Tata Coffee & Starbucks Sign MoU for Strategic Alliance in India
~ Companies to Explore Collaboration for Sourcing and Roasting Premium Coffee Beans in India; Agreement Will Support Starbucks Future Market Entry and Operations in India ~
MUMBAI, India--(BUSINESS WIRE)--In a significant step toward market entry in India, Starbucks Coffee Company (Nasdaq: SBUX) today signed a non-binding Memorandum of Understanding (MoU) with Tata Coffee Limited, one of the region’s leading providers of premium arabica coffee beans. The MoU will create avenues of collaboration between the two companies for sourcing and roasting high-quality green coffee beans in Tata Coffee’s Coorg, India facility. In addition, Tata and Starbucks will jointly explore the development of Starbucks retail stores in associated retail outlets and hotels.
“India is one of the most dynamic markets in the world with a diverse culture and tremendous potential”
.The agreement recognizes Starbucks and Tata Coffee’s shared commitment to responsible business values. In accordance with the MoU, the two companies will collaborate on the promotion of responsible agronomy practices, including training for local farmers, technicians and agronomists to improve their coffee-growing and milling skills. Building on Tata’s demonstrated commitment to community development, the two companies also will explore social projects to positively impact communities in coffee growing regions where Tata operates.
Commenting on the announcement, R K Krishnakumar, Chairman of Tata Coffee, said, “We welcome Starbucks entry into India because of both its unique experience with the store format and for its commitment to society, values that we share.”
“India is one of the most dynamic markets in the world with a diverse culture and tremendous potential,” said Howard Schultz, Chairman, President and CEO, Starbucks Coffee Company. “This MoU is the first step in our entry to India. We are focused on exploring local sourcing and roasting opportunities with the thousands of coffee farmers within the Tata ecosystem. We believe India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations.”
Tata Coffee, with its large arabica coffee production base spread over different growing districts of South India, has supplied premium coffee beans for Starbucks in the past and is now building a structure for a long-term relationship.
In the areas of sourcing and roasting, Tata Coffee and Starbucks will explore procuring green coffee from Tata Coffee estates and roasting in Tata Coffee’s existing roasting facilities. At a later phase, both Tata Coffee and Starbucks will consider jointly investing in additional facilities and roasting green coffee for export to other markets.
Tata Coffee has rich expertise in the bean-to-cup value chain, with an unyielding focus on quality. It has won global accolades for its premium coffees. Over the years, Tata Coffee has further strengthened its arabica coffee production base by producing premium specialty coffee. The company has an internationally certified (ISO:22000) Roast & Ground unit at Kushalnagar in the Coorg district of India, and is a dedicated supplier to cafes across the country and specialty roasters across the globe. Tata Coffee has rapidly transformed itself by adding to its portfolio through acquisitions, becoming a more vertically integrated business.
Starbucks Coffee Company is the premier roaster and retailer of specialty coffee in the world, headquartered in the United States, in Seattle, Washington. The company manages over 16,000 stores and operates in more than 50 countries. Starbucks sells a wide variety of coffee and tea products with a range of complementary food items, primarily through retail stores. Starbucks has a long association with India. For the last seven years, the company has been ethically sourcing coffee beans from India and contributing to several social programs in the country. Starbucks believes in doing business responsibly to earn the trust and respect of its customers, partners and neighbors.
About Starbucks
Since 1971, Starbucks Coffee Company has been committed to ethically sourcing and roasting the highest-quality arabica coffee in the world. Today, with stores around the globe, the company is the premier roaster and retailer of specialty coffee in the world. Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks Experience to life for every customer through every cup. To share in the experience, please visit us in our stores or online at www.starbucks.com.
About Tata Coffee
Tata Coffee is Asia’s largest coffee plantation company and the 3rd largest exporter of instant coffee in the country. The Company produces more than 10,000 MT of shade grown Arabica and Robusta coffees at its 19 estates in South India and its two Instant Coffee manufacturing facilities have a combined installed capacity of 6000 metric tonnes. It exports green coffee to countries in Europe, Asia, Middle East and North America. In 2006, Tata Coffee acquired Eight 'O Clock Coffee Co., a segment leader in the US coffee retail market for US$ 220 million.
