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.