Losing Lehman

The press has a Lehman problem.

We’ve suspected as much for a while now, but only steeled ourselves to trace its outline after we came across an unfortunate New York magazine cover story in early December on former Lehman Brothers CEO Dick Fuld.

We have a two-pronged argument here. On the one hand, the New York story was particularly bad, because we know enough about Fuld that to portray him as a victim, which the piece does, is just plain uninformed. But that said, the New York story also reflects still-existing gaps in broader press coverage of Lehman, and it would be unfair to expect New York magazine to give us the kind of quality coverage that financial mainstays, even The Wall Street Journal, which has led on Lehman, have had a hard time producing.

And this last point is the one we care about most. If the press had given us a more broadly contextual narrative of the financial crisis—see Dean Starkman’s “Boiler Room” piece for more on that—it wouldn’t be nearly so easy for New York either to isolate Fuld from the larger story of financial collapse or to let him off the hook.

The fact is, coverage of the financial crisis over the past several months has demonstrated two frequent failings: first, and most importantly, a narrowness of scope that leads reporters to obsess over esoteric financial details without conveying their broader significance—which in turn leads to a focus on the wrongs against investors as opposed to those against borrowers; and second, a belief in the usefulness of approaching the financial crisis through profiles of CEOs and policymakers, which inflates the importance of individuals —as opposed to calling attention to the system over which they presided. To add reader-insult to reader-injury, those individuals are too often let off the hook for the things they did do.

The latter tendency is especially a problem in magazines, and New York gave us a particularly blatant example of both flaws in its cover piece.

We’ll take you through that now, so you see the kind of problems we are talking about, before wading into the broader coverage.
We’ll start, as any reader would, with the cover itself:

The horns photoshopped onto Fuld’s head pretty much indicate that problems are to come. After all, nothing quite undercuts criticism like overstatement. And the crux of the article’s argument bears out that initial concern. First we get a synopsis of the conventional wisdom:

Fuld is blamed for betting the farm on the way up, then stubbornly refusing to recognize the company’s dire straits on the way down.

And then the stroke of counter-intuition—the bread-and-butter of magazine journalism—to drive the piece forward:

But Fuld is also in some sense a victim.

If you are wondering how, as any sensible person would, read on:

He’d held on to 10 million shares of Lehman stock until the end and lost almost $1 billion—‘He drank the Kool-Aid,’ said one executive. And consensus grows that the Lehman fall was one of Treasury Secretary Henry Paulson’s and Fed chairman Ben Bernanke’s biggest mistakes, amplifying the crisis exponentially. These days, Fuld goes to his office in the Time & Life Building—he’s still nominally the CEO of Lehman—and talks on the phone to a few former colleagues, those he’d been close to for years, replaying the final months of the firm. They often work one another to the edge of rage trying to decipher ‘the mystery,’ as Fuld still thinks of Lehman’s collapse. Why didn’t the government save Lehman the way it saved so many others, Bear Stearns and AIG and, just last week, Citigroup? Fuld and his allies can’t help but blame Paulson, whom he’d trusted and, until the end, viewed as an ally and even a friend. Yet Paulson, for reasons Fuld doesn’t yet understand, participated in making him the scapegoat. ‘He feels betrayed,’ said one friend.

Wait, Fuld feels betrayed? What kind of Alice-in-Wonderland world is this? Fuld didn’t just drink the subprime Kool-Aid, but mixed the stuff up and passed it around. The problem is, once one understands Fuld’s role as a vital cog in the system, which is pretty much undeniable (we’ll get to that in a moment), the article’s entire argument falls apart.

First of all, Fuld can’t be the “victim” of an institutional collapse he himself brought on—especially not, as NY mag notes, while wandering through his Greenwich, Conn., house (one of five) with “twenty rooms, eight bedrooms, the poolhouse, tennis court squash court.” There are indeed victims here, but Fuld is not one.

Second. Yes, the article raises a crucial question in asking why Lehman was let to fail—severely deepening the financial crisis—and the argument now floating around that Paulson and Bernanke should have saved it is quite convincing. Count us among those who want to know more about the logic of that decision.

But.

That said, New York has the roles all mixed up. We are the ones who should feel betrayed here, and not just by Fuld. The fact is, the government owed Fuld nothing and the public everything—and the Lehman debacle was just one more way the bailout, such as it is, didn’t deliver.

Now, that Fuld has a somewhat narrower view is not surprising—after all, we are all at the center of our own universes, and CEOs with nicknames like “gorilla” probably even more so—but NY doesn’t have to go along with it.

Which brings us to what should have been the heart of the article. These nuggets are buried a few pages in, and briefly describe two important facts. One, Lehman’s leverage:

At one point, it was said that Lehman had borrowed $32 for every $1 in its coffers.

And two, its role in subprime:

Lehman quickly put its capital to work in real estate and soon was a dominant force in the sub-prime mortgage market, which catered to borrowers with shaky financial backgrounds.

But not only does the piece largely gloss over these points before returning to its victim narrative, it passes along Lehman excuses, like:

To push the stock price, Lehman had to continually increase revenues. How to do that wasn’t a big mystery. ‘In the late nineties, Goldman Sachs had made a ton of principal investments which paid off four years later,’ says one former Lehman executive. ‘It drove Lehman higher-ups to think we weren’t being aggressive enough. We had to keep up.’

This is an excuse for subprime? It is certainly in the interest of Lehman executives to make us think so. Again, New York seems to have lost critical perspective.

In short, this piece works too hard at making us see life according to Fuld—and his coterie at Lehman—and not nearly hard enough at giving us the bigger picture.

What is that bigger picture? Substantive context for the Lehman collapse is largely to be found in bits and pieces, shards of information in articles whose interest is more circumscribed. Some examples:

• The WSJ’s early October article (subscription) titled “The Two Faces of Lehman’s Fall,” which examined whether during its last days Lehman misrepresented its condition to investors in an effort to save itself. (Dean praised this piece in an otherwise tough critique of the paper’s crisis coverage.)

• An early October New York Times piece , “The Road to Lehman’s Failure Was Littered with Lost Chances,” that examined the question of whether Fuld could have saved Lehman had he handled the firm’s mounting crisis differently.

• Another early October piece in the WSJ that examined how Lehman real-estate hot shot Mark Walsh continued “doing deals even as rivals stepped back amid signs that credit was tightening and the market had peaked.”

All of these pieces contain some nice reporting, and all point to serious failings at Lehman. As the New York State comptroller Thomas DiNapoli wrote recently in a motion filed in U.S. Bankruptcy Court, “Mr. Fuld’s decisions drove the company toward ruin.” So if you are angry at Fuld, you have plenty of company.

But despite what we do know, coverage still has large gaps. We get a sense of what we as readers are still missing when we come across the rare example of a piece that really gets it.

In a prescient 2007 WSJ article (subscription), Michael Hudson aired some dirty laundry and explained how Lehman was “a prime example of how Wall Street’s money and expertise have helped transform subprime lending into a major force in the U.S. financial markets.” He then went on to describe how Lehman distinguished itself in the subprime arena:

Lehman topped other Wall Street firms over the past two years, packaging more than $50 billion in subprime-mortgage-backed securities in both 2005 and 2006. Overall, Lehman officials say the subprime business has accounted for 3% of the firm’s overall revenues in recent quarters, or roughly $500 million in 2006.

Lehman has also been a leader in investment banks’ push to buy their own lenders. Through its subprime unit BNC Mortgage Inc., it lends directly to consumers, bringing in more fees and giving it more control over the quality of the loans.

Lehman’s deep involvement in the business has also made the firm a target of criticism. In more than 15 lawsuits and in interviews, borrowers and former employees have claimed that the investment bank’s in-house lending outlets used improper tactics during the recent mortgage boom to put borrowers into loans they couldn’t afford.

This piece stands out for both its foresight and its perspicacity: It puts Lehman in the context of subprime and links it not just to investors, but borrowers.

And Hudson’s piece builds on earlier reports like an excellent 20/20 and New York Times segment, from 2000, on Lehman and subprime. The piece—which we
owe Hudson for calling our attention to in his recent Audit interview—will show you some of the real victims. It’s well worth a watch.

