Who Was Behind The Lehman Brothers Collapse?

The demise of a firm can be attributed to poor leadership. The majority of the blame will fall at the door of the most powerful individual within the organisation. Naturally, they have most control over the company’s operating strategy and direction. At the time of their collapse, Lehman Brothers had a very experienced management team headed by the longest serving CEO on Wall Street. Bloomberg’s BusinessWeek magazine identified Richard S. Fuld Jr as holding the position of CEO since November 1993 until the end of 2008, after the bank’s collapse. Many of Fuld’s employees viewed him as a tyrant and noted that all decisions were undertaken by Fuld’s management team, his confidants, as noted by Ward’s book "The Devil's Casino" (2010). In the aftermath, he was cited as the single biggest factor in their demise.

Before the Lehman Bros bankruptcy, Fuld had been considered by his peers and the public as a successful and commanding figure. As unlikely as it may sound, Barron's Magazine, published in New York, featured an article praising Fuld as late as 11^th February 2008. In it, Steven M. Sears, claims that in a bear market such as the USA was at that point in time, those firms that are properly run are easier to identify. He claimed that it would be unlikely that Lehman Bros would be forced to devalue themselves, let alone become insolvent!

Fuld could claim many triumphs under his leadership. One particular instance was weathering the problems of the Mexican Peso Crisis at the very beginning of his reign. Another was shielding the bank against pension fund depreciation during the 1997-1998 Asian Crisis when many Asian currencies dramatically lost value, thoroughly discussed by Dess, Lumpkin & Eisner (2010). Forbes Magazine (2006) had identified him as the uniting force behind the Lehman Bros. Barron’s Magazine, based in New York, publishes an annual list of the 30 most influential CEOs currently on Wall Street. The list is in no way based on scientific formula or statistics; rather it is centred on the public reputation of each CEO and the opinions of their peers and analysts. Barron’s cite their criteria for inclusion as the “bold vision and strikingly effective management style” shown by each CEO. The editors believe this is as an indicator of how much of a driving force they are behind their company and how much success is due to their input alone. Fuld had been included on the three lists since its first inception in 2005 until the 2007 version.

Once it became apparent that Lehman was in trouble, public opinion turned against Fuld and his team of managers as this was viewed as their fault. Below are images indicative of the time post-bankruptcy. The media portrayed Fuld as a caricature and a hate figure.

Each of the 14 years under Fuld’s stewardship had resulted in consecutive year end profit. Publicly traded stocks even reached an all-time high of $86 during this period. 2007 proved to be the last year to produce a profitable financial report. This was the fourth consecutive year of record revenue and income to the institution, Reuters (Sept. 12, 2008). Revenues were reported to be over $60billion and profits in excess of $4billion, details provided in research carried out by Kwabena Boamah (2011) for the Swiss Management Centre University.

In March 2008 Lehman Bros stock price fell by up to 48% upon the news of Bear Stearns fire-sale. Even that this stage, only 6 months before collapse, the bank appeared to be the next casualty, Fineman & Onaran (2008) reported for Bloomberg. The third quarter report on 10^th September announced a loss of $3.9billion, the largest in Lehman Bros history. When no buyer was willing to match the valuation attributed to the corporation by Fuld's team and as the Federal Reserve had already stated that they would not be forth-coming with help, Lehman Bros filed for bankruptcy with listed assets of $639billion.

Below is an extract of Fuld’s written statement that he issued on the 1^st September 2010 for use by the Financial Crisis Inquiry Panel – he declined to appear in person. Fuld took full responsibility for the bank’s collapse, possibly due to media pressure. But even at this juncture, he believed that Lehman Bros could have been saved with a Treasury bail-out:

“Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumours that Lehman did not have sufficient capital to support its investments. All of this resulted in a loss of confidence, which then undermined the firm’s strength and soundness.”