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Dick Fuld is Still Trying to Blame Everyone Else For Lehman’s Failure

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The English language needs a new word to describe the nature and degree of disconnectedness from reality represented by Dick Fuld. He occupies a weird funhouse realm in which he did no wrong, those mean people in DC and the evil shorts brought down a viable enterprise. Remember, this is the man who certified financial statements goosed up to the tune of $50 billion via Repo 105, a ruse that ought to have been an accounting fraud but wasn’t, says he never heard of it, yet considers himself sufficiently well informed about what was happening at his former firm to be a qualified judge of whether it could have survived. Frank Partnoy concluded:

The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

The report cites extensive evidence of valuation problems. Check out page 577, where the report concludes that Lehman’s high credit default swap valuations were reasonable because Citigroup’s marks were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s valuations the objective benchmark?

Or page 547, where the report describes how Lehman’s so-called “Product Control Group” acted like Keystone Kops: the group used third-party prices for only 10% of Lehman’s CDO positions, and deferred to the traders’ models, saying “We’re not quants.”

Economics of Contempt comes to a simpler conclusion, that Lehman was misrepresenting the size of its liquidity pool “in a huge way.”

But no matter how you look at it, even with the voluminous Valukas report, no one has come up with a plausible explanation as to the magnitude of Lehman’s black hole. As we noted:

But the numbers do not add up. The bankruptcy administrator has put the losses at $130 billion (although that number is still in play) and was (remarkably) denying that Lehman had a solvency problem at the time of its collapse, when the tenor of the Government section suggests the reverse. In addition, Lehman’s net worth as of May 31, 2008 was reported at $26 billion. So if we accept the $130 billion estimate, the swing from reported net worth to losses realized was over $150 billion. We still have no satisfactory explanation of how that took place.

“Denial” and “pathological” are near cliches and therefore far too weak to describe the fantastically distorted lens through which Dick Fuld views the world. He seems to believe if he can get enough people to repeat his delusions, that will make them true. Bloomberg apparently had an advance version of his written submission to the Financial Crisis Inquiry Commission (sadly, I don’t see it yet at the FCIC website), and it appears to be a doozy. From Bloomberg:

Richard Fuld, former chief executive officer of Lehman Brothers Holdings Inc., said regulators relied on “flawed information” in denying his company aid that was extended to competitors.

“Other firms were hurt by their plummeting stock prices,” Fuld, 64, said in prepared remarks submitted to the Financial Crisis Inquiry Commission for a hearing in Washington today. “Lehman was the only firm that was mandated by government regulators to file for bankruptcy. The government was then forced to intervene to protect those other firms and the entire financial system.”….

“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days,” said Fuld.

Yves here. There is a wee problem with this account. With Lehman’s books unreliable (this is something pretty much everyone on the Street knew prior to its collapse, that its asset values were inflated in a serious way), a government remedy was out of the picture. Even with the monster AIG rescue, there were a lot of decent assets that could serve as collateral for loans. But was there really anything solid at Lehman? The gaping maw of losses in fact confirms that the hesitation of any actor to step into the breach was warranted.

Or maybe Fuld still believes in the tooth fairy:

The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share.

In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

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35 comments

  1. attempter

    I had to laugh while reading this; this post is an antidote. I’ve been reading Too Big to Fail and have felt oddly relatively unhostile toward Fuld, compared to my feelings of rage and hate toward pretty much everyone else in there.

    The psychological reason I feel that way is because Fuld has already been smacked down to an extent (though he still has all the money he stole), while all the other criminals – Geithner, Dimon, Bernanke, etc. – remain the flourishing exemplars of wingnut welfare and continue to commit capital crimes on a daily basis. I guess it seems like Fuld at least has been neutralized.

    But intellectually I know that’s invalid. He’s just as criminal, just as evil.

    (Sorkin fraudulently represents him as befuddled but well-meaning, the victim of subordinates. Just the way Obama cultists represent their Fuhrer.)

    1. kievite

      An interesting question is why Fed and Treasury rejected Lehman application to became a bank holding company…

      1. Skippy

        Smiley Rule #3. Run around table naked till others are satisfied or authority with out punishment is unenforceable…eh…and what better way to remove the weakest of the pack…M&A buffet.

        Cosmology would have parallels, me thinks.

        Skippy…good to see ya back kievite.

  2. Ina Deaver

    That last couple of paragraphs is gold. I especially love how three crickets and a bullfrog is 150% of the value of the portfolio.

    This is onion level stuff. Antidote, indeed!

  3. Sungam

    Well, I can semi see his point. I mean, it looks like most bank asset valuations still come from lala land or are only at their current level due to government support. I’m pretty sure that most Wall Street Banks if put on hold and taken apart on the same day as Lehman would also show huge funding gaps, exceedingly dodgy accounting of liquidity and so forth.

    In a way the sad thing is that while everyone now has a very good idea how bad Lehman was we’re still not entirely sure how much worse than everyone else they were.

    1. mezcal

      Absolutely agree.
      The asset valuations were and still are complete fiction.
      Just look at the writedowns that Sheila does every Friday.