Tata Coffee’s other areas of business include tea, pepper, timber and hospitality in the form of ‘Plantation Trails’ – which recreates the plantation lifestyle of yesteryears. Tata Coffee’s farms are triple certified: Utz, Rainforest Alliance and SA8000 reinforcing its commitment to the people and the environment.
Thursday, January 13, 2011
World Bank estimates 3.3% GDP growth this year
The global economy in 2011 and 2012 is shifting into a phase of slower but solid growth, with India and China contributing towards almost half of the global growth, says the World Bank’s latest Global Economic Prospects 2011 report.
The World Bank estimates that the global GDP, which expanded by 3.9 per cent in 2010, will slow down to 3.3 per cent in 2011 before reaching 3.6 per cent in 2012.
Developing countries are expected to grow by seven per cent in 2010, six per cent in 2011 and 6.1 per cent in 2012. They will continue to outstrip the growth in high-income countries which will expand by 2.8 per cent in 2010, 2.4 per cent in 2011 and 2.7 per cent in 2012, the report said.
Besides, steered by India, the South Asian region is projected to post 7.9 per cent GDP growth on average over the 2011-2012 fiscal years. The Indian economy is projected to grow at 8.5 per cent in 2011 and 8.7 per cent in 2012, according to the report.
The World Bank estimates that the global GDP, which expanded by 3.9 per cent in 2010, will slow down to 3.3 per cent in 2011 before reaching 3.6 per cent in 2012.
Developing countries are expected to grow by seven per cent in 2010, six per cent in 2011 and 6.1 per cent in 2012. They will continue to outstrip the growth in high-income countries which will expand by 2.8 per cent in 2010, 2.4 per cent in 2011 and 2.7 per cent in 2012, the report said.
Besides, steered by India, the South Asian region is projected to post 7.9 per cent GDP growth on average over the 2011-2012 fiscal years. The Indian economy is projected to grow at 8.5 per cent in 2011 and 8.7 per cent in 2012, according to the report.
Tuesday, January 11, 2011
iGate buys 63% stake in Patni Computers for $1.2 b
US-based iGate has acquired nearly 63 per cent stake in the country’s sixth largest IT firm Patni Computer Systems for $1.22 billion.
iGate will buy 45.6 per cent stake of the company’s three founders — Narendra Patni, Gajendra Patni and Ashok Patni — along with 17.4 per cent stake of private equity firm General Atlantic, the iGate CEO, Mr Phaneesh Murthy, told reporters here.
The transaction is valued at about $1.22 billion, including the mandatory 20 per cent open offer to be made to the public shareholders of Patni, he added.
The deal is expected to be completed in the first half of 2011 after acquiring all the regulatory approvals.
Meanwhile, the shares of Patni Computers were trading at about Rs 466.80, up 1.46 per cent on the Bombay Stock Exchange. — PTI
iGate will buy 45.6 per cent stake of the company’s three founders — Narendra Patni, Gajendra Patni and Ashok Patni — along with 17.4 per cent stake of private equity firm General Atlantic, the iGate CEO, Mr Phaneesh Murthy, told reporters here.
The transaction is valued at about $1.22 billion, including the mandatory 20 per cent open offer to be made to the public shareholders of Patni, he added.
The deal is expected to be completed in the first half of 2011 after acquiring all the regulatory approvals.
Meanwhile, the shares of Patni Computers were trading at about Rs 466.80, up 1.46 per cent on the Bombay Stock Exchange. — PTI
From where do IPL franchises get revenues?
IPL Chairman Lalit Modi clarified how franchisees can earn profit in IPL. Team owners get 80% of broadcast revenues, 60% of sponsorship revenues, 100% of team sponsorship revenues, 80% of ticket revenues, 87.5% of all merchandising revenues, and 100% of all hospitality revenues.
