God, Country, Lehman

NEW YORK (TheStreet) -- The turning point in my three-month career at Lehman Brothers happened well before I began with the company in July of 2008.

I'd been hired into Lehman's analyst class about a month before the sudden failure of Bear Stearns signaled an epic bull-market run on Wall Street was coming to an end.

Amid the turmoil of Bear's collapse that March, I felt it would be smart to email one of the executives who had hired me to let them know I was still very much invested in Lehman.

"I wish I could be there to roll up my sleeves and help out. I look forward to the opportunity to contribute my best efforts to the Firm," I wrote from my college email address.

It was a smart move. Why not be on the record as standing tall when circumstances at Lehman took a turn for the worse that summer?

Better yet, I got a note back. Five years later, it stands as one of the better insights I have into what went awry at Lehman.

"It's all hands on deck but we have been through this before. We have the best senior management on the street and they will not let anything happen to this Firm without a fight," the exec wrote.

"God, Country, Lehman," he added.

At the time, Lehman was one of a few banks on Wall Street still reporting solid profits. Except for Goldman Sachs (GS), it was considered the choice firm for a fast start in finance. Rank-and-file employees made it a point to impress upon new recruits that the next step for Lehman was Wall Street's top spot.

As larger competitors like Merrill Lynch, Citigroup (C) and UBS (UBS) took billions in mortgage-related writedowns and management heads rolled, Lehman, led by longtime CEO Richard S. Fuld, could boast that it was gaining ground.

Fuld had freed Lehman from American Express (AXP), and he'd led the firm through the Asian financial crisis and the failure of hedge fund Long Term Capital Management. After the Sept. 11, 2001 terrorist attacks destroyed Lehman's World Trade Center offices and crippled its staff, Fuld rallied the firm and moved it to a now iconic midtown Manhattan skyscraper.

When Bear Stearns collapsed in about a week's time, however, the aura surrounding Lehman evaporated. On March 17, the day of Bear's fire-sale to JPMorgan (JPM), Lehman's shares fell as much as 40%. Some investors such as David Einhorn of Greenlight Capital had questioned Lehman's balance sheet and now, it seemed, people were taking notice.

A day later, Lehman reported an unexpectedly high first-quarter profit that signaled, once again, the firm would eat the lunch others had lost on Wall Street.

Shares in Lehman surged 46%.

That Spring, Fuld was profiled by the New York Times as possibly the type of Wall Street veteran who could pull Lehman through a growing tumult in the bond markets. Lehman's new CFO, Erin Callan, also became a financial media darling after the firm's resilient first-quarter results and a successful capital raise that included a multi-billion dollar investment from C.V. Starr and $4 billion in new equity.

Wall Street Meltdown: Five Years Later:

Fuld and Callan were polarizing inside the firm, however. Some saw reason to believe they could help the firm survive. Others weren't so sure.

At a picnic with fellow college grads in June, many of whom were also headed to Wall Street, one hedge fund manager remarked that 2008 would be the last stop on the gravy train between colleges and Wall Street. A lot of us would be out of a job by year-end.

Shortly thereafter, Lehman reported a net loss of $2.3 billion, its first loss in years, as subprime mortgage writedowns finally hit the firm's financial statements. Management admitted they were disappointed by their execution and vowed to improve performance.

By the time I started working for Lehman in early July, reports were already surfacing that Fuld was traveling the world in search of a strategic buyer or a deep-pocketed sovereign wealth fund to make a cornerstone investment. It is also now known that Fuld lobbied top government officials to ask Warren Buffett if he would take a look at investing in the firm.

My job in Lehman's sprawling over-the counter (OTC) swaps operations, while not on a glamorous trading floor, exposed me to a part of Wall Street that I and most ordinary people had been virtually unaware of prior to 2008. Being in the engine room of Lehman's trading business also revealed some worthwhile anecdotes, even if they are tame in comparison to the double-chinned, onion-burger eating bond salesmen at Salomon Brothers that Michael Lewis described in Liar's Poker.

Firms like Lehman were throwing bodies at their swaps businesses, in an effort to weed through a giant paper trail of trades left outstanding from when derivatives markets were booming just a few months earlier. Some colleagues had been sleeping in Lehman's offices and working banker-like hours to untangle webs of failed trades that were woven across Wall Street.

