Christian Meissner was bristling with anger as he walked into the staff
auditorium at Lehman Brothers’ London headquarters at 8.30 last Monday
morning.
Only a week earlier the 39-year-old Austrian investment banker had landed a
new job as co-chief executive of Lehman’s business in Europe, the Middle
East and Asia. Yet his first address to his staff was not what he had
envisaged. Instead of inspiring the troops to break into new markets, he had
to tell the assembled employees they were out of a job. Lehman’s overseas
arms had been put into administration after the decision the night before by
its American parent to seek Chapter 11 bankruptcy protection. It had become
the biggest corporate failure in history.
“It’s over, move on,” was all Meissner could muster. Minutes later, employees
began filing out of the door of One Bank Street, Canary Wharf, clutching
boxes filled with the contents of their desks.
Some went to the seventh-floor canteen where they drained the remaining cash
from their company vending-machine cards. Others meandered over to the
near-by All Bar One, which was soon overflowing with the newly unemployed.
There, and in the Slug and Lettuce next door, the mood was morose. People
greeted strangers with just two words “You Lehman?” It was invariably met
with the terse response: “Ex-Lehman.”
“Nobody was expecting bankruptcy,” said a banker cradling a pint of lager.
“Over the past few weeks clients were asking what happens if we go bankrupt
and we just said we don’t know – it seemed impossible.” Only a week before
the collapse, as Lehman chief executive Richard Fuld tried desperately to
find a buyer for the bank, the London office had been consulting managers on
new ways to attract recruits.
As details of the 158-year-old firm’s waning hours emerged, incredulity and
sadness turned to anger. In the days leading up to Lehman’s collapse, the US
business clawed back all the cash held at its overseas subsidiaries.
Everything outside America was funded through London and every penny $8.2
billion - had been repatriated to America by electronic transfer. Large cash
transfers are normal for a business of such size, but usually, the money
flows back. This time, it didn’t.
Meissner and the rest of the European executives were furious. They bombarded
New York with angry phone calls all night, begging for money to make one
last pay-roll, but to no avail. “We were basically told ‘Europe, you’re on
your own’,” said one senior Lehman executive. Another said: “There is a big
feeling in London that the New Yorkers have looked after themselves. What’s
worse, the problems in New York were what brought us down.”
In New York on Friday, the administrator of the British operation, Price
Waterhouse Coopers, filed an 83-page motion to recover the $8.2 billion
taken from London.
Lehman’s demise was a blow for its staff but especially for Edouard
d’Archimbaud. The 24-year-old Frenchman had arrived on Monday to start his
£45,000 a year job as a trader. The weekend fire on the Eurostar had held up
his efforts. “I finally got here and found out I was fired - we were all
fired. I have a six-month lease on a flat in London and I don’t know how
I’ll pay for it.”
The funereal atmosphere in Canary Wharf could not have been more different
from the triumphant mood two days later on 7th Avenue in Manhattan when Bob
Diamond, president of Barclays, and Bart McDade, Lehman’s president, strode
out on the trading floor of Lehman’s headquarters to be greeted by a
standing ovation. For $1.75 billion (£956m), Barclays had agreed to buy the
American investment-banking and capital-markets businesses, securing up to
10,000 jobs. The businesses controlled $72 billion in assets, against $68
billion in liabilities. Just 5% of these are the dreaded toxic
property-backed instruments.
By the end of the week, however, the terms had to be altered because of the
falling value of Lehman’s assets. Barclays may pay up to $200m less. The
assets it is taking on dropped to $47.4 billion and the liabilities to $45.5
billion.
Also thrown into the deal were Lehman’s towering headquarters building in
midtown Manhattan and two data centres in New Jersey, estimated to be worth
about £700m. And Diamond had even better news for the American staff. More
than $2.5 billion in bonuses and other remuneration would be guaranteed. A
cheer went around the room. “God Save the Queen” blared from the
trading-floor speakers.
