The world is still feeling the effects of the downturn which is, quite easily, still the most discussed issue in academic, financial and news circles. How They Blew It—The CEOs and Entrepreneurs Behind Some of the World’s Most Catastrophic Business Failures, a new book by Jamie Oliver and Tony Goodwin, has profiles of some of the biggest names (Bernie Ebbers, co-founder WorldCom, Marg Goldberg, owner of Crystal Palace Football Club, Ken Lay, CEO, Enron) who built—and broke—their empires and, collectively thereafter, the entire financial world. An edited excerpt from the chapter on Dick Fuld, CEO of Lehman Brothers:
Dick Fuld, King Kong
CEO, Lehman Brothers
The extraordinary collapse of the 158-year-old investment bank Lehman Brothers shocked the financial world. Its dramatic demise hastened panic on the international market and no doubt contributed towards what would become known as the global credit crunch of 2008. Its root was sub-prime mortgage lending, and at the head of Lehman Brothers was Dick Fuld.
Richard Fuld or Dick, as he preferred to be known, was born in New York in 1946. He graduated from the University of Colorado in 1969. He had plans of becoming a test pilot or an aeronautical engineer, but this ambition was not helped by a fight with a commanding officer, and it was not to be. It was not for nothing that Fuld would later gain the nickname “the gorilla”.
How They Blew It—The CEOs and Entrepreneurs Behind Some of the World’s Most Catastrophic Business Failures: By Jamie Oliver and Tony Goodwin, Kogan Page, 216 pages, Rs 295.
Instead Fuld got a job at Lehman Brothers. He never left. Fuld started out as a commercial paper trader but he took night classes at NYU’s Stern School of Business and in 1973 attained an MBA. He was destined for greater things. Founded in 1850 in Montgomery, Alabama, Lehman Brothers started out as a cotton trading business. In the beginning it was just German Jewish immigrant brothers Emanuel, Mayer and Herbert Lehman. The Lehman family became a part of the New York aristocracy with Herbert becoming the 45th governor of New York and later a US senator. Herbert’s cousin, Robert, ran the firm from 1925 until his death in 1969—the year Fuld started.
The year before Fuld took over, Lehman Brothers made a loss of $102 million. By 1994 it had 9,000 employees and $75 million in earnings.
It is a sort of widely acclaimed track record of success that makes people believe they can do no wrong. The more it continues the more unquestioning people become of the leader, whose position becomes impregnable. Other executives transfixed by the leader become more concerned about the details than the bigger picture. The CEO’s personal whims start to take on increased importance and people take their eyes off the ball.
Between 1994 and 2007 Lehman Brothers’ market capitalization grew from $2 billion to $45 billion. Its share price went from $5 to $86, creating an average annual return for shareholders of 24.6%. It grew to more than 28,000 employees with more than 60 offices in over 28 countries. The one man behind this incredible growth was Fuld. One reason for it was that by 2006 Lehman Brothers was the number one underwriter of securities backed by sub-prime mortgages. This sub-prime lending was the riskiest of the lot.
Between the years 1993 and 2007 Fuld reportedly received nearly half a billion dollars in total compensation. In 2007 alone he earned a total of $22 million, including a base salary of $750,000 and a cash bonus of $4,250,000 and stock grants of $16 million. Fuld was the chairman of the board of directors and CEO. He was king.
By 2007, Lehman Brothers was the largest trader of stocks on the London Stock Exchange and had a role in a fifth of all corporate takeovers. In 2003, it purchased assets management business Neuberger Berman for $3 billion. The next year it bought California-based BNC Mortgage, a company that specialized in making sub-prime loans. Lehman also bought Aurora Loan Services, another lender that specialized in loans made to borrowers without full documentation. In the first half of 2007, Aurora was originating more than $3 billion a month of such loans.
So why was Lehman buying these firms? Lehman’s trick was to repackage mortgage loans into bonds. Lehman reported record earnings in 2005, 2006 and 2007. Lehman’s shareholders reaped a 17-fold increase from 1994 to its peak in February 2007. But the whole lot was built on quicksand: dodgy mortgages that could never and would never be repaid.
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