Lehman became ‘a culture of liars’ soon after the Mexican crisis, notes the epilogue to Vicky Ward’s ‘The Devil’s Casino’ (www.wiley.com), citing insider views. “It was then that basically the job became about ‘What are we going to spin today to hide our real difficulties?’ That’s when things started to slide.”
Contrasting that with the finest days, when “the spoils of money or the trappings of ego hadn’t yet begun to rot away Lehman’s ‘one firm’ culture,” the author adds that back then ‘the Ponderosa Boys… slept only with their wives. They were honest.’
The Ponderosa Boys
As one learns in chapter 2, ‘the Ponderosa Boys’ is a reference to ‘Bonanza,’ a TV series of the 1960s about an intrepid rancher and his sons, each of them born to a different wife. “Lehman’s Ponderosa Boys were T. Christopher ‘Chris’ Pettit, Joseph M. ‘Joe’ Gregory, Thomas ‘Tommy’ Tucker, and Stephen ‘Stevie’ Lessing. Each morning at 5 am, they’d meet at Lessing’s house in Laurel Hollow on Long Island’s north shore, for the 45-minute drive in to Wall Street.”
Before work each weekday morning, the group would stop off at a gym in lower Manhattan, just a short walk from their office, and alongside business competitors from Goldman Sachs, run on treadmills and lift weights, the author narrates. “They took pride in being the first through the doors of that gym, and were often greeted with the Bonanza theme music as they walked in. Liz Neporent, who was a trainer at the gym, had coined the nickname for the bunch…”
‘One firm’ mantra
The Ponderosa Boys were driven, competitive risk takers, unafraid of peers with better resumes and sharper wits – and they were completely united, Ward describes. Between 1984 and 1995 they were the architects of what would become the new Lehman Brothers, he adds. “Their tiny division fought for its life and grew into an investment bank whose values would reflect, for a short while, what those men dreamed of creating: a firm that encouraged a militaristic loyalty and hardscrabble resourcefulness exemplified by the credo ‘The Trader Knows Best’ and a selfless embrace of the ‘one firm’ mantra.”
An example of the mantra was the anecdote Pettit often told his colleagues – about how John F. Kennedy had once bumped into a janitor cleaning the floors of NASA’s vast corridors. “What are you doing?” JFK had asked the janitor. “Mr. President, I am helping put a man on the moon,” the janitor had replied. So too, Pettit wanted every person at Lehman to relate to the firm’s business, the author recounts.
Culture conflicts
Instructive of merger problems is the chapter titled ‘Slamex,’ which discusses ‘the shotgun marriage of two of Wall Street’s most culturally diverse houses,’ Shearson Lehman Brothers. While Shearson was a vast brokerage of 8,000 salespeople who made money purely on commission, and who neither cared about nor understood investment banking, Lehman had its deep roots in providing initial capital to firms like the Woolworth Company, Sears, Roebuck & Company, the Studebaker Corporation, and RCA.
“The Lehman executives thought that the Shearson brokers were self-centred idiots; the Shearson brokers had little comprehension of what the Lehman guys were doing. As for Lehman Commercial Paper Inc. (LCPI) they thought they were the modern-day equivalent of the Three Musketeers – ‘all for one, one for all.’”
About three years before the merger, Shearson had been acquired by American Express, then run by James D. Robinson III, and with ‘luminaries like Kissinger, President Gerald Ford, and Vernon Jordon on its board.’ Robinson’s reason for buying an investment bank, as the book reasons, was to create the first financial supermarket. “He had a credit card business with American Express, and he had a brokerage to sell it and – the third essential ingredient – he now had an investment bank to stake his ground on Wall Street.”
Dick’s reserve
One of the subjects of the merged entity that worried American Express was ‘leverage’ which Amex board saw as ‘risk,’ such as in a balance sheet of $90 billion! The balance sheet was often inflated by low-risk hedged US Treasury trades and repurchase agreements (repos) – a common practice on Wall Street, but not in the more conservative credit card business, Ward explains.
