Richard Fuld and Lehman

Gorilla Fuld and Lehman Brothers (Excerpts from Czander’s book)

Wall Street has always been know for its excesses and for promoting the mentality that relies exclusively on the profit motive and rewards. This way of thinking once the domain of Wall Street is now pervasive in corporate America. Wall Street executives became celebrities as their wealth and power was flaunted. However, their celebrity status quickly moved to greedy villains as they became the gang that significantly contributed to the financial meltdown in 2008.

Richard Fuld the CEO of the defunct Lehman Brothers is a prime example of CEO excess. In 2006 Fuld received a 17 percent salary raise to bring his yearly total to $40.5 million. This income included $6.3 million cash bonus, $10.9 million of restricted stock, $10 million in options, $750,000 in salary, and $12.5 million from a vested portion of a long-term incentive plan. Lehman Brothers gave out bonuses of $5.7 billion in 2007, with Fuld receiving $35 million. Fuld’s five-year compensation total, excluding this latest bonus, is nearly $312 million. In addition, starting in 2007, Lehman pledged to pay Fuld $180 million in stock over the next 10 years provided he stays with the firm (Onaran,2007). After telling investors Lehman had survived the housing credit crisis, the bank reported losses of $2.8 billion in the first quarter of 2008, Fuld gave what many consider to be a feeble response, and he demoted two top executives. In September, 2008, Lehman filed for bankruptcy, and Barclays bank purchased its core assets for $2 billion. In 2008-09 Barclays terminated 4,600 jobs and Fuld was out.

Fuld was not the highest paid Wall Street CEO in the high flying days of 2006 he had three ahead of him. Lloyd Blankfein of Goldman Sacks made $58 million, followed by Stanley O’Neal of Merrill Lynch at $48 million, and John Mack of Morgan Stanley at $42.2 million. In 2007, Blankfein made over $53 million, and Mack made over $41 million. The CEO who took over for the ousted O’Neal, John Thain made over $83 million. Peter Kraus joined Merrill Lynch just before it collapsed and was bought by Bank of America, after 3 months on the job he got an exit package of $25 million. He then was given $52 million to take a job at Alliance Bernstein. He gets rich going and coming.

The Wall Street Bonus

The famous Christmas bonuses are also painful to observe from an average worker’s perspective. In 2007, the four largest investment firms, Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns, gave out year end bonuses of nearly $30 billion.

Investment bank Goldman Sachs bonuses increased 22 percent in 2007 as they awarded $12.1 billion in bonuses. Its CEO Lloyd Blankfein received $68 million, $14 million more than 2006. Goldman co-presidents Gary Cohn and Jon Winkelried were each given bonuses worth $40.5 million, up from $26 million apiece in 2006.

Much of Goldman Sachs record profits in 2007 came from its successful financial manipulations in the subprime mortgage market. It essentially bet against its major Wall Street rivals, who plunged heavily into the business of repackaging home mortgages, into ever-more-complex financial securities whose value is now problematic, even unknowable. As a reward, in 2008 Sachs Co-Presidents each earned $67.5 million with Blankfein earning about $100 million. In 2008 Goldman’s stock declined more than 60% and had to obtain a $10 billion government bailout and Blankfein’s compensation dropped to $42.9 million.

In 2009 after two profitable quarters Goldman Sachs repaid the government its bailout money and set aside $11.36 billion for compensation and benefits in the just first six months of the year, a 33% increase from last year. JPMorgan Chase also paid back taxpayer money and set aside $14.5 billion for bonuses in the first half of 2009, up 22% from 2008.Morgan Stanley has also repaid the government and the bank recorded its third-consecutive loss in the second quarter of 2009. Despite that, the bank has set aside $6 billion so far this year for bonuses and $3.87 billion just in the second quarter, which represents 72% of its revenue. Main Street is once again outraged.