As the summer carried on, a sharp slowdown in trading lingered as a concern. Everyone's workload tailed off. So much for an all-hands-on-deck effort.

Weekly Tuesday-evening presentations by Lehman's various fixed-income desks revealed just how surprised some were to learn of the exotic products the firm was trading. No meeting I went to was better attended than an August 2008 presentation by Lehman's synthetic CDO desk.

A geeky trader explained Lehman's understanding of the loss rates of synthetic CDOs and ended his presentation with his head hung, having conceded that the product was not performing as expected. The Q&A session stretched far longer than the presentation. Since Lehman's collapse, synthetic CDOs have yet to make a comeback.

At an orientation put on by Human Resources to introduce new hires to Lehman's "do's and don'ts," one management-type couldn't understand why the firm banned client outings to male-only golf clubs. How could one possibly build a business with those kinds of restrictions? Where would the crackdown end?

Clearly, some were mentally unprepared for the change that would soon grip Wall Street. When Lehman failed, so did its no-strip-club policy. Employees swarmed a now-defunct lounge across the street that was offering free drinks as a consolation.

All Hands on Deck

Five years ago, investors around the world were watching to see if long-tenured Wall Street lions such as Fuld, John Mack of Morgan Stanley (MS) and Lloyd Blankfein of Goldman Sachs (GS) could pull their firms through a quickly worsening credit crunch.

Next time there is a similar crisis, hopefully Wall Street's leaders won't be jetting around the world like Fuld and Mack in search of life-saving capital. Instead, they should be busy assuring regulators and investors that their firms are prepared for an organized liquidation.

Wall Street is brimming with stories of cowboy CEO's who pulled firms from the brink of collapse.

Fuld led Lehman through at least three crises. Mack wrested control of Morgan Stanley after its merger with Dean Witter and pushed the firm headlong into risky trading businesses. Blankfein was part of the C-Suite coup at Goldman that brought the firm to public stock markets.

J. Pierpont Morgan locked bankers in his library to stem the Panic of 1907 and about 100 years later, JPMorgan (JPM) CEO Jamie Dimon, faced with a similar circumstance, was the first among a handful of Wall Street CEO's to accept capital that the government wanted to inject in the nation's largest banks.

The bankruptcy of Lehman Brothers, however, repudiated the mythology surrounding titans like Fuld, Mack and Blankfein. Wall Street, having over-leveraged in the 2000s and grown to the point where firms were "too big to fail," is now clearly unsuitable for buccaneering types.

Lehman's failure set off a chain of events that precipitated the worst economic slump since the Great Depression and exposed fundamental flaws in the business models of major securities firms. Everyone on Wall Street would have been out of a job had the Federal Reserve and U.S. Treasury not sprung into unprecedented action and provided billions in bailout money and trillions in cheap liquidity.

Those bailouts spawned a stiff regulatory response, the full weight of which is yet to be seen. Already there has been a dramatic change in tone atop Wall Street.

Blankfein is one of just a few remaining CEOs ever to have manned a trading desk. Dimon, Wall Street's loudest voice, is mired in the fight of his career as he tries recover from a $6 billion trading loss and ward off criminal and regulatory inquiries hitting JPMorgan.

Morgan Stanley's Mack has been replaced by James Gorman, a wealth management expert, and the firm's earnings show it is de-emphasizing expensive trading businesses.

Vikram Pandit, a hedge fund manager who led Citigroup, was ousted in late 2012 in favor of an executive tasked with winding down the bank's non-core businesses. Bank of America is being run by a lawyer who is trying to work through over $40 billion in subprime mortgage losses. Robert Diamond, CEO of Barclays, left the firm in disgrace last year and has been replaced by a credit card banker.

Still, no captain of industry had a bigger cult of personality than Lehman's Fuld and nobody has seen a more complete rejection of their legacy. The Wall Street that Fuld reigned over until Lehman's last days no longer exists.

When Lehman was a scrappy Wall Street upstart, there was no reason it couldn't be led with the aggressive spirit that firms like Salomon Brothers and Drexel Burnham Lambert carried in a previous day.

When Lehman became one of largest banks in the U.S. with a $639 billion balance sheet and trillions of dollars worth of derivatives trades, "God, Country, Lehman" was an unacceptable way to approach a financial crisis.

Wall Street has and will continue to become more programmