What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis, along with the assistance of an overly deferential corporate governance system that was blind to the risks being faced and a Napoleonesque CEO who could not see the disaster that was looming.
Richard S. Fuld, Jr. has always liked to run Lehman Brothers as though it were a one-man show. The way the company’s fortunes are shrinking, it may come to that. Short of a miracle in the form of a last-minute white knight, as of Monday, Lehman -Wall Street’s fourth-largest, and one of its most storied, investment dealers- will in all likelihood face bankruptcy. Frantic weekend-long meetings at New York Federal Reserve headquarters involving top government officials as well as leading Wall Street bankers, and Mr. Fuld, whose teetering firm prompted the emergency Friday detours from the Hamptons, have failed to produce the solution Lehman needs to stay afloat. There is no buyer and no massive infusion of capital. Bankruptcy lawyers have already been called in.
Lehman’s descent into the horror world of overleveraging and sagging confidence, insufficient capital and mounting losses, like that of Bear Stearns before it, must ultimately be seen as a failure in corporate governance. It is the duty of every board to serve as a check on management and to take care that risks to the survival of the institution are scrupulously avoided. As we noted some time ago, all meaningful positions of corporate power and responsibility have been vested in company CEO Richard Fuld. He heads management as well as chairs the board. He also chairs the executive committee, whose only other member is John D. Macomber, now 81 years old. Mr. Fuld, whom Forbes reports received more than $354 million over the past five years, has been the driving force behind the decisions that have brought the company to its plight. It is a fall that might have been arrested by an active and engaged board of directors, except Lehman does not appear to have one. What it has, instead, is a Dick Fuld fan club.
This is a board where, of the 10 independent directors, three are in their seventies and two are in their eighties. The finance and risk committee, chaired by 80-year-old Henry Kaufman, as first revealed by Finlay ON Governance, met only twice in 2007 and in early 2008 even when risk was becoming the 800-pound gorilla in every Wall Street boardroom. The idea that some of Mr. Fuld’s power should be shared more broadly or that an independent director should head the board is not something these directors have tackled.
After other companies have been faced with multi-billion dollar losses -Merrill Lynch, Citigroup, AIG and UBS jump to mind- the CEO has been replaced. At Lehman, it appears that the board and Mr. Fuld are determined that the fate of the company and its driving force will be inextricably intertwined, perhaps forgetting how that approach ended for Captain E.J. Smith and the ill-starred Titanic. Not even Mr. Fuld’s now famously shortsighted proclamation, made several billion dollars in losses ago, that “the worst of the impact of the financial markets is behind us,” was enough to prompt the ire of his hand-picked directors.
For at least half a year, there have been signs, and rumors, of distress at Lehman. There has also been evidence that management has been in a state of denial, as the conference call remarks last June by its former CFO, Erin Callan, revealed: “We stand extremely well capitalized to take advantage of these new opportunities. From a risk management perspective, we continued to operate in our disciplined manner we’re known for.”
Over the ensuing weeks, losses and write-downs mounted. Lehman’s stock has drifted, and at times plunged, since February. But there is little evidence that the board itself became seized of the issue. No changes in the governance regime were announced. No special committee of independent directors was formed. The obvious need for capital infusion, which the company frequently denied, was never answered adequately. At one point, as recorded here previously, the company was even taking on more shaky investments in the form of Alt A loans.
The market has been giving the board and management its unequivocal and unvarnished reaction for some time. But there was scant evidence that Lehman’s boardroom really grasped the depth of the market’s dissatisfaction, or the untenability of its own financial condition, until last week, when the company’s .share price fell even below the level of Bear Stearns after its collapse and Fed-led rescue. On Friday, the stock closed at $3.65. Only seven months ago, it stood at $65.00.
It is the end of the Lehman era. What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis. It was ably assisted, or perhaps prompted, by a widespread attack of corporate amnesia regarding the dangers of treating risk without the respect it deserves and the failings of boards that slumbered while CEOs saw only the upside of deals and the compensation rewards they would bring and never the other part of the intractable law of gravity.
As far as power and accountability are concerned, there has been really only one man at Lehman Brothers. That’s about the way it will wind up when the lights are turned out, the sign comes down and one of Wall Street’s longest running chapters comes to an end. It is another sad lesson in the dangers of hubris, blindness to the realities of risk and the delusion of invincible status that too long marked the direction and culture of this fabled institution.