The record for exit packages would have been Richard Fuld if his company had not gone bankrupt he was scheduled to receive $299 million when he exited

Examining Fuld

Richard Fuld, the celebrity CEO of bankrupted Lehman Brothers, appeared in magazines and newspapers on a regular basis, and was called “Gorilla” Fuld. Over a period of 12 years he converted Lehman into a financial high roller that earned more than $15 billion in profits from 2003 through 2007. His investment bank had been hailed as one of Wall Street's best-managed firms as recently as a year ago (Associated Press, 2008 b). In 2006, Institutional Investor magazine named Fuld, America’s top chief executive. The “gorilla” nickname was given because of his aggressiveness, which brought his company considerable success. However, success, and accolades may have had two problematic consequences. It may have encouraged Mr. Fuld to take more and bigger risks, in particular, aggressively piling into high-risk mortgages, and it caused him to find it difficult to acknowledge that his company, was in difficulty – despite frequent warnings from leading analysts. For example, even as Lehman’s stock dropped from $85 to $22 Fuld was persuading investors that the bank remained on solid ground. After, thirty years with the company, he came to believe he was invincible and rejected reports that the bank was in serious trouble. Consequently, his failure to admit failure and sell at prices he rejected as too low, led Lehman to the brink.

In September, 2008 Lehman filed for bankruptcy. Lehman, “… did this to themselves with their own greed," according to A. M. Sabino, a St. John's University business professor who specializes in bankruptcy. "People just got crazy and in their endless obsession to squeeze every penny of profit, they forgot about the perils of taking on too much risk." 28,600 employees are expected to lose their jobs and savings. Between 1993 and 2007, Fuld received about $466 million in compensation, according to executive pay research firm Equilar (Associated Press, 2008b).

A good example of an executive constellation that engaged in high risk and denied realities associated with potential failure is the defunct Lehman Brothers.

The largest bankruptcy in American history, Lehman Brothers filed for bankruptcy in the fall, 2008. The story of this failure centers on Richard Fuld, Lehman’s CEO. Fuld joined Lehman as a college intern in 1969. He was appointed CEO in 1993 and became the longest serving CEO on Wall Street. In his 16 years 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 in 2007, and multiplying its share price 20 times. According to Onaran and Helyar (2008), “Fuld lived for and identified with his firm. It was his oxygen …. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades.” Over the past eight years his compensation totaled about $300 million.

According to Onaran and Helyar (2008), “Fuld's failure to save Lehman … is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. …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. “ Fuld rejected offers to save the firm, Warren Buffett’s offer was considered too low and banks from Japan, China and Dubai were also rejected. If he had accepted offers, Lehman might have survived, but Fuld refused. Why? Some suggest he was too proud and accused Fuld of hubris. Shefrin (2002) maintains that CEO’s suffer from the “Lake Wobegon Syndrome” where all the children are above average. Wiestein, (1980) suggests that excessive optimism is most apparent when CEO’s believe they can exert control and have a high level of commitment. Fuld’s commitment and control was legendary on Wall Street.

Fuld has been widely criticized as the major reason for Lehman’s demised and he has been ridiculed as an example of the high risk Wall Street practices that sent the American economy into turmoil in the fall of 2008. According to New York State Comptroller Thomas DiNapoli, “Mr. Fuld’s decisions drove the company toward ruin ….” (Tong, 2008). What was the motivation for these decisions?

Fuld was always a risk taker. He began his work at Lehman on the commercial-paper desk, and was considered a formidable fixed-income trader. According to Onaran and Helyar (2008), ``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.'' Who were the others? It did not matter, what mattered was that he surrounded himself with the infamous “yes men”. One can easily come to the conclusion that any CEO who has the need to be surrounded by “yes men” is on the road to self destruction, because these subordinates are filled with conscious and unconscious hostility that evolves out of the function of serving their master. They function as intimidated, obliging and thoughtless underlings, who may occupy prestigious positions but do so because they always say “yes”. The hostility evolves from their feelings of being a fraud and their contempt towards their boss. Consequently, they withheld important information from Fuld and worst they lied to him. Have “yes men” been known to lie to their bosses, of course.

Fuld had created the illusion that Lehman was a close knit family. It may have been a family, but it more closely resembled a dysfunctional family. Let’s look at some characteristics of dysfunctional families and how the executive constellation at Lehman resembled them.

· In dysfunctional families speech is stifled and there is emotional intolerance to the expression of feelings or opinions. Lehman was a culture of fear and intimidation where “bad news” was not allowed. Fulds interactions were brief to the point of bluntness. Monosyllables and at times grunting was an often used mode of communication. When Fuld was angry he would give his underling his intimidating stare. This meant one had better depart.

· Dysfunctional families have addiction problems. Alcohol and drugs are most prevalent. At Lehman the addiction was money. Fuld hired what he considered the “best brains” on Wall Street, often at the highest salaries, with the highest bonuses.