On December 22, The Globe and Mail (subscription) in effect redid and expanded on Hudson’s WSJ piece, showing Lehman wading deliberately, organizationally, inexorably into the subprime slime:

Eric Hibbert felt uneasy when he toured First Alliance’s head office in Irvine, Calif., in July, 1995.

Mr. Hibbert was a vice-president at Lehman Brothers and he’d been sent to meet First Alliance founder Brian Chisick to see if Lehman could form some kind of relationship with the mortgage lender.

‘This is a weird place,’ he wrote later in an internal memo. While he noted the company’s ‘efficient use of their tools to create their own niche,’ he also pointed out that ‘there is something really unethical about the type of business in which [First Alliance] is engaged.’

The article goes on to explain well the “elaborate game of passing the buck” that eventually brought down Wall Street and did so much damage beyond it. The account includes not just the actions of Dick Fuld and Co., but also raises the impact on borrowers and the role of deregulatory legislation like Sen. Phil Gramm’s Commodity Futures Modernization Act.

That this kind of reporting, as infrequent as it is, hits the heart of the matter is clear from the recent book Chain of Blame, which documents Wall Street’s role in causing the financial crisis. Here, authors Paul Muolo and Mathew Padilla set recent history straight:

Several Wall Street firms had rushed into the subprime market mid-decade [1990s], taking nondepository mortgage companies (old and new alike) public. Firms like Bear Stearns and Lehman Brothers managed the IPOs for them, bought and securitized their subprime mortgages, and lent them money through warehouse lines of credit.

And thus the seeds of disaster were already sown. In fact, in an indication of what was to come, Muolo and Padilla point out that there was a first, smaller subprime crisis in the late 1990s, but that it

got little attention in the general media, including the New York Times and the Wall Street Journal, which were busy covering the Russian debt crisis and meltdown of LTCM [the hedge fund Long-Term Capital Management].

The first subprime crisis didn’t, obviously, lead to broad economic collapse, and after two years of uncertainty the industry was back on its feet again, with Lehman at its center:

‘When the subprime business recovered, Lehman was making money hand over fist,’ recalled [mortgage industry veteran Bill] Dallas. ‘To many, Lehman owned the market.’

And here are Muolo and Padilla again:

By 2005, unbeknownst to most American borrowers, a handful of Wall Street firms had been in the business of actually originating residential loans for well over a decade. It was a well-kept secret—outside the mortgage industry, that is—because that’s the way Wall Street wanted it. The last thing the brokerage side of Lehman Brothers needed was its equities business to be marred by negative headlines about its residential loan unit.

Shouldn’t the press have been connecting these dots? And not just in a piece here or there but in a sustained way? In fact, even now, after reading post-Lehman-collapse coverage, Muolo and Padilla’s revelations are likely to come as a surprise to all but the most assiduous followers of Wall Street.

That the financial press struggles with historical context is evident from the way it has treated Lehman’s history. In pieces chronicling its fall, Lehman is repeatedly referred to as an “158-year-old” firm, with all the solidity that such an age implies.

But this characterization is wrong.

As Allan Sloan and Roddy Boyd smartly pointed out last July in The Washington Post, the firm is more accurately only 14 years old. Here is the explanation. We’ll quote it at length, because it is important:

How did Lehman, which had a reputation for prudence and sound management, end up in this pickle? Because, irony of ironies, Fuld, who prevailed in a decades-long battle for Lehman’s soul, adopted the policies of the people that he and his trading floor allies fought so bitterly in Wall Street’s most famous civil war of the 1980s.
The trading faction, which included Fuld and was led by his then-boss, Lewis Glucksman, wanted the firm to stick to its traditional knitting of trading and underwriting securities. The banking faction, led by Steve Schwarzman and Pete Peterson, wanted to use the firm’s capital aggressively to do risky deals. The traders prevailed then—but Fuld ultimately adopted large elements of the [banking] faction’s proposed strategy.
Fuld’s reversal isn’t just some tactical change. It’s huge. It’s as if Jack Welch had decided during his General Electric days that the touchy-feely school of management was right after all and began walking the halls to ensure that people were happy.
Lehman resolved its various internal disputes by selling itself to American Express in 1984. Schwarzman and Peterson left to start Blackstone Group and become multibillionaires. Fuld stayed at Lehman. After 10 mediocre-to-awful years as part of American Express’s failed financial supermarket strategy, an undercapitalized, independent company called Lehman Brothers emerged in 1994.
This Lehman Brothers bore little resemblance to Old Lehman Brothers, other than carrying a name dating back to 1850. Distinguishing between the Lehman of legend and the Lehman of today is key to understanding Lehman’s problem. This isn’t an old-line firm molded by storied Wall Street patricians. It’s a 14-year-old firm that’s been molded by 14-year chief executive Fuld.