    2. kievite

      “Remember, this is the man who certified financial statements goosed up to the tune of $50 billion via Repo 105, a ruse that ought to have been an accounting fraud but wasn’t, says he never heard of it, yet considers himself sufficiently well informed about what was happening at his former firm to be a qualified judge of whether it could have survived.”

      I respectfully disagree. Fuld is just a side show. From browsing today’s hearings on Cspan and have an impression the Fed and Treasury were playing interesting and pretty dangerous games at the time too.

      I think we should compare Lehman with other investment banks. The net result would be that all TBTF investment banks were amazingly reckless and all of them were up to the neck in derivatives.

      Therefore the question “Why Lehman?” still needs to be answered Fuld or no Fuld.

      Can Lehman be saved? Absolutely. Did the bankruptcy did tremendous damage ? Absolutely. A lot of losses were result of bankruptcy and associated financial shock and selling assets at huge discount.

      Why this was done ??? This is the question…

    1. Ina Deaver

      Never, EVER would I knock the Onion. We play a very popular drinking game around our house when the despair gets too thick called “pick the onion” – we pull articles from real “media outlets” and from the Onion and try to sort reality from their pungent satire. Oddly, gets easier after several drinks rather than harder.

  4. jf

    Clearly, Dick Fuld is an idiot.

    Some strange things happened after both Bear Stearns died and Lehman. Bear Stearns probably could have been saved by having the Fed open the discount window and changing to a “bank” like the other firms did. After Lehman went down, Wall Street convinced people that mark-to-market had to go.

    How convenient. You hear silly analysts like Dick Bove talk about how cheap banks are because they trade at near book value. HA! What is book value?

    Three major REIT’s walked away from from underwater commercial mortgages last week. How are banks books going to look when this becomes a standard business procedure for these firms. Not too mention all the money the banks are losing on foreclosed homes…

    In conclusion, Wall Street is a rigged game. Both Bear and Lehman were happily killed by the Fed and a treasury secretary helping his former firm (Goldman Sachs).

    1. Drew in Chapel Hill

      I hate Geithner – but he didn’t ever work for GS – in an on the payroll capacity that is ;)

      1. Chris

        Doesn’t really matter where Geithner worked, he’s part of The Establishment so he gets a pass no matter what.

        1. Drew in Chapel Hill

          Well – he worked for the NYFRB. Which in my opinion, is worse than GS. At least at GS they have a financial incentive to screw-over retirees, state workers, pension funds, etc. even though it is hmmm… evil. Geithner seems to be one of those great protectors of the public trust that seems intent on fellating all of the lower Manhattan financial district in the interest of the American people.

        1. jf

          Definitely speaking about Paulson…But little Timmy probably going to get a VP job at Goldman sometime in next year…

          1. Drew in Chapel Hill

            My apologies. I stand corrected. I don’t even want to get started on Paulson. I already want to go pour myself a drink, turn the lights off, close the shades, and listen to Leonard Cohen – and it is only 11am.

            Unfortunately, unlike the government jobs mentioned above, there would probably be repercussions for me if I broke the rules.

  5. Drew in Chapel Hill

    It’s all so depressing. The fact that Repo-105 exist as legal way to commit fraud against ones investors, and the public at large in Lehman’s case, should tell everyone who can rub two brain cells together how corrupt, rapacious, and complicit our government is in the heist that took place at Wall Street’s behest. And I say that as someone who believed in government my whole life, and works (very hard and for not much pay) for them now.

    The sad fact is that government now exist to protect businesses and the one-percenters from the people. Dick Fuld is a**hole, but he’s a**hole that is a product of that system. Honestly, the man has come off as a delusional, out of touch, doddering idiot in every appearance. He seemed so impetuous, and angry to be in front of congress… yet he didn’t have any idea what his “book” was, the accounting tricks that were taking place, Lehman’s liabilities and so on. It really doesn’t occur to him that, as CEO, that is what he was paid do to – know this stuff and make the decisions about what the company did. He looks like he’s thinking, “Hey guys, we bought and paid for this… and you’re making me miss my morning round at the course with this testimony! WTF? It’s gonna be hot as hell by the time I get out there!”

    And, as if those circumstances aren’t enough to harsh your buzz, when it all gets exposed (the clueless CEO, the spineless and corrupt NYFRB and Congress, the bread and circuses in Washington) no ones seems to give enough of a s**t to make someone – anyone – go to jail for it. Isn’t sunlight supposed to be the cure? I guess that doesn’t work anymore either. H*ll, Fuld is still using Lehman assets to pay for his legal defense! And no one is stopping him. Still bleeding the retirees, investors, funds, etc. that were dumb enough to believe in the system – right down the last drop.

    I wish I were a religious person… not for the salvation, but so I could imagine a place where one day these people might actually see some justice – they sure as h*ll aren’t going to get it here.

    1. Drew in Chapel Hill

      Oh yeah – don’t forget that the NYFRB guy who oversaw all those perfectly legal Repo-105 fraud transactions at Lehman. What was his name? Oh yeah, Tim Geithner. He’s running the treasury now. Make me feel just great about our chances for recovery.

