Lehman CEO Richard Fuld Lied to the Public While Privately Seeking Capital
NewsToBeRead
The Two Faces of Lehman's Fall
Private Talks of Raising Capital Belied Firm's Public Optimism
In the weeks before it collapsed, Lehman Brothers Holdings Inc. went to
great lengths to conceal how fast it was careening toward the financial
precipice.
The ailing securities firm quietly tapped the European Central Bank and the
Federal Reserve as financial lifelines. On Sept. 10, one day after Lehman
executives calculated the firm needed at least $3 billion in fresh capital,
the firm assured investors on a conference call it needed no new capital at
all. Lehman said its massive real-estate portfolio was valued properly, but
Wall Street executives who have seen it say it was overvalued by more than
$10 billion. As hedge-fund clients began yanking their money from Lehman,
the firm assured them it was on solid financial footing.
On Sept. 11, J.P. Morgan Chase & Co. effectively ended Lehman's campaign to
appear strong. In its capacity as a middleman between Lehman and its
clients, J.P. Morgan knew more about Lehman's predicament than most
outsiders, and it didn't like what it saw. J.P. Morgan demanded from Lehman
$5 billion in additional collateral -- easy-to-sell securities to cover
lending positions that J.P. Morgan's clients had with Lehman -- repeating an
unmet request from a week earlier, people familiar with the situation say.
It was a knockout blow. That $5 billion collateral call, coupled with a huge
outflow of money from Lehman's hedge-fund clients, so weakened the
158-year-old Wall Street firm that it sought Chapter 11 bankruptcy
protection four days later.
During the credit crisis, financial firms have been squeezed between
conflicting pressures: to tell the public the painful truth, but also not to
ignite panic. The story of Lehman's desperate effort to survive -- pieced
together from securities filings, bankruptcy-court documents and more than
two dozen interviews with participants in the drama -- reveals for the first
time how far Lehman went to save itself. The firm's behind-the-scenes
maneuvering raises questions about whether it crossed the line into
misleading clients and investors.
To an extraordinary degree, investment banks depend for their survival on
trust -- from lenders and investors, from hedge funds and other big clients,
and especially from other large banks that are their trading partners. Their
businesses are so complex, their balance sheets so massive and opaque, that
hardly anyone outside the tent can know for sure how much trouble a firm is
in. When outsiders sense weakness, they are quick to bail out.
On Monday, the House Oversight and Government Reform Committee is holding
hearings to examine the regulatory mistakes and financial excesses that led
to Lehman's bankruptcy filing. Among those testifying will be Richard Fuld
Jr., Lehman's chief executive officer.
FBI Inquiry
The Federal Bureau of Investigation has launched a preliminary inquiry into
whether Lehman or its executives committed fraud by misrepresenting the
firm's condition to investors. Prosecutors from the U.S. Attorney's office
in New York's Eastern District are examining, among other things, whether
Lehman executives misled investors by making upbeat comments to investors
and research analysts on Sept. 10 -- five days before the firm filed for
bankruptcy protection, according to people familiar with the investigation.
Former prosecutors say severe financial pressure can put executives at
investment banks in a tough spot, given how important it is for them to
maintain customer confidence.
"It's a dance all these executives do when your company is built on trust
and you can't show weakness," says Peter Henning, a former lawyer at the
Justice Department and the Securities and Exchange Commission, who now
teaches at Wayne State University law school in Detroit. "But public
statements of strength were used against" top executives at Enron Corp. by
criminal prosecutors to show they were misleading investors, he notes. "You
can look like you are talking out of both sides of your mouth."
Lehman's collapse was a decisive moment in the 13-month-old credit crisis.
The government's decision not to bail out the firm set off a near panic
among investors and lenders world-wide, forcing the U.S. to push through a
historic rescue plan for the financial system.
Over the summer, Mr. Fuld came under pressure to replenish capital depleted
by mounting real-estate losses. In August, as investors pushed down Lehman's
stock, rumors began swirling that the firm was in trouble.
Mr. Fuld and his bankers contacted Bank of America Corp., MetLife Inc., HSBC
Holdings PLC in the U.K., investors representing Dubai ruler Sheik Mohammed
bin Rashid Al Maktoum, and China's main sovereign-wealth fund, China
Investment Corp., people familiar with the matter say. The effort went
nowhere. Spokespeople for the banks either declined to comment or weren't
available.
Crunch Deepens
As the credit crunch deepened, the Fed had set up a new lending facility for
investment banks. Although the central bank doesn't reveal who borrows from
it, the market generally figures it out, and there's a stigma associated
with it. Lehman didn't do so over the summer, because it didn't want to be
seen as needing Fed money, says one person familiar with the matter.
Lehman went elsewhere, stepping up its borrowing from the European Central
Bank. The borrowing, at least some of it by a Lehman operation in Frankfurt,
drew no attention in the market. By the time Lehman sought bankruptcy
protection, it owed between ?8 billion and ?9 billion. An ECB spokeswoman
declined to comment.
