This week was a milestone in U.S. financial markets history, being the fifth anniversary of the Lehman Brothers collapse. Lehman’s was of course the largest U.S. bankruptcy ever and Lehman’s collapse ensured its name was recorded in the Guinness book of records.
In the run up to the collapse it seemed that everything was fine and dandy in the US economy with the housing market setting new gains and the stock market following in lockstep too. Every investment was a winner and the growing mortgage securitisation business was quite the opportunity for investment bankers who could, for the first time, invest in the so called “subprime market”. Lehman was, at the time, one of those “lucky” companies, heading for more than 50 consecutive profitable quarters. Managed by the so called “gorilla”, one Dick Fuld, and at the time deemed to be by Institutional Investor magazine in 2006 the Nr. 1 CEO in the Brokers & Asset Managers category. How times would change in a short time…
The “gorilla-esque” Dick Fuld!
What Lehman’s stockholders didn’t know was that Dick Fuld was “massaging the books” in order to make things look prettier than they really were. With the help of his team, he tweaked the figures through a simple accounting procedure involving “temporarily” exchanging $50 billion of assets into cash. Prior to reporting their earnings, the company recorded its loans sat on its balance sheet as a sale, using the cash generated to pay down debt and thus appear to have reduced leverage. Of course, after the earnings report, the company then rebuys the assets and so depleting the cash. This is a manoeuvre that mislead investors and ultimately wound up costing them (and many others) dear…
Unfortunately, the accounting creativity applied was but a blunt instrument when compared with the huge level of mortgage securities that Lehman was carrying and that it ultimately had to sell off and impair during the height of the crisis in 2008. Only when everybody started questioning just how much the subprime assets were really worth (to the delight of Messrs Paulson & Pellegrini), did it become apparent that not only Lehman but many of the global investment banks were up their necks in effectively unsaleable assets. Ultimately the whole mortgage market would collapse and with it very nearly the entire financial system.
On September 15, 2008, as the day dawned clear and calm in New York, Lehman had no other option than to file for bankruptcy protection, an event that shook the entire financial world. The US then entered a deep, and what was to prove be a long lasting recession which lead the FED to intervening in an unprecedented manner in the economy and providing the necessary liquidity to avoid the worst. The financial collapse spread throughout the whole world however and it is still negatively impacting many European countries. Through both illegal activities and irresponsible behaviour, the investment banking sector showed itself to be in disgrace but in a final slap to the millions of people who suffered around the globe, almost all of the architects of this destruction (whether unwitting or otherwise), are still out there, living in their $10 million condos.
In the aftermath of Lehman’s collapse, the SEC analysed more than 15 million documents and called more than 30 witnesses to testify but not one person has been charged so far and as the deadline to fill charges against bankers nears, it seems highly unlikely that anybody will be. With many people still struggling to simply get a job, the US economy growing at low rates and confidence in Wall Street and bankers minimal, those responsible for the crisis are still living seem to have got away with it with impunity and are enjoying their ill-gotten gains.
Dick Fuld, Lehman’s CEO however hasn’t succeeded in any job so far. He worked for a hedge fund for sometime but now has lost his securities license. In 2008, concerned with what could happen to his wealth, he sold his $13.75 million mansion for just $100 to his wife in a preventative measure to avoid the potential liabilities if he is successfully sued.
Erin Callan, Lehman’s CFO, was seemingly the wrong person in the wrong place at the wrong time. After the collapse she gave up of her financial career.
Joe Gregory, Lehman’s COO and a lifelong friend of Fuld seemingly has not been doing anything more than selling his assets steadily and his is listed as inactive in the securities world at present.
Still, they are much better off than the vast majority of US citizens and likely never to have to work again.
With regards to other past Lehman officers and top-level employees who helped create the worst financial crisis seen since the 1930’s many are still engaged in a successful financial career, with a great deal employed by Barclays. These people are part of the decision process regarding your assets, directly or indirectly. It seems that this is a crisis without the requisite scapegoats.