  6. Jesse

    At this point Fuld is probably trying to cover himself, litigation-wise.

    He *could* believe what he is saying. I’d give it slightly better odds than Jeff Skilling, but not by much.

  7. charles

    Drew in Chapel’s hill’s remark is spot on, people should
    remember that the NYFRB mandated an ‘audit’of Lehman’s
    following the Bear Stearns’collapse

  8. ep3

    As Sorkin points out in his book, everyone knew after bear that lehman was next. Paulson and company did absolutely nothing to protect them over that 6 month period and only half-heartedly attempted buyouts by other companies. Paulson left it up to Fuld to solve his own problems and yet worked nite and day to save his precious Goldman and it’s casino, AIG. I don’t think Fuld is innocent. But considering that the companies that were saved were all friends of republicans and democrats, to me Paulson knew it would be a money free-for-all if lehman blew up.

  9. jf

    Gee I forgot to mention some other timing of events…when was that AIG bailout approved? Yes, the one that bailed everyone out at 100 cents on the dollar…after the convenient killing off of Lehman…interesting.

  10. Anonymous Jones

    Sorry, just can’t share the rage. Dog bites man. People generally believe that all their successes are the result of their talent and hard work and all their failures are the result of bad luck and others’ meddling.

    And even then, we don’t know that Fuld even *believes* this. Unreliable narrator problem. It’s in Fuld’s best interest to convince a few people that he wasn’t to blame even if he knows he was to blame.

    It’s good to show that he is not being accurate, but we need no words other than “denial” and “pathological” to describe this (and we can never be sure that those even apply here…Fuld may know exactly what he’s doing).

    1. Yves Smith Post author

      The reason I think he is crazier than that are the many depictions of him in the media, not jus Sorkin’s. His behavior when he was trying to get a deal done for Lehman was stunningly desperate. It was teh M&A equivalent of walking up to every woman in the bar and saying, “Wanna fuck? I’m really horny.”

      And the depictions of his behavior by insiders and outsiders also show him to be extremely narcissistic and hyper aggressive to boot.

      Now I agree completely that his line on Lehman’s viability is what his attorney would advise. But there is also plenty of evidence of him being borderline unhinged, and that being depicted as a virtue as long as the firm appeared to be making money.

  11. Hugh

    The adjective you are looking for is Fuldian. It comes from that old saying:

    Fuld me once, shame on — shame on you. Fuld me — you can’t get fuld again

  12. jk

    And all the pretty horses who worked for Fuld are now happily ensconced at…Barclays, mostly, except for Tom Russo, Jester-in-Chief, who landed comfortably working for his old pal Benmosche (Croatian Vacation dude) at AIG. Stunning.

  13. Washington Carrasco

    I’m reminded of the Chilean verb davilar after Juan Pablo Davila, a copper trader who accidentally hit “buy” rather than “sell” and attempted to recoup by making increasingly unprofitable trades that ultimately lost 0.5 percent of Chile’s gross national product. The verb means to botch things in a big way.

  14. Skippy

    Hell these guys are playing the biggest game of smiley ever! It’s a poker game some guys told me about in the military (DMZ stuff).

    First you get 10 or so guys, then a big table, next one or two gals from momasan, oh and lots of grog. Guys sit at said table with gals underneath. Now its really three games in one, poker, drinking and smiley. The trick is to not smile whilst the gals are applying their skills or penalties apply ie: scull drink (increasing loss of playing skill), lose/forfeit monies on the table, strip naked and run around table till others are satisfied etc.

    Skippy…Wall st and DC, the biggest game of smiley this planet has ever seen…cough…Bear Stearn’s/Lehman’s collapse = they smiled and were caught…sigh.

    PS. nothing like watching human potecial getting pissed up the wall like a frat boy still trying to deal with his feelings over mommy and daddys precived lack of love.

    1. skippy

      Um…the get payed soooo much?

      Is that not the metric of virtue in this day and age, huckleberry?

      Skippy…the amount of $$$$$$$ in ones recompense is directly attributable to their inalienable worth to the planet…eh[!]…hence veracity!!!!!

      PS. how much do you make by the way[?], just checking you know.

  15. yoganmahew

    Of course he is blaming everyone else. To do anything different would be to admit culpability in a criminal enterprise and end up with him disgorging his ill-gotten gains.

    What do you think he is, a priest? … er, maybe that was a bad example…

  16. DavidE

    Why did the Fed and Hank Paulson force the Bank of Evil (Formerly known as Lehman Brothers) into bankruptcy?

    Fuld’s explanations are ridiculous. The question is not whether Lehman was insolvent. The question that should be asked is when did Lehman became insolvent. When should Lehman have been forced into bankruptcy? From some of the contemperaneous notes that were given, it appears that the federal government believed that Lehman was insolvent early in 2008 if not in 2007. They should have acted at that time.

    By forcing Lehman into bankruptcy earlier, the losses would have been less.

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