As concerns about Lehman spread through the market, its executives began
hearing from clients. None of them wanted to have money tied up with Lehman
if it filed for bankruptcy protection. Christian Lawless, a senior vice
president in Lehman's European mortgage operation, says he fielded numerous
calls from investors seeking to pull out assets. "You guys are financial
professionals," he recalls telling some skittish clients. "Our balance sheet
is better than ever."
In early September, GLG Partners, a large London hedge fund in which Lehman
holds a stake, grew increasingly concerned. In a series of calls, Mr. Fuld
and other Lehman executives assured GLG managers that Lehman would survive.
But managers at the hedge fund, which had been trimming exposure to Lehman
for months, decided to move more assets out of the firm anyway.
Shortly before Labor Day, Lehman's talks to raise capital from the Korea
Development Bank fell through. On Sept. 9, after that news surfaced,
Lehman's stock plunged 45% -- its largest daily percentage decline ever.
Demanding Collateral
Lehman still had superior ratings on its bonds. J.P. Morgan, however, was
growing concerned. As Lehman's "clearing bank," J.P. Morgan acted as the
financial middleman between Lehman and its clients. Steven Black, co-CEO of
J.P. Morgan's investment bank, phoned Mr. Fuld just after lunch that day. He
told the Lehman chief that in order to protect itself and its clients, J.P.
Morgan needed $5 billion in additional collateral -- over and above the $5
billion J.P. Morgan had demanded five days earlier, which had yet to be
paid.
Mr. Fuld managed to persuade Mr. Black to settle for $3 billion right away,
leaving the prior $5 billion request unresolved. Mr. Black dispatched two
J.P. Morgan investment bankers to discuss a capital-raising plan.
Meanwhile, Lehman executives arranged a conference call for the next day to
announce earnings ahead of schedule and to disclose plans for a
restructuring. That evening, discussions with outside bankers about possible
capital raising ended without any formal plan. The bankers counseled Lehman
against holding the call, warning there were too many open questions about
the firm's finances.
That evening, top Lehman executives discussed the need to raise between $3
billion and $5 billion to shore up capital by early 2009, according to one
person familiar with the meeting. Documents that discussed this need were
circulated to senior executives, this person says.
Early the next morning, Sept. 10, Lehman hosted the conference call for
investors. The firm announced that it expected its largest quarterly loss
ever, $3.9 billion, driven largely by declines in real-estate valuations.
Mr. Fuld said the firm intended to sell a majority stake in its
investment-management division and would cut its dividend.
Lehman executives didn't say anything about needing to raise capital.
Mike Mayo, a Deutsche Bank AG bank analyst, asked whether Lehman would need
to raise $4 billion as part of the plan, according to a transcript of the
call. Lehman's chief financial officer, Ian Lowitt, replied: "We don't feel
that we need to raise that extra amount." At another point, Mr. Lowitt said:
"Our capital position at the moment is strong."
Messrs. Fuld and Lowitt declined to comment. One Lehman executive says the
firm determined sometime the prior night that additional capital wouldn't be
needed because Lehman hoped to raise more money by selling additional
assets.
By the following day, Sept. 11, the price of Lehman's credit-default
swaps -- the cost to protect against losses on $10 million of its debt for
five years -- had soared to $800,000 a year, from $219,000 at the end of
May. Clients began calling and emailing Lehman to get their money out.
Lehman scrambled to comply so as not to betray weakness.
But J.P. Morgan was worried about holding lending positions with Lehman if
the firm collapsed. Jane Buyers Russo, head of J.P. Morgan's broker-dealer
unit, phoned Lehman's treasurer, Paolo Tonucci. She told him Lehman would
have to turn over the $5 billion in collateral that J.P. Morgan had asked
for days earlier.
Fulfilling the request temporarily froze Lehman's computerized trading
systems. It nearly left the firm with insufficient capital to fund its
trading and other operations.
Lehman's unsecured creditors now say J.P. Morgan helped to spark a
"liquidity crisis." J.P. Morgan calls that "unfounded conjecture."
Fed officials, who were watching Lehman closely, saw that lenders and
clients were pulling back. They were growing more worried that Lehman wasn't
going to make it.
On Friday afternoon, Sept. 12, credit-ratings firms warned they would
downgrade Lehman's debt on Monday if it didn't raise fresh capital.
Inside Lehman, there was growing panic. So many customers called to withdraw
money that it couldn't properly process the requests. The firm's
cash-management system -- which each day is supposed to sweep up cash from
offices such as London and redistribute it the next day -- couldn't handle
the surge. Lehman's New York arm couldn't properly get money to London
accounts, which left Lehman's main European arm, based in London,
essentially broke by Monday. Some $5 billion that was supposed to get to
Lehman's London operations or its counterparties didn't arrive by Monday,
estimates PricewaterhouseCoopers LLP, which was hired to help sort out the
mess.
Surviving the Weekend
Fed officials worked at Lehman's headquarters with its executives to
determine which of its assets weren't already pledged to other lenders, and
could be used as collateral for a Fed loan. Officials were hoping to help
the firm survive into the weekend. Lehman borrowed roughly $30 billion from
the Fed, on an overnight basis, paying it back by Saturday, according to
several people familiar with the matter. A Lehman executive says the firm
didn't borrow from the Fed at that time.
The New York Fed arranged emergency discussions, which began on Friday night
as Lehman's board consulted with bankers at Lazard Ltd. Lehman hoped to
strike a deal to sell itself to Bank of America or Barclays PLC.
Nevertheless, its lawyers began late Friday night to prepare a Chapter 11
bankruptcy filing, in the event that it was needed.
The New York Fed summoned Wall Street executives to try to work out a
solution to Lehman's dilemma. Neither Barclays nor Bank of America was
interested in buying Lehman's commercial real-estate operations. The Fed
asked executives from a group of firms, including Goldman Sachs Group Inc.
and Credit Suisse, to value Lehman's massive commercial-real-estate
portfolio and to consider investing several billion dollars each to buy it.
The executives grilled Mark Walsh, then Lehman's commercial real-estate
chief, according to several people who were there. They wanted to know why
Lehman hadn't more aggressively "marked down," or cut in value, its $32.6
billion commercial-real-estate holdings, these people say. Securities firms
are required to "mark to market" their holdings, meaning to value them on
their books at the level at which they could sell them right away.
Executives looking at Lehman's books were surprised by Lehman's high
valuations on real-estate assets. Two Wall Street executives who reviewed
Lehman real-estate documents say they believe the firm's real-estate
valuations are roughly 35% higher than they should be.
Some of its European real-estate loans raised particular concern. According
to a Lehman document reviewed by The Wall Street Journal, Lehman "marked"
some European securities backed by real-estate loans at 97.9% of par value,
or nearly 98 cents on the dollar. Lehman valued similar U.S. assets at 56
cents on the dollar. While the European market for such securities has been
slightly better than the U.S. market, it has also been hammered by the
credit crisis.
These valuations are important to thousands of Lehman creditors who are owed
tens of billions of dollars. These creditors may hold that real estate as
collateral, or hope to see it sold, perhaps to the federal government
through the recently approved bailout plan.
Lehman believes its real-estate portfolio is properly valued. On the Sept.
10 conference call, Mr. Lowitt, the CFO, said the firm's recent sales of
real-estate assets had been "in and around our marks."
By Sunday, Sept. 14, Fed officials believed Lehman had run out of options.
Neither Barclays nor Bank of America would commit to a deal unless the
government agreed to finance a transaction that would almost surely cost the
taxpayers money. Treasury Secretary Henry Paulson insisted he wouldn't do
such a deal, and Fed officials didn't feel they had a mandate to do one on
their own. Meanwhile, insurance giant American International Group Inc. was
teetering.
At a late-afternoon meeting with Lehman and its lawyers, officials from the
New York Fed and elsewhere delivered a message: Lehman must file for
bankruptcy.
Working with bankruptcy lawyer Harvey Miller, the firm put together its
filing in about five hours. Shortly after midnight Sunday, Lehman sought
Chapter 11 bankruptcy protection.
Mr. Lawless, the Lehman mortgage executive, emailed clients that night.
"Words cannot express the sadness in the franchise that has been destroyed
over the last few weeks, but I wanted to assure you that we will reappear in
one form or another-stronger than ever."
The bankruptcy threw into disarray tens of billions of dollars of cash and
securities entrusted to Lehman by hundreds of hedge funds that were
customers of the firm's prime brokerage, which loans money and stock to
hedge funds and processes their trades. Some of the world's best-known hedge
funds, including D.E. Shaw & Co. and Och-Ziff Capital Management., have
assets tied up in Lehman and its subsidiaries.
"I've seen some pretty significant and difficult situations, but nothing
like this," says Tony Lomas, a PricewaterhouseCoopers partner.
That Monday, Lehman's broker-dealer arm, which had not itself sought
bankruptcy protection, borrowed $45.5 billion from the Fed's special lending
facility for investment banks. The central bank wanted to keep the unit
going for at least a few days to try to preserve order in the markets while
the operation unwound.
That same day, Barclays restarted talks with Lehman. The following day, the
U.K. bank agreed to buy the bulk of Lehman's North American business, for
$1.54 billion. To seal the deal, Barclays agreed to pay off the $45.5
billion loan that Lehman had gotten from the Fed, and to take from the Fed
the collateral that backed the loan. The Fed didn't lose any money on the
deal.
Back at Lehman, Mr. Fuld informed employees about the deal in a note. "I
know that this has been very painful on all of you, both personally and
financially," he said. "For this, I feel horrible."
-Ianthe Jeanne Dugan, Joellen Perry, Cassell Bryan-Low, Amir Efrati,
Lingling Wei and Alex Frangos contributed to this article.
Write to Carrick Mollenkamp at carrick.m...@wsj.com, Susanne Craig at
susann...@wsj.com, Jeffrey McCracken at jeff.mc...@wsj.com and Jon
Hilsenrath at jon.hil...@wsj.com
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"NewsToBeRead" <NewsTo...@USA.Com> wrote in message
news:12233219...@news.usenet.com...
Wait for resident rsc RACISTS alvey, will_s and the rest of their mafia to
accuse Richard Fuld to be a corrupt third world company CEO that drove a
first world company Lehman Brothers into Bankruptcy.
LOL