The Delusional Dick Fuld

Richard Fuld, the former chief executive officer of Lehman Brothers, is the Shaggy of finance. On the cause of the financial crisis and the collapse of Lehman Brothers, his claim is, “It wasn’t me.”

Seven years after he drove the 158-year old firm he ran with an iron fist into bankruptcy, he has reappeared to accept blame for, well, absolutely nothing. Fuld seems to believe himself blameless for either his role in the crisis or the collapse of Lehman. Speaking at a penny stock event, Fuld is still confused about the differences between ownership and control. He made the bizarre claim that “Regardless of what you heard about Lehman Brothers’ risk management, I had 27,000 risk managers because they all owned a piece of the firm.”

As if an employee e-mail to Fuld would have changed the firm’s direction: Imagine “Hi Dick, I own 10,000 shares of Lehman. Please divest all of our risky derivatives and securitized subprime mortgages because I think we’re going to take losses on them.” For the man known as “The Gorilla” to make such an assertion is beyond absurd.

Before we take a closer look at Fuld, a preface: The crisis was notcaused by Fuld or by Lehman Brothers alone. If we look at the top 25 things to blame, the five biggest Wall Street firms (Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs) and their CEOs all fall somewhere in the middle of the list.

Keep also in mind that causation is a complex matter, and that finance is an intricate, interconnected system. There were many, many forces at work that led to the collapse. However, this complexity doesn’t excuse bad actions, poor judgment, and terrible decision-making. I’ve spilled too many pixels explaining why Lehman crashed and burned, but for those of you who may have forgotten:

Wild Overleverage: Lehman Brothers lacked sufficient capital. It used an excessive amount of leverage — about 40-to-1 debt to equity — to chase profit in all manner of exotic mortgage-backed securities.

Had it stayed with a more modest leverage ratio of, say, 12-to-1, it would have had a stronger capital cushion. There would have been less underwriting activity, smaller gains in proprietary holdings and lower risk. The downside of having a de minimus capital structure is when bad investments are made, there is almost no room for error and no buffer to absorb losses.

Why 12-to-1? Lehman Brothers was among a group of five banks that asked for — and received — a waiver of the 1975 net capitalization rule. This led the Securities and Exchange Commission to issue what became known as the Bear Stearns exemption. The rule, which still applied to all other investment firms except the five listed above, displaced the older ratio of 12-to-1.

Hence, this was a very conscious risk-management decision made at the highest levels of the bank.

Bad Modeling Assumptions: When you are jacked up at 40-to-1 leverage, your investment models better be perfect. Lehman’s models were decidedly not. Among the false assumptions in these models were: a) residential real estate never loses value; b) the derivatives market is always liquid, with ready buyers available; c) the risk of borrowing short and lending long can be readily managed. Even as substantial evidence was piling up that these assumptions were false, they were ignored by management.

Excessive Real Estate Exposure: Lehman wasn’t the only securitizer of subprime mortgages — ground zero for the financial crisis — but it was among the biggest. By 2004, Lehman Brothers was originating $40 billion a year in mortgages to feed its collateralized-debt obligation machine. As journalist Roger Lowenstein has pointed out, it was for a time much more lucrative than just selling stocks to investors and underwriting plain vanilla bonds.

Reliance on Ratings: Here is an interesting conundrum: Lehman’s securitized products were highly dependent on the ratings of Moody’s and Standard & Poor’s. However, Lehman was also one of the prime purveyors of credit-rating payola — it participated in the conflict-ridden practice in which issuers pay raters to grade the quality of the debt sold by the payer. If both parties to this arrangement didn’t know the credit ratings were worthless, they sure should have.

CDO Ownership: Lehman kept the senior-most layers of the CDOs it created for itself, but bought credit default swaps on them for safety. Consider that Lehman’s managers weren’t confident enough in the models that forecast the solvency of those tranches, yet they used the same models to determine that American International Group was a creditworthy counterparty to insure them. When the music stopped, Lehman ended up holding lots of what turned out to be junk paper. That’s why Lehman collapsed, and it was apparent (at least to me) back in June 2008 it was in trouble.

