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.