New York had been saved but in London, Price Waterhouse Coopers (PWC) was
parachuted in to take charge of the administration and oversee an orderly
liquidation of the business.
A European managing director sent a furious e-mail to McDade and other top
executives. “I am waiting on an e-mail from you, like all colleagues in
Europe, acknowledging the hard work, dedication that all of us showed for
Lehman and you,” he wrote. “Come on guys. Show some respect for the rest of
the world who carried your flag and believed in the ‘one firm’ culture . . .
there is a thing called ‘appreciation and class’ even after the war is lost.”
The London staff did win a small victory. Lehman’s administrators clinched a
deal to allow them to be paid. A loan was secured against some of Lehman’s
office buildings and the last pay cheques are expected to go out next week.
Meanwhile, talks with potential buyers of Lehman’s European businesses are
continuing – Barclays and Nomura are among the groups sifting through the
ruins. Some jobs could still be saved. Hellman & Fried-man and Bain
Capital are thought to be close to buying the coveted Neuberger Berman
asset-management arm.
For Diamond, whose stewardship of the Barclays Capital investment bank has
propelled Barclays from a marginal British banking group into a global
financial pow-erhouse, the deal was the realisation of a long-held ambition
to expand the bank’s presence on Wall Street. He described it as a
“once-in-a-lifetime” opportunity.
“A remarkable transaction,” cooed Exane BNP Paribas. “The acquired businesses
. . . come with 10,000 employees and propel Barclays Capital to a top-three
position in American capital markets to substantially complete its global
franchise.” Keefe, Bruy-ette & Woods published a glowing note
entitled The Ace of Diamonds.
Diamond had been eyeing Lehman for a while. Two months earlier he had flown to
America to meet Treasury and Federal Reserve officials to inform them of his
interest after Lehman’s market value had plummeted. Lehman was still talking
to other bidders. At one point, Korea Development Bank offered to inject
$5.3 billion at $6.40 a share for a “controlling stake” in the group, but
Fuld rejected the offer as being too low. Days after the Koreans walked
away, Diamond was on a plane back to New York.
To some Barclays investors, however, the apparent masterstroke has begun to
look shaky. In front of a courtroom packed with furious creditors, judge
James Peck approved the deal on Friday. The terms had to be altered to
reflect a huge fall in Lehman assets in the three days that had passed since
the deal was struck - the assets in question had dropped from $72 billion to
$47.4 billion.
One senior Lehman banker in London predicted a difficult marriage between the
aggressive culture of Lehman and Barclays’ more genteel approach. Investors
will hope that Diamond and John Varley, Barclays’ chief executive, know what
they are getting themselves into. “If I were Varley, I would have some real
concerns. This is going to be a very difficult, uncomfortable integration,”
said one banker. “Barclays is a classic UK clearing bank, and they do things
in a very particular way. They are very cautious, they have strict quality
controls, they are not freewheeling. Lehman is a very different beast. It’s
an aggressive trading house that has an M&A and a trading platform,
which Barclays has actually sold out of in recent years.”
Citigroup also questioned the logic of a deal that increases Barclays’
exposure to investment banking during the most significant downturn in the
sector in decades. The American bank estimated that the new unit will make a
£1 billion loss this year and “adds risk at a time when balance-sheet
strength and cautious management are required.”
With $639 billion in assets and $613 billion in liabilities at the time of
filing, Lehman Brothers is by some distance the largest bankruptcy ever –
six times the size of Worldcom, which collapsed in 2001 with $107 billion in
assets.
For the lawyers, PWC and other advisers there will be a fee bonanza of
unprecedented proportions. John Marquess, president of Legal Cost Control,
an auditor appointed to work on the Enron and Worldcom bankruptcies,
predicted the fees would exceed $1 billion. “They are staggering numbers,
but this is a staggering case,” he said.
That is significant for creditors because the vast majority of fees are paid
by the bankruptcy estate, meaning a smaller pie for the rest.
- Additional reporting: Kate Walsh and Iain Dey
