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Liquidation

September 19, 2008

Last summer, I felt proud that my son, Kyle, a junior at the prestigious Wharton School of Business, was working in the summer as an intern at the also-prestigious Lehman Brothers. Lehman Brothers was founded in 1850. Its website proclaimed, “The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers.”

            Today, Lehman’s website says, “Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. The Firm is headquartered in New York, with regional headquarters in London and Tokyo, and operates in a network of offices around the world.”

            They need to change their website. After 158 years in business, Lehman Brothers filed for bankruptcy protection and is being liquidated. The news cameras showed hundreds of employees walking out of the tall Times Square headquarters, with their tote bags, briefcases, computers, and suitcases. It was as if hundreds of competitors on The Apprentice Show had all been fired by at the same time and escorted out of the glass towers on Wall Street. The only difference is that these people had jobs, income, and wages that they had worked their lives to earn. They weren’t just television tourists on a TV “reality show.”

A little over a year ago, Lehman’s stock was about $80 a share and the business seemed to be flourishing with mergers and acquisitions, private equity, fixed income, and investment banking. Kyle worked over 50 hours a week as an intern and was involved in one of the large company acquisitions that Lehman had been hired to manage. He felt that something might be going wrong on one of the Lehman Monday calls. He says, “When the banks went to sell the debt in the open market (for two private equity deals,) no one bought it and it was the first sign that something might be wrong with highly levered loans. The banks then had to take on all that debt on to their own balance sheet and fund it themselves. On the call were people from leveraged finance and they said we are still open for business but looking at things more cautiously now. A few weeks after I left, almost all PE (private equity) deals were on hold since the fear that no one would buy the highly levered debt—and then it tailspinned.”

            During Kyle’s last week, Lehman made him a very generous offer to come to work after college, including base pay, health insurance, travel expenses, and a large projected bonus based on past history. Kyle writes, “When I think back to during all this is all the people that tried to pitch me to stay. They were saying this is the best time in the history of the company and what a great time to start at the firm. I asked one of the MDs what would happen if the PE markets washed up and he said it wasn’t a problem since they would just do more restructuring work or sell side of companies. Everyone back then was so confident and not worried at all and even when they came back in October, when they wanted us to sign, they were saying that it was almost over and not anywhere close to what happened in 2000. I’m glad I never bought in to all the crazy things they were telling me.

“No one possible could have forecasted this last summer—there were hundreds of things that led to this collapse—it’s just crazy how psychology and fear can destroy a company so large.”

            How right he was! The risky no-money-down mortgage business that most banks and financial companies had been making billions on became a plague that spread to Bear Stearns, Fannie Mae, Freddie Mac, Citigroup, Washington Mutual, Merrill Lynch, AIG, and Lehman Brothers, to name a handful. The losses spread and the merger and acquisition market dried up, banks stopped risky lending, and then the billions of write-offs began. And the stocks kept going down and down for a year.

            But don’t fear: the government is here. Move Bear Stearns to JP Morgan with the government’s help. Take over Fannie Mae and Freddie Mac and swallow over $250 billion in debt. Tell the businesses that the government can’t help anymore and let Lehman Brothers go under and then let a $650 billion 158-year-old company get swallowed up by Barclay in England for $2 billion. Then, change your tune and buy most of the AIG Insurance Company and give them an $85 billion dollar loan. Then, stop short-selling for awhile and discuss a government enterprise that will take over all financial institutions’ bad debt. Then, come up with a way to back-stop the trillions of money market funds that had been collapsing.

            And then the stock market rises in pandemonium.

            We need to calm down and liquidate our fears but it’s not easy when the leadership in Washington and Wall Street is so reactive and inconsistent.

            Do you feel confident that either Barack Obama or John McCain will bring the right leadership to the economy? I certainly don’t. But I am tired of worrying about it.

Let liquidation and meltdowns take their course and let’s watch, like spectators at a sporting event…except that it’s our money, our tax dollars, our children, and us that are the athletes. And no one knows what winning looks like.

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