LCPI had a ‘secret cushion,’ known internally as ‘Dick’s reserve,’ named after Dick Fuld, the boss. How did it work? Sample this, from a quote in the book, attributed to a former managing director: “Every day we would report up to Shearson and American Express our P&L for the day. We knew that the management upstairs, if they saw the P&L going up and down dramatically – one day we made a lot of money, and the next day we lost a lot of money – they’d know that we were betting a lot of money, and taking a lot of risk.”
What was the solution? “If our P&L looked like a nice stead EKG (electrocardiography) kind of thing, then everything was okay. So on the days we made a lot of money, Dick didn’t report all of it, and when we lost a lot of money, he took a little out of that kitty to make that day’s P&L not as bad. We called that kitty (kept on a piece of paper) ‘Dick’s reserve.’”
Survival strategy
The chapter titled ‘Independence Day’ is about Lehman going public in 1994, and John Cecil, a McKinsey consultant, coming onboard, theoretically as chief administrative officer. Less than a year later, Moody’s downgraded Lehman’s rating. And Cecil identified four things that had to be done if the company had to survive.
Top in the list was cost-cutting, especially of “a vast amount of fat, including luxuries such as the barbershop and shoe-shine stand on the executive floor, and Lehman was paying out over half of its revenues in compensation and another 41 per cent in ‘non-personnel expenses.’” Initiatives to trim costs are invariably accompanied by push-backs. A joke, for instance, doing the rounds was: ‘When the milk came out of the refrigerator and they replaced it with dairy creamer, we knew it was a bad market.’
One of the ‘wasteful habits’ that Cecil discovered was in the $11 million spent by Lehman in 1993 for moving people around inside the World Financial Center office. “If a new trader joined a desk, the entire desk had to be rewired and altered. This created a domino effect, which required paying union workers massive overtime since the configuring had to be done at night. The bankers demanded the same perk.”
Cecil, therefore, prohibited anyone from moving desks without his permission. “He told a new hire, ‘Why don’t you just ride the elevator or walk from one side of the building to the other?’”
No nepotism
The second imperative was that the nepotism had to stop. Family members and friends could no longer be hired unless they actually merited a spot, felt Cecil. Thus, Harvard MBAs were welcome in areas such as investment banking, whereas in other areas such as bond sales, ‘Lehman was looking for people who were hungry and could work in a team.’
Next goal was to be competitive in all capital market areas, globally, beginning with Europe and Asia, the book informs.
And the final part of Cecil’s strategy was to fix the culture of the firm, because he knew that a securities house could be ruined at the whim of a single trader. “The only way to stop ‘selfish’ or ‘foolish’ acts of trading, as he called them, was to get people to always consider the firm’s return on equity (ROE) – and not just their bonuses – before acting. In pursuit of this Cecil introduced the restricted stock unit (RSU) – as a form of payment to every ‘firm member’…”
Hubris or tragedy
At the time of writing, there are news reports about the resumption of Lehman bankruptcy trial, and the forthcoming auction of the firm’s collection of ‘artwork and ephemera.’ But to many Lehman people, the entity is still alive. “For all the things that went wrong, there was something unique about it, something really strong and magical,” as captures a quote in the book.
To Lloyd Blankfein of Goldman Sachs, who made a consoling call to Fuld, it was a flood. “Bear was on the first floor of the building and you were on the second… We were on the fifth. The flood got stopped before it reached the fifth floor.”
Going beyond the debate whether the Lehman story is one of hubris or a tragedy, there is an insightful quote of a former executive committee member towards the conclusion of the book. “There’s a long street of mistakes on Wall Street, and there’s a car that’s slowly rolling toward a cliff, and there’s this guy who gives the last little push, to make it topple down,” reads a vivid portrayal. Now, is he the villain? “Yes, on one level he is. But the guys who drove it to the edge are the ones who may deserve most of the blame.”
Gripping tale of a financial ruin.
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