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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Oct 20

Written by: Donald van Deventer
10/20/2009 3:09 AM 

Joseph Tibman’s The Murder of Lehman Brothers is a great complement to Lawrence G. McDonald’s A Colossal Failure of Common Sense.  This blog is a reflection on Lehman and the points that Joe Tibman raises.

In a recent blog I described some of my own experiences at Lehman Brothers, where I spent the years 1987 to 1990 as a senior vice president in the investment banking department (“Eulogy for Lehman Brothers: Hasta la Vista, Baby,” Kamakura blog, , September 14, 2009).  One of the reasons I so looked forward to Joseph Tibman’s book was that he spans the years from 1990, the year I left, until the downfall of the firm on September 15, 2008.  Lawrence G. McDonald’s book, by contrast, is focused on the last few years before the fall. 

As an alumnus of the firm from the “Bonfire of the Vanities” period, I thought the most striking thing about both Tibman’s and McDonald’s books is that they loved Lehman Brothers.  When I look at the firm and the people who were there with me, my “love” for Lehman parallels my love for junior high school, my love for swimming lessons at an unheated swimming pool at Laguna Beach high school, or the operating room at Queens Hospital in Honolulu.  All of those experiences were experiences I needed to have, and yet I am very glad that they’re over.  For Larry and Joe, they’re truly sorry to see Lehman go.  This regretful parting is even more admirable because, contrary to the image of investment bankers, the regret on the part of both authors is not about the money.  They miss the team.

I spent the summer of 1977 on Wall Street after the usual cut-throat competition among Harvard MBAs for the choice summer spots.  I think I ended up as the only Harvard Ph.D. on Wall Street that summer.  The thing I most remember, as a Californian, was that long sleeve shirts on 100 degree days in Manhattan were a 24/7/365 uniform.  That’s why I’m in Waikiki now. 

After that, as senior vice president in the funding department at First Interstate Bancorp, we were called on by some now well-known investment bankers early in their careers.  Takumi Shibata, now Deputy President and Chief Operating Officer of Nomura and effective boss of a lot of ex-Lehman people, was one of the people who helped First Interstate think through the pros and cons of a Tokyo listing (we passed, the right decision).  Jon Winkelreid was the coverage officer at Goldman Sachs and went on to be named co-Chief Operating Officer from 2006 until his retirement in 2009.  Mike McKeever, later one of three co-heads of investment banking at Lehman, was the front line investment banker for Lehman on the First Interstate account.  Mike was the main reason I choose to join Lehman, even though, during the recruiting process, it became obvious that the foreigners in Tokyo acted like a bunch of frat boys on Saturday night, except they acted like that seven days a week.

I plunged into Joseph Tibman’s book looking for some news of the many people that were respected and (in some cases) feared from the “Old Lehman” that I knew, since almost everyone made the rounds of the Tokyo Office sooner or later:  Jimmy Three Sticks (James D. Robinson III, CEO at American Express), Lou Gerstler (COO at American Express and later CEO of IBM), Peter Cohen (CEO of Lehman), Peter Luthy, Hansgeorg Hoffman, Mike Rulle, Bernard St. Donat (“the doughnut” in Tom Wolfe’s Bonfire of the Vanities), Richard C. Holbrooke (special representative for “Af-Pak” now but who wandered through Lehman between government gigs), and many others.  I know that Joe Tibman must have known all of these people because of his 19 years at the firm. The amazing thing about Joe’s almost 20 year tenure at the firm was that such longevity was nearly impossible.  Turnover at the firm was 20-30% a year.  Not only that, as Lawrence G. McDonald’s personal story shows, your “turnover probability” was largely out of your control and independent of your skill.  At that 20 or 30% hit rate, the odds of lasting 20 years at Lehman was somewhere 0.26% to 0.30%--that’s 26 basis points, not percentage points.  Well done, Joe.  Amazing.  The median tenure at a 20-30% quit rate was almost exactly 3 years, which was precisely how long I lasted.  In fact, when a bunch of us left Lehman Tokyo for other gigs in Japan, Lehman worked hard to call our deferred bonus payments “retirement” payments, which cut the tax rate for us in half.  I needed proof that, at a then age 39, I could factually show that 39 was a legitimate retirement date at Lehman.  I demanded and got a list of everyone who had quit Lehman in 1988 and 1989 and their ages at the time.  It was a very long list, and less than 10% of the people on the list were older than I was.  So Joe has a lot of stories to tell in The Murder of Lehman Brothers.