Sloan and Boyd are not the only ones to mention this history—and, in case you are interested, many who do reference Ken Auletta’s Greed and Glory on Wall Street:The Fall of the House of Lehman—but they stand out for clearly outlining its significance.

This current problem of insufficient, or even incorrect, historical context is compounded by earlier stories, from the days of soaring earnings, that praised Fuld for raking in the money. Here is a Fortune piece from 2006:

Lehman Brothers, a 156-year-old firm that has had numerous brushes with death is now enjoying its greatest run ever. Richard S. Fuld Jr., 59, took over the notoriously fractious Lehman Brothers 13 years ago, when it was a forgotten subsidiary within the rat’s nest that was Shearson/American Express. Driven partly by those who dismissed him and his firm as second- or even third-rate, Fuld transformed Lehman from Wall Street weakling to global powerhouse.

Considering that we got such articles while the crisis was building, it is not a shock that we now get articles that tell us Lehman’s disaster started in the past several months or in the past few years.

So now let’s go back to the latest coverage of Fuld. Our purpose in doubling back is to make an important point clear: Yes, Fuld deserves criticism, but excessive focus on Fuld is still a problem because it obscures the larger picture.

Take, for example, the early October segment on Fuld that came as a part of Anderson Cooper 360’s “Culprits of the Collapse” feature. CNN correspondent Joe Johns didn’t mince words:

Fuld is the guy who ramped up Lehman’s business in mortgage-related securities, at least until the bubble burst. But unlike many other firms, when the subprime market went south, he didn’t pull back. Instead he got in deeper.

This is true. And it is important—one of the shards of context we mentioned earlier—but “culprits of the collapse” is the wrong framework for this kind of examination, because it doesn’t address the problem as systemic. To start and stop with Fuld, or any other CEO, is to make a variant of the same mistake New York did.

We got more-sophisticated examples of that same mistake in late December, from the WSJ (subscription) and Bloomberg. These articles offer a variety of details on Lehman’s fall, but their focus is misleadingly narrow: negotiations inside Lehman and between Lehman executives and the rest of the financial establishment.

The inclusion of visual details (e.g. “Mr. Fuld, his suit jacket now off, leaned back in his chair”) is a time-honored business-press device, and we have no problem with it, but it’s no substitute for context.

We’ll close on a related note, by pointing out a problematic sub-genre of Lehman coverage: comparing Fuld unfavorably to Merrill CEO John Thain. The premise of these stories, in the NYT or the WSJ, for example, is that the comparison is interesting because one firm survived and the other didn’t. But this comparison is ultimately of limited importance because both firms were essentially playing the same game.

And, crucially, what happens is that these pieces help to justify the government’s decision not to save Lehman—a decision that, problems with the bailout aside, has been increasingly looking like the wrong one.

For example: In the days just before Lehman’s fall, The Wall Street Journal published a (now-to-be-regretted) editorial that opposed a government bailout for Lehman. The argument included the observation that Fuld “appears to have managed the crisis with less skill and dispatch than has, for example, John Thain at Merrill.” Maybe so, but so what? Whatever Fuld did or didn’t do, at the eleventh hour all that should have mattered to Paulson and Bernanke was the impact of Lehman’s fall on the larger economy. Let the prosecutors—and, fingers crossed, the media—figure out the rest.

In the end, the proper response to the demonization of Fuld is not to pull a New York and say he is a victim, but to perform a Michael Hudson and look at the larger picture.

Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.