IPL Advertisement tariff Rs 4 lakh to 5 lakh / 10 seconds. (It was Rs 2 lakh to 3 lakh / 10 seconds in 2008). Sony has said to be earned above of Rs 400 crore this year as advertisement revenue which was about Rs. 275 crore last year.
Most franchises break even in 2 yrs some make profit in 1st yr itself..
IPL Advertisement tariff Rs 4 lakh to 5 lakh / 10 seconds. (It was Rs 2 lakh to 3 lakh / 10 seconds in 2008). Sony has said to be earned above of Rs 400 crore this year as advertisement revenue which was about Rs. 275 crore last year.
Most franchises break even in 2 yrs some make profit in 1st yr itself..
Goldman Sach invests in Facebook
Goldman –Facebook news
• Goldman invests 450 mn in Facebook on its own balancesheet+1.5 bn investor money in fb, 50mn russias digital sky technologies
• Goldman reserves the right to do whatever it wants with its own investment n not b transparent with its clients abt the same
• valuation of company GS is 88bn and it will charge fees of 4.5-5% to its clients for their investments
• The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.
• The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions – all without being a publicly traded company.
• Y it doesn’t want to go public-quartely reports, annual meetings n other mandatory disclosures…6 yr old –very young co..generally private firms take 10-15 yrs before they go public..mark zuckerberg is jus 26yrs
• Linkedin may go public this yr…ceo and board of directors r open to it..depends on their willingness and experience to handle it…
• Controversy- Valuation of Facebook at 50bn (2bn revenue, 2000 employees- founded in 2004). This was done atleast one to 2 months ago before goldman came into picture. But goldman validated it. (FB valuation was 10bn in 2009 and its users have doubled in 1 yr…should its valuation quintuple?)
• Advertising rev growth-very strong
• Reasons y one may not buy FB
1. Facebook reached 500 million users in July. There's been no update since, even though the company had meticulously documented every new 50 million users to that point. Might the curve have crested? And let's not even talk about the fact that they don't really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenues would amount to $4 per user at that base.) I certainly haven't spent any money on the site, despite being a fairly regular visitor. And any advertiser who is trying to target me on the social network is wasting their money. But that's just me.
2. goldman self interest in validating valuation
3. games cannot sustain ad banners
4. revenues in 2010 jus 2 bn…paying 25 times of it is too high..other numbers not given out
5. warren buffet's opinion-calling it like another boom, rather invest in more than half of gs thn in fb
REf: http://finance.fortune.cnn.com/2011/01/04/five-reasons-why-im-not-buying-facebook/
• Goldman invests 450 mn in Facebook on its own balancesheet+1.5 bn investor money in fb, 50mn russias digital sky technologies
• Goldman reserves the right to do whatever it wants with its own investment n not b transparent with its clients abt the same
• valuation of company GS is 88bn and it will charge fees of 4.5-5% to its clients for their investments
• The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.
• The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions – all without being a publicly traded company.
• Y it doesn’t want to go public-quartely reports, annual meetings n other mandatory disclosures…6 yr old –very young co..generally private firms take 10-15 yrs before they go public..mark zuckerberg is jus 26yrs
• Linkedin may go public this yr…ceo and board of directors r open to it..depends on their willingness and experience to handle it…
• Controversy- Valuation of Facebook at 50bn (2bn revenue, 2000 employees- founded in 2004). This was done atleast one to 2 months ago before goldman came into picture. But goldman validated it. (FB valuation was 10bn in 2009 and its users have doubled in 1 yr…should its valuation quintuple?)
• Advertising rev growth-very strong
• Reasons y one may not buy FB
1. Facebook reached 500 million users in July. There's been no update since, even though the company had meticulously documented every new 50 million users to that point. Might the curve have crested? And let's not even talk about the fact that they don't really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenues would amount to $4 per user at that base.) I certainly haven't spent any money on the site, despite being a fairly regular visitor. And any advertiser who is trying to target me on the social network is wasting their money. But that's just me.
