RICHARD FULD Jr does not like people bad-mouthing his firm. Five weeks ago, after being targeted by gossip again, the chairman and chief executive of Lehman Brothers fired off a memo to his 25,000 staff worldwide.
Contrary to popular belief, the e-mail said, Lehman is in good financial health. Problematic mortgage assets that have caused the bank to announce $9 billion (£4.9 billion) of write-downs in the past year are being dealt with. Work is in progress to “protect the firm from further market dislocations”, Fuld added.
He went on to point out that “the investment management business alone is worth $8 billion to $10 billion, the approximate market capitalisation of our entire firm on Friday”.
By the time many Lehman employees reached the end of Fuld’s memo, they concluded that he had just put the business up for sale. Over the past few days the idea has gathered momentum.
Lehman’s battered shares sparked into life on Friday amid claims that the state-run Korea Development Bank is considering a bid. The rumours followed suggestions earlier in the week that Fuld has held tentative discussions with South Korean and Chinese investors about buying up to 50% of Lehman’s shares.
A sale mandate has been circulated regarding the invest-ment-management business, much of which is accounted for by Neuberger Berman, bought in 2003 for $2.6 billion.
Meanwhile, the bank is still lumbered with more than $75 billion of leveraged loans, unloved mortgage assets and commercial-property investments it is desperately trying to shunt off its balance sheet.
“Lehman is sound, in spite of all the rumours you hear,” said one source close to the firm. “But there is pressure from investors to sell assets, so that’s what’s going to happen.”
Fuld is better known as The Gorilla on Wall Street, a mon-iker earned during his days as a bond trader on account of his aggressive attitude. Having been at the helm of Lehman for 15 years, he is Wall Street’s longest-serving boss.
He led Lehman as it broke from its former owner American Express, the credit-card giant. He then brought Lehman back from the brink of disaster after the near-collapse of the hedge fund Long-Term Capital Management in 1998.
Fuld is well respected internally, not least for the amount of time he spends with clients. Hedge-fund bosses including GLG’s Manny Roman and Michael Hintze at CQS are said to have direct “hotlines” to Fuld’s office and can call any time, night or day.
The 62-year-old transformed a business with revenues of about $3 billion into one that generated almost $20 billion last year.
Lehman’s historical reputation had been built on bond sales, but Fuld expanded the firm into corporate finance, investment management and created a huge equities- trading platform that is now the biggest player on the London Stock Exchange, Nasdaq and most of the world’s other big bourses.
In London, Fuld has spent millions since 2000 recruiting mergers-and-acquisitions bankers from rivals such as Morgan Stanley and Credit Suisse.
“Fuld and his team at Lehman were always the wan-nabes,” said one former Lon-don-based Lehman executive. “They wanted to be Goldman Sachs. In fact they wanted to out-Goldman Goldman: they were obsessed with it. Now that’s all unravelling.”
Continuity is seen as a virtue at Lehman, as reflected by Fuld’s long reign. He sent long-term lieutenant Roger Nagioff to oversee expansion in London. Joe Gregory, who stood down from the board this year alongside the finance director, Erin Callan, had worked with Fuld for more than 20 years.
In 2003 Sir Christopher Gent became the first ever European Lehman director. Of the other nine nonexecutive directors who sit beside Gent on the firm’s board, no fewer than six were in position at the time he joined five years ago.
“Dick’s welcoming speech was that he had an open-door policy, and you should always feel free to walk in and tell him when he was doing something wrong,” said one former senior Lehman banker. “In reality, he didn’t want to hear it. You could never tell the emperor that he had no clothes.”
Lehman’s upcoming third-quarter results are expected to make grim reading, with analysts forecasting $3 billion more in write-downs. While its balance sheet has suffered less damage through the credit crunch than rivals such as Merrill Lynch and Morgan Stanley, analysts fear that the worst is still to come.
Lehman may have sold $147 billion of assets from its balance sheet in the second quarter, but its remaining exposure to American mortgages is the highest on Wall Street. Its $40 billion commercial-proper-ty book is twice the size of that held by Morgan Stanley, Merrill or Goldman. The fear is that it may have to take ever bigger losses as it sells off those holdings into a declining market.
Since the US Securities and Exchange Commission (SEC), the Wall Street watchdog, launched a clampdown on the spreading of malicious rumours, rogue claims that Lehman will soon go bust have dried up. The reality is that the firm has funding lines secured for more than a year and more liquid assets than almost any of its peers. Nonetheless, there is an expectation it may have to raise more capital, in addition to the $11.9 billion it has raised since February.
Fuld has fought hard against what he believes to be a whispering campaign conducted by short-sellers and has demanded a full-scale probe by the SEC.
The SEC has subpoenaed more than 50 Wall Street firms demanding every document containing the name Lehman amid suspicions that traders betting on a fall in Lehman’s share price had been spreading rumours.
Although it would be wrong to question Lehman’s solvency, it is fair to debate the firm’s future. Lehman’s shares have plunged 85% since their peak in early 2007, falling further than any other broker or investment bank.
With the company now worth about $10 billion it looks like easy pickings for any would-be bidder. Even after Friday’s rally, the shares are changing hands at about $14.40. Some traders argue that if the price hits $10 a bid is inevitable.
Analysts at the brokerage Fox-Pitt Kelton are convinced Fuld is planning a management buyout: “We concede that a buyout is tricky but insist that insiders and sponsors can navigate the issues.”
It is difficult, however, to detect much interest in such a deal from rank-and-file bankers who have seen their wealth slump. With the history of investment banking littered with bad deals, it is tricky to find a willing buyer for the whole business.
“The obvious buyer for Lehman was always JP Morgan,” said an executive at a rival firm. “But now that they have taken over the remnants of Bear Stearns, that won’t happen.”
Whatever happens, Lehman is unlikely to escape the credit crunch in its current form.