Repo 105: Has Dick Fuld really forgotten about this accounting maneuver? On a quarterly basis, Lehman would sell short-term repurchase agreements to create the temporary appearance of cash on its balance sheet to offset some of its towering debt. This made the company look much less leveraged than it actually was. After the quarterly earnings report, the company then reversed the repurchase agreements and the cash drained from the balance sheet. It was a giant sham transaction.

Fuld’s claim that Fannie Mae, Freddie Mac and other so-called government-sponsored entities caused the crisis has been thoroughly, repeatedly, utterly debunked. The sort of revisionism we see from Fuld is no surprise, given his brand of delusion.

You don’t need to take my word on any of this; read the Chapter 11 bankruptcy report on Lehman Brothers. It is an embarrassment of riches of the many follies of Lehman Brothers in general and the man who ran the company.

It’s rather stunning that Fuld, who led Lehman from 1994 until its 2008 collapse, refuses to accept any responsibility for its failure. Even former Federal Reserve Chairman Alan Greenspan has admitted error for his role in the financial crisis; that Fuld will not is deeply revealing.

The rock ‘n’ roller in me wants to suggest Dick Fuld give a listen to Led Zeppelin. To help him start accepting some responsibility, I suggest Step 1 begins with the classic rock tune: “Nobody’s Fault But Mine.”

For further reading on Lehman and the financial crisis:


Originally published as: The Dick Fuld Denial


What's been said:

Discussions found on the web:
  1. rd commented on Jun 1

    The de-regulation push in the late 90s was based on the concepts of Wall Street firms being rational risk managers capable of self-regulating. The fact the Dick Fuld still doesn’t get that he and Lehman were incompetent at risk management means the entire premise of the de-regulation movement is complete bunk. In a highly leveraged system, you only need a handful of bad actors to bring the whole system down. The early warning sign of this was LTCM when a no-name small hedge fund had to be rescued to avoid imploding large swathes of the financial system. Once you had major Wall Street firms showing the same lack of systemic understanding, we ended up with 2008-9.

    And we are just talking about incompetence here, not even getting into the numerous criminal and fraudulent activities happening (latest poster child is FX traders). I wonder what will be exposed when the next bull market tides washes back out to sea. I don’t think it will be pretty since it appears that many of the cultural mindsets have not been modified as much as they should have been.

    • willid3 commented on Jun 1

      i think they understood where they were leading, they just didnt thing it would happen on their watch, or if it did, they could blame it on some one else. which they continue to do when it blew up in their face

    • DeDude commented on Jun 2

      Exactly. LTCM demonstrated that you cannot trust the leadership of financial institutions to adjust their risks down to a level that is acceptable for society as a whole. They have stuffed away lots of personal money in case they bankrupt their company, so the only potential personal loss is pride and a forced early retirement. Off course they are willing to take greater risks than society should let them. Furthermore, like the gamblers in Las Vegas we know that they will double down on risk to get out of a tight spot, so what initially could have been solved without creating severe systemic damage is allowed to get completely out of control. Not only do they need very tough rules; they need very close and tough oversight.

  2. A commented on Jun 1

    Definitely on the top of the sleeze list.

    Somewhat challenged by the ‘we didn’t do anything wrong’ when Goldman knowingly sold shit and then bet against it.

    There is no place for ethics on Wall Street.

  3. MarkKlose commented on Jun 1

    It’s worth noting that in the 5/28 NY Times article on his speech, Fuld is reported to have said “Then in 2007, the Fed raised interest rates, essentially ending the housing boom it had encouraged,” The fact is that the Fed started raising the target Fed Funds rate in June 2004 and continued increments until June 2006 where is stayed until September 2007 when they started lower the rate. Some of the worst RMBS vintages were packaged after the rate had increased and the volume certainly didn’t decrease in that window.

  4. Blissex commented on Jun 1

    «I’ve spilled too many pixels explaining why Lehman crashed and burned,»

    And I have read the excellent book our blogger wrote too, but eventually I have come up with a wider single cause.