2. goldman self interest in validating valuation
3. games cannot sustain ad banners
4. revenues in 2010 jus 2 bn…paying 25 times of it is too high..other numbers not given out
5. warren buffet's opinion-calling it like another boom, rather invest in more than half of gs thn in fb
REf: http://finance.fortune.cnn.com/2011/01/04/five-reasons-why-im-not-buying-facebook/
Monday, April 19, 2010
Indian Rupee Appreciation and its Effects
The Indian currency is issued by the Reserve Bank of India (RBI). The Indian rupee exchange rate is measured against six currency trade weighted indices. These currencies belong to countries that have a strong trade relationship with India.
The exchange rate of the Indian rupee (or INR) is determined by market conditions (demand and supply). However, in order to maintain effective exchange rates, the RBI actively trades in the USD/INR currency market. The rupee currency is not pegged to any particular foreign currency at a specific exchange rate. The RBI intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy.
First, let’s understand how exchange rates are adjusted by market conditions. In Indian economy factors like high inflation would encourage the RBI to hike its interest rates to curb the money supply in the market. Money supply reduces because loans become expensive and savings become attractive. But this higher return on investment becomes attractive for foreign investors as well especially as Indian markets become more stable compared to other markets. Hence, foreign currency (capital) flows in, increasing demand for Indian currency resulting in currency appreciation. These foreign investments are directly reflected in the stock markets. Hence stock markets rise as currency appreciates. However exports are adversely affected. Indian Exports become less competitive in the global markets fetching lower returns. IT Industry, textiles, manufacturing industry and other export oriented industries are affected. As money supply is curbed, the purchasing power reduces and with the exports decreasing, market sentiment becomes negative. This reduces flow of money supply in the market. RBI therefore reduces the interest rates so that people once again borrow and buy. Money supply increases. Thus the Indian currency depreciates. This is the basic cycle how exchange rate adjusts back.
Now, let’s relate this logic to what’s happening currently. The rupee is again appreciating, after a lull of eight months. In the week ended April 9, it climbed by 2.9 per cent to a 19-month high of Rs44.29 a dollar on the back of surging FII inflows into equity and debt market. In the 12 months to April 9, 2010, it has appreciated by 11.5 per cent from Rs. 50.02.
However, Indian economy is running a high current account deficit of over 3 per cent of GDP and a trade deficit of around 10 per cent of GDP. Hence to increase exports by making them more competitive, one would expect rupee to depreciate. But the opposite seems to have happened and rupee is appreciating.
The rupee is appreciating because of inflows of foreign capital into India’s stock and debt markets. With interest rates on the rise here (RBI increased CRR by 75bp to absorb liquidity in Jan and on March 19 increased repo and reverse repo rate by 25bp) and rates in the West still hovering near zero, the debt market too has become more attractive than ever. Foreign fund managers are bullish on Indian growth story. In 2010 so far, As per Sebi figures, FIIs have poured $5.35 billion in the stock market and another $4.73 billion in the debt market. This has driven the Sensex past 18000.
As I said, this appreciation of currency is adversely affecting the exports. It hurts industry, agriculture and traded services, and is particularly damaging to the recovery prospects for employment-intensive manufactured exports such as garments, textiles, leather products and gems, which suffered setback during global recession. Shares of software companies have taken a beating on bourses on fears of smaller revenues and narrower margins.
Broadly, what seems to be happening is that the US dollar is depreciating (in real terms), and so is the Chinese yuan, against all other currencies. This means that as net exports (exports minus imports) from the US and China increase smartly, the burden of absorbing this increment in net exports falls on the rest of the world.