· In dysfunctional families there may exist a perfectionist attitude where there is a fixation on prestige, power, and putting up a “good front” to impress others. According to Fuld he never let managers who disagreed square off directly. The most dissension he will tolerate is an agreement to disagree. Fuld stated; "What I need is peace in the family." (Wharton, 2007).

· In dysfunctional families, isolation is often an issue. According to Onaran and Helyar (2008), Fuld became increasing isolated, turning more of the operations over to his officers, however, the authoritarian climate he created cut him off from dissenting opinion.

· In dysfunctional families the lack of impulse control is often a problem. Fuld was feared because of his temper and outbursts.

· In dysfunctional families there is little show of feelings and denial of an inner life. “In public at least, Fuld has never seemed to react with emotion to anything. When times were bad, he just said they would get better. When times were good, he said the same,” (Onaran and Helyar, 2008).

· In dysfunctional families conflict is apparent. Lehman had a reputation for turf wars, personality clashes, and power grabs.

· Dysfunctional families avoid change and “doing things differently. In a discussion about leadership at the Wharton school in 2004, giving leadership advice Fuld said, pick a strategy and stick with it, "unless of course, you're wrong."

· Dysfunctional families have a aura of self righteousness about them. Fuld recalled that in 1998 the financial press was filled with false rumors about the firm. Fuld's policy had always been to ignore the press and let false rumors die. He stuck with that strategy as the stock fell from $85 a share to $22. Finally, he was forced to go out on the road and talk to analysts. Fuld also pre-released earnings to help explain away the rumors (Wharton 2004). This strategy failed in 2008.

What Lehman had was a toxic mixture of resistance to and a fear of change, associated with ever increasing risk. This was most apparent when Fuld spoke at the Wharton school of business in 2004. “Fuld was asked how Lehman will be able to compete against much larger investment firms and international banks such as Citigroup. He responded that the size of a firm is not as important as its understanding of risk tolerance. While Lehman could support six or seven major deals a year, it will instead focus on three or four that can most benefit from Lehman's expertise”, said Fuld, who cautioned that “the global financial system remains awash in liquidity that could dry up suddenly. If that were to happen, Fuld does not want Lehman to be overextended” (Wharton, 2008). The real tragedy was he allowed or perhaps encouraged Lehman to do the opposite. He avoided change and embraced risk and overextended his company..

Lehman was Fulds creation, and it became an important part of, not only his professional career, but his life. For Lehman to decline meant he was in decline. At the age of 62 he could not accept the move towards decline, and death. Fuld became a “Tragic Man”..

The Delusional CEO

Fuld creates an intimidating environment and so demoralizes his staff that they come to believe that the CEO is not the problem, but is in fact quite superior, and that they, the employees are incompetents. When these employees are in management positions they struggle with the experience of being devalued and unappreciated and they see kudos and resources going to others less skillful or successful, but supportive of the fantasy of perfection. On the other hand, a gulf can develop between employees that see reality correctly and observe the CEO as being “out of touch” with reality. Typically, the CEO will fight back and accuse these employees as being troublemakers or cynics. They are often correct employees do become cynical when the executive and his constellation used distortions to protect their delusions.

As time goes on the CEO becomes increasingly insulated, (Fuld was called the “invisible CEO”) withdrawing from reality and engaging in behaviors that appear to outsiders, as bazaar and contradictory. Bonding within the executive constellation evolves almost exclusively from scapegoating activities where non-believers are attacked and labeled. The system becomes exceedingly conservative, politically correct, and judgmental. Their primary activity is to support the illusion of perfection. The CEO reaches downward selecting more and more managers and potential managers who support his delusion or pretend to do so. As these individuals are selectively promoted the CEO becomes increasingly inadequate and the organization deteriorates farther. As statistics or “the metrics” suggest the organization is failing the CEO will rely more and more on testimonials and antidotal data to maintain the fantasy that things are very well.

Another way the CEO maintains delusions is by increasing ceremonies where they congratulate each other, and share stories about their perfections among themselves and anyone who will listen. Often the recipients of these testimonials are low-level employees or interns. The others, those who are scapegoated and labeled, are left out of these functions because often they are the one who are criticized either formally of informally. The CEO carefully controls the “list” of who is invited. The “we-they” climate created by the CEO is supported by events to overtly display the minority status of the “they”.