subprime. That move backfired, with values for those mortgages falling as the year went on.
Heavy exposure to battered real-estate investments soon brought down another Wall Street stalwart, Bear Stearns. Within a few days in March, customers backed away and Bear Stearns's access to certain funding sources dried up. The firm imploded. The government arranged for J.P. Morgan Chase & Co. to buy Bear Stearns, in what people at the firm called a fire sale.
All eyes were on Lehman. It, too, had troubled mortgage holdings on its books, and it was less diversified than some of its rivals.
The day after Bear Stearns was rescued, Lehman's shares fell as much as 48% during the day before closing down 19%. Mr. Fuld flew back to New York from India, where he was visiting Lehman clients. During the 26-hour trip, Mr. Fuld joined Wall Street chiefs on a conference call hosted by a government official to discuss Bear Stearns.
He voiced confidence that Lehman's stock would recover. 'People are betting that the Fed can't stabilize the market,' he said in an interview at the time. 'I don't think that is a very good bet.'
At the firm's annual shareholder's meeting on April 15, he was upbeat. 'I believe the worst of the impact to the financial markets is behind us. That does not mean it's over. But this country's economy will need a number of quarters to regain its previous strength.'
Rumors about Lehman's health kept swirling. Its stock closed at $39.56 on May 21. Late that day, David Einhorn, one of the firm's biggest critics and manager of hedge fund Greenlight Capital, gave a critical speech on Lehman to a group of high-profile investors, saying the firm hadn't taken necessary write-downs. Its fiscal first-quarter profit, he said, was fueled in part by one-time gains. Two days later, Lehman shares had dropped to $36.11.
Early in the second quarter, it would become clear that the firm would post a loss, the first in its 14 years as a publicly traded company.
On June 1, Lehman executives boarded a jet headed to South Korea, according to flight records reviewed by The Wall Street Journal. Once in Seoul, a Lehman team, including its chief legal counsel, met with a team from the Korea Development Bank.
Two days later, the Journal reported that Lehman was hoping to raise capital. Investors, worried that the company would have to raise money, diluting common shares, sent the stock down. On June 5, the plane returned to New Jersey, flight records show. The team failed to get a deal.
'Who talked?' an angry Mr. Fuld demanded of his executive committee in a closed-door meeting. The executives remained silent, according to a person who was there.
Mr. Fuld grew increasingly frustrated about chatter over Lehman's future and rumors that counterparties were shying away from trading with the firm. At one point, Mr. Fuld contacted Goldman Sachs Group Inc. CEO Lloyd Blankfein. 'You're not going to like this conversation,' Mr. Fuld told Mr. Blankfein, according to people familiar with their talk. Mr. Fuld said he was hearing 'a lot of noise' about Goldman traders who were allegedly spreading negative rumors about Lehman. Goldman declined to comment.
It was part of a broader effort by Mr. Fuld to contact traders he felt may have been talking down his stock with rumors Lehman believed to be false, according to someone familiar with the matter. It is illegal to spread rumors one knows to be false with the intention of manipulating a public company's price.
On June 9, the firm, facing market worries about its financial well-being, pre-announced its fiscal second-quarter earnings and said it had raised $6 billion in fresh capital. The next morning, Mr. Fuld polled his executive team on what they thought needed to be done. There was an unexpected call for a management change. Some in the room felt Joe Gregory, the firm's long-time president, who had made some of the operating decisions now in question, should leave the firm.
Hugh 'Skip' McGee III, global head of investment banking, was the first to speak, saying he felt someone needed to resign. Herbert H. 'Bart' McDade III, the firm's popular head of equities, agreed change was needed.
The next day, Mr. Gregory, a longtime friend of Mr. Fuld's, offered to resign. He also told the chief executive that Erin Callan -- the firm's high-profile chief financial officer, and another lightning rod for criticism -- was leaving her post.
(MORE TO FOLLOW) Dow Jones Newswires
September 10, 2008 23:05 ET (03:05 GMT)
WSJ(9/11) Lehman Struggles To Shore Up Confidence -2-
Mr. Gregory's resignation was a blow to Mr. Fuld, who had long sought to unify his employees into a tight-knit team under a 'one firm' slogan. It was also the beginning of a distracting divide in Lehman's senior management ranks. Other high-level executives, including the head of the firm's global fixed-income operations and one of its international heads, have announced their departures.
On June 16, the day the firm released its full second-quarter results, Mr. Fuld held town-hall meetings in New York and London. 'This is not us,' he told employees, according to people who were there. The firm was supposed to be nimble and smart, he said, and he was disappointed that it stuck for too long with assets it was having trouble selling.
On July 10, Lehman was hit with another round of rumors that some large clients were scaling back dealings with Lehman. Shares closed down 12%, to $17.30.
Mr. Fuld privately sought to dispel the chatter, but the share price continued to whipsaw. In mid-July, the Securities and Exchange Commission, which had been under fire from Lehman and others for not responding more vigorously to the rumors, said it planned to crack down on firms or individuals who spread false rumors. The securities regulator sent subpoenas to brokerage firms and hedge funds across Wall Street.
In a further bid to crack down, the SEC declared a temporary limit on short-selling of 19 financial stocks, including Lehman. The firm's shares temporarily rose and the rumors subsided.
The SEC's short-selling limit expired in mid-August. Lehman's shares resumed falling.
In August, Mr. Fuld and the Korea Development Bank talked again, this time in New York. Lehman hoped to reach a deal that would give KDB a large stake in the firm. At that meeting, the Korean bank proposed to invest $4 billion to $6 billion into Lehman, according to people familiar with the matter.
The Koreans felt their approach was realistic and were prepared to move forward, but that Mr. Fuld was holding out for a better deal, according to a person familiar with that side of the negotiations. Lehman's negotiators said that KDB did not extend an offer, according to people familiar with the talks, nor did the Koreans have the authority to make a deal given the regulatory scrutiny they faced at home.
As the meeting dragged on, Mr. Fuld, a trader used to making snap decisions, grew frustrated. He threw up his arms and the meeting ended. The two sides parted and subsequent talks faltered.
On Tuesday, news surfaced that Lehman's talks with KDB had in fact ended. This triggered fresh investor concerns that Lehman was having trouble raising capital, triggering a 45% drop in the firm's stock -- its largest daily percentage decline ever, and the lowest closing price in nearly a decade, on a split-adjusted basis. The Dow Jones Industrial Average shed 2.4%, dousing enthusiasm for hopes of a comeback for Lehman and the broader financial sector.
Mr. Fuld left room for a takeover on Wednesday, even as he reiterated his commitment to remain independent. 'If anybody came with an attractive proposition that made it compelling for shareholder value, that would be brought to the board, discussed with the board and evaluated. That has not changed,' Mr. Fuld told research analysts and shareholders.
'This firm has a history of facing adversity and delivering. We have a long track record of pulling together when times are tough and then taking advantage of global opportunities,' he continued. 'We are now on the right track to put these last two quarters behind us.'
Susanne Craig |
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