Given its current account deficit, a rise in US net exports makes sense. However, having a relatively flexible rupee when China manages its currency aggressively makes little sense for India. That is why RBI needs to take some action to depreciate it. Right now, RBI is following a hands-off policy towards the currency, mainly because inflation heads its list of concerns (meaning the need to have high interest rate to curb inflation as explained above). Inflation had been on a year-on-year basis at 9.9 per cent in February 2010 exceeding its baseline projection of 8.5 per cent for end-March, therefore containing overall inflation has become imperative. Injecting additional liquidity into the system by buying up dollars to contain the rupee would clash with its objective of inflation control. And if it were to mop up this liquidity by selling government bonds, it would complicate the job of managing government’s borrowing programme, besides imposing financial costs. RBI therefore has no good option. The alternative course of action may be to moderate net capital inflows. There are various instrumentalities, including tightening of P-Note regulations, reduction of external commercial borrowing limits etc.
In fact, the currency market seems to believe that some weakening of the rupee is inevitable. This may be because of fall in exports and reduced purchasing power of people. Thus exchange rates are expected to adjust back as different economies stabilize and Indian interest rates go down.
Looking at past also, we see that the recent surge in the value of the rupee seems like the reminiscent of the sudden, sharp appreciation of the currency in the spring of 2007. At that time, the driving factors were an accelerating surge in capital inflows and a sudden policy shift by RBI (generally believed to have been dictated by the finance ministry) in favour of non-intervention in the currency market. In January 2008, the stock market had crashed after reaching a peek of 21000, at that time, the rupee rate had appreciated to 38 against the dollar, it was for the first time that rupee was so strong.
In 2008, Post-Lehman (Sept 15, 2008) collapse, dollar inflow declined with oil companies and investors purchasing more and more dollars. Persistent outflow of foreign funds increased the pressure on the rupee, causing it to decline. 2008 was really bad for stock markets and in January 2009, the market reached its lowest close to 8000, from its peak at 21000. The rupee on the other hand had depreciated through out the year reaching a high of 52 on 5th March when the stock market was its lowest.
However, since the later half the stability of the Indian economy attracted substantial foreign direct investment, while high interest rates in the country led to companies borrowing funds from abroad resulting in a healthy rebound in 2009-10.
And therefore, since January 2009, the market is steadily moving up and so is the rupee getting strengthened. However in the next 3-6 months, RBI would increase interest rates and so we expect Rupee to weaken to some extent.
The exchange rate of the Indian rupee (or INR) is determined by market conditions (demand and supply). However, in order to maintain effective exchange rates, the RBI actively trades in the USD/INR currency market. The rupee currency is not pegged to any particular foreign currency at a specific exchange rate. The RBI intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy.
First, let’s understand how exchange rates are adjusted by market conditions. In Indian economy factors like high inflation would encourage the RBI to hike its interest rates to curb the money supply in the market. Money supply reduces because loans become expensive and savings become attractive. But this higher return on investment becomes attractive for foreign investors as well especially as Indian markets become more stable compared to other markets. Hence, foreign currency (capital) flows in, increasing demand for Indian currency resulting in currency appreciation. These foreign investments are directly reflected in the stock markets. Hence stock markets rise as currency appreciates. However exports are adversely affected. Indian Exports become less competitive in the global markets fetching lower returns. IT Industry, textiles, manufacturing industry and other export oriented industries are affected. As money supply is curbed, the purchasing power reduces and with the exports decreasing, market sentiment becomes negative. This reduces flow of money supply in the market. RBI therefore reduces the interest rates so that people once again borrow and buy. Money supply increases. Thus the Indian currency depreciates. This is the basic cycle how exchange rate adjusts back.
Now, let’s relate this logic to what’s happening currently. The rupee is again appreciating, after a lull of eight months. In the week ended April 9, it climbed by 2.9 per cent to a 19-month high of Rs44.29 a dollar on the back of surging FII inflows into equity and debt market. In the 12 months to April 9, 2010, it has appreciated by 11.5 per cent from Rs. 50.02.
However, Indian economy is running a high current account deficit of over 3 per cent of GDP and a trade deficit of around 10 per cent of GDP. Hence to increase exports by making them more competitive, one would expect rupee to depreciate. But the opposite seems to have happened and rupee is appreciating.
