September 12, 2018 / 8:04 PM / 2 years ago

Breakingviews - Lehman is long-term champion in Wall Street hubris

The Lehman Brothers name moves across a news ticker in New York's Times Square in this September 15, 2008 file photo. REUTERS/Joshua Lott

NEW YORK (Reuters Breakingviews) - Lehman Brothers should not have failed. No, that’s not a criticism of the U.S. government’s refusal to bail out the firm, thus condemning it to file for bankruptcy on Sept. 15 a decade ago. Instead, it’s a recognition of how Chief Executive Dick Fuld and his lieutenants had built a well-run investment bank – until they succumbed to hubris.

Under Fuld, Lehman navigated several crises. The Mexican peso collapse, the Asian and Russian meltdowns and the dot-com bust all hit within six years of the Wall Street firm getting spun out of American Express. Minutes after the first plane hit the World Trade Center in September 2001, executives had a team crossing the Hudson river to Lehman’s backup office. Fuld liked to tell how watching a gambler in a casino lose everything after doubling down taught him the value of caution.

He forgot it during the real-estate bubble – an asset where Lehman was a leader. That, though, bred overconfidence that seeped into other assets from commercial property to leveraged buyouts. In late 2006, Fuld and the gang approved raising the company’s risk limit by almost half – just as Goldman Sachs started cutting exposures. Within months Lehman had shot through that as Fuld, President Joe Gregory and investment-banking boss Skip McGee routinely waived limits on individual deals, as Anton Valukas detailed in his report on Lehman’s collapse for the bankruptcy court.

Those who spoke out against such moves, like risk chief Madelyn Antoncic and trading head Mike Gelband, were sidelined or removed. The top dogs’ response to the worsening crisis was so slow that plans to offload debt and bridge-equity stakes in problem deals like Archstone Property were in the “18th inning” in late 2007, in the words of former finance chief Erin Callan.

Rather than address the concerns she raised, Fuld and Gregory would caution her about her “provocative” clothing and “interrogatory style.” They were similarly tin-eared when confronted by the arguments of short-sellers. All the while, executives were using an accounting trick, Repo 105, to make Lehman’s balance sheet look healthier than it was in its final few quarters. Regulators acquiesced as Lehman raised risk limits.

So was it the government’s fault too? Fuld, for one, argues that it was, also blaming regulators and even homeowners. That question now has little relevance – the rules governing banks have changed dramatically since 2008. But Lehman wouldn’t have failed without hubris – and for that there’s still no cure.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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