    In the 1980-1990 period for various reasons the Republican party (and the Rubin wing of the Democratic party) switched to being the party that represented the interests that made money not by owning land, or owning businesses, or by being managers of businesses, but by benefiting from access to *increasing leverage*. Not even of finance, but of those parts of finance that made huge tax-free or nearly tax-free capital gains fueled from increasing leverage.

    So did most of the conservative parties of angle-american culture countries: they all became the parties principally sponsored not by landed rentier insiders, or business rentier insiders, or management rentier insiders, but by leverage rentier insiders.

    And they all unleashed the power of ever increasing leverage to balloon the personal profits of their sponsors.

    In the past 20-30 years economic policy has largely been reduced to a series of intellectual excuses and practical actions for ever increasing leverage.

    With the enthusiastic complicity of the vast mass of house price speculators in the middle class, who demanded with ferocious greed to be gifted higher leverage ratios for property speculation from which they were getting over 100% ROI per year at the expense of those less wealthier than themselves.

    • Blissex commented on Jun 2

      «In the past 20-30 years economic policy has largely been reduced to a series of intellectual excuses and practical actions for ever increasing leverage.»

      Should mention that Sheila Blair, once head of the FDIC (and thus very aware of the state of banks and credit markets), recently made the same argument:
      «We had a crisis that was based on solvency problems: banks and households were borrowing too much. They needed to go through a process of deleveraging. Monetary policy cannot address that.»
      «And, so, I think we need to reduce our reliance on monetary policy, which creates instability by encouraging leverage and encouraging lenders and investors to go further and further out on the risk curve.»
      «But this idea that we need to feed the beast by letting them take on higher and higher levels of leverage so that they can make levered returns and generate more shareholder profits for themselves is not sustainable in the long term.»

  5. Crocodile Chuck commented on Jun 1

    Lehman, like Bear, was an increasingly marginal player in the capital markets.

    One of the things that came back to bite it was Fuld’s refusal to pitch in with his stablemates during the LTCM Crisis in Aug. 1998. Hank Paulsen remembered this.

    But the idea of funding a sprawling $0.7T balance sheet with overnight hot money-and doing so without even an asset:liability committee-is the definition of insanity.

    It was just a matter of time.

    • DeDude commented on Jun 2

      “Fuld’s refusal to pitch in with his stablemates during the LTCM Crisis in Aug. 1998”

      I did not know this. Now that peculiar “save one but let the other go down” act of the early financial crisis makes sense. It was not flip-flop policy, it was a personal grudge.

    • Blissex commented on Jun 2

      «funding a sprawling $0.7T balance sheet with overnight hot money-and doing so without even an asset:liability committee-is the definition of insanity.»

      It is the definition of delivering huge bonuses for 10-15 years for everybody involved and then letting suckers deal with the black hole.

    • Blissex commented on Jun 2

      «”funding a sprawling $0.7T balance sheet with overnight hot money-and doing so without even an asset:liability committee-is the definition of insanity.”»
      «then letting suckers deal with the black hole»

      deTocqueville wrote in the 1830s:
      «Consequently, in the United States the law favors those classes that elsewhere are most interested in evading it.
      It may therefore be supposed that an offensive law of which the majority should not see the immediate utility would either not be enacted or not be obeyed.

      In America there is no law against fraudulent bankruptcies, not because they are few, but because they are many. The dread of being prosecuted as a bankrupt is greater in the minds of the majority than the fear of being ruined by the bankruptcy of others; and a sort of guilty tolerance is extended by the public conscience to an offense which everyone condemns in his individual capacity.»

  6. weekender823 commented on Jun 2

    Barry – I read this and reread your “25 things to blame” article and I do have one question.

    Granted most on the list deserve jail, but are the criminals really to blame for the target rich environment? I suggest that the Triffin Dilemma, the imbalances caused by using a sovereign currency as the world’s reserve currency, enabled these exceptional thieves to prosper.

    If we set aside all of the NWO related fear-mongering, could replacing the USD with a basket of currencies (including the USD), represented by the IMF’s SDR, be a worst solution except for all the others?

Posted Under