The rupee is appreciating because of inflows of foreign capital into India’s stock and debt markets. With interest rates on the rise here (RBI increased CRR by 75bp to absorb liquidity in Jan and on March 19 increased repo and reverse repo rate by 25bp) and rates in the West still hovering near zero, the debt market too has become more attractive than ever. Foreign fund managers are bullish on Indian growth story. In 2010 so far, As per Sebi figures, FIIs have poured $5.35 billion in the stock market and another $4.73 billion in the debt market. This has driven the Sensex past 18000.
As I said, this appreciation of currency is adversely affecting the exports. It hurts industry, agriculture and traded services, and is particularly damaging to the recovery prospects for employment-intensive manufactured exports such as garments, textiles, leather products and gems, which suffered setback during global recession. Shares of software companies have taken a beating on bourses on fears of smaller revenues and narrower margins.
Broadly, what seems to be happening is that the US dollar is depreciating (in real terms), and so is the Chinese yuan, against all other currencies. This means that as net exports (exports minus imports) from the US and China increase smartly, the burden of absorbing this increment in net exports falls on the rest of the world.
Given its current account deficit, a rise in US net exports makes sense. However, having a relatively flexible rupee when China manages its currency aggressively makes little sense for India. That is why RBI needs to take some action to depreciate it. Right now, RBI is following a hands-off policy towards the currency, mainly because inflation heads its list of concerns (meaning the need to have high interest rate to curb inflation as explained above). Inflation had been on a year-on-year basis at 9.9 per cent in February 2010 exceeding its baseline projection of 8.5 per cent for end-March, therefore containing overall inflation has become imperative. Injecting additional liquidity into the system by buying up dollars to contain the rupee would clash with its objective of inflation control. And if it were to mop up this liquidity by selling government bonds, it would complicate the job of managing government’s borrowing programme, besides imposing financial costs. RBI therefore has no good option. The alternative course of action may be to moderate net capital inflows. There are various instrumentalities, including tightening of P-Note regulations, reduction of external commercial borrowing limits etc.
In fact, the currency market seems to believe that some weakening of the rupee is inevitable. This may be because of fall in exports and reduced purchasing power of people. Thus exchange rates are expected to adjust back as different economies stabilize and Indian interest rates go down.
Looking at past also, we see that the recent surge in the value of the rupee seems like the reminiscent of the sudden, sharp appreciation of the currency in the spring of 2007. At that time, the driving factors were an accelerating surge in capital inflows and a sudden policy shift by RBI (generally believed to have been dictated by the finance ministry) in favour of non-intervention in the currency market. In January 2008, the stock market had crashed after reaching a peek of 21000, at that time, the rupee rate had appreciated to 38 against the dollar, it was for the first time that rupee was so strong.
In 2008, Post-Lehman (Sept 15, 2008) collapse, dollar inflow declined with oil companies and investors purchasing more and more dollars. Persistent outflow of foreign funds increased the pressure on the rupee, causing it to decline. 2008 was really bad for stock markets and in January 2009, the market reached its lowest close to 8000, from its peak at 21000. The rupee on the other hand had depreciated through out the year reaching a high of 52 on 5th March when the stock market was its lowest.
However, since the later half the stability of the Indian economy attracted substantial foreign direct investment, while high interest rates in the country led to companies borrowing funds from abroad resulting in a healthy rebound in 2009-10.
And therefore, since January 2009, the market is steadily moving up and so is the rupee getting strengthened. However in the next 3-6 months, RBI would increase interest rates and so we expect Rupee to weaken to some extent.
Wednesday, November 12, 2008
How lehman fell....
http://www.bloomberg.com/apps/news?pid=20601109&sid=aZ1syPZH.RzY&refer=home
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages --those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
``The only reason it didn't happen,'' Leigh Bruce, a Barclays spokesman said today, ``is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn't have that approval, so it wasn't possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.''
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Failure's Furies
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
Restless Nights
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages --those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
``The only reason it didn't happen,'' Leigh Bruce, a Barclays spokesman said today, ``is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn't have that approval, so it wasn't possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.''
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Failure's Furies
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
Restless Nights
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
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