As Joe says early in the book, he loves investment banking and he wants to continue in the business.  Joe clearly should because he couldn’t survive 20 years at Lehman without being both very good and very lucky.  From a reader’s point of view, that means Joe can’t write like Michael Lewis, naming names and being funny about real people’s real foibles and mistakes, except with respect to people like Dick Fuld and Joe Gregory whose trials and tribulations are increasingly in full public view.  Even in my case, having served in the Tokyo office with a delightful guy who later stole the Empire State building and served time in jail for that, I don’t want to mention his name.  I like him as a person. I understand that Joe can’t tell all.

What this means for Joe is that The Murder of Lehman Brothers is much more focused on Dick Fuld’s role at the firm, both good (post 9/11) and bad, than a no holds barred telling of the story.  That’s a small price to pay for a fascinating history that covers nearly 20 years of Dick Fuld’s rise and fall at Lehman.  Joe also does a great job of putting the fall of Lehman in the full context of the 2007-2009 credit crisis, complete with a very nice description of the confident “it can’t happen here” ambiance that pervaded Lehman until the last few months or so.  To recreate that feeling, I went to www.sec.gov and grabbed the last 10-k filing by Lehman Brothers Holdings, the December 31, 2007 version.

I just picked out two numbers.  Total assets on December 31, 2007: $691,063 million.  Total common shareholders’ equity: $22,490 million.  A leverage ratio, if you believe the numbers, of 30.7 to 1.  A 3.25% decline in the value of the assets of the firm would wipe out the firm if everything on the balance sheet at 12/31/2007 were worth par (and it certainly wasn’t).  When I worked at Lehman, did I look at numbers like this?  Not once.  I was too busy.  I was 7,500 miles from New York, and, like Joe Tibman, I was totally confident of Lehman’s future and I didn’t need to look at the numbers.  If there was something wrong, my colleagues in New York would show fear, the best early warning system.  The only time I saw that fear was the night of October 19, 1987, the night of Black Monday.  At 2 am New York time, one of my closest counterparts in New York called Tokyo to see whether life as we knew it had ended.  100% of my assets were in money market funds, but I could understand the fear.  Other than that one day, I never saw one reason to be concerned, so I totally understood how early in 2008 the typical investment banker was convinced that everything would come out ok.

Joe does a very nice job of describing how things unfolded at Lehman from a broader context.  Joe can’t tell stories without revealing his real identity, but the narrative still works great.  In the end, like Lawrence McDonald, Joe points the finger firmly at Dick Fuld and Joe Gregory.  There’s no doubt that the captain of the ship deserves what he gets when he steers into the iceberg.

Joe’s a lot tougher than I would have been, however, on Hank Paulson.  As I’ve related in other blogs, the rescue of Bear Stearns with a heavy U.S. subsidy was very heavily criticized by Democrats and Republicans alike.  Clearly, there was a limit politically to what could be done given the view of the world that prevailed shortly after the Bear Stearns rescue.  That view changed with the inevitable conservatorship for FNMA and FHLMC.  With the government of China owning a large slug of those bonds, there was no way they would be allowed to fail.  AFTER THAT, however, the government had to end the moral hazard that would inevitably result from a policy that “everybody’s too big to fail.”  The next firm in trouble was a firm in BIG trouble.  That, unfortunately, was Lehman.  The fact that AIG was right behind Lehman is what really made the Lehman bankruptcy stand out—if AIG had been 6 months later or 9 months later, AIG probably would have been allowed to fail as well.  By the time AIG came around, however, the general consensus was that Chicken Little was probably right—the sky might be falling.  At that point, Hank Paulson truly was out of options—the sky could not be allowed to fall.  If there’s a critique of Paulson, it was that he did not realize the Lehman card was at the bottom of this house of cards.

Joseph Tibman, you’ve written a great book and I hope one of your friends will e-mail me your real name at info@kamakuraco.com. I promise not to reveal your identity.  In your next book, I hope you’ll tell all of your story—I am sure it’s a very good one.  Well done.

Donald R. van Deventer
Kamakura Corporation
Honolulu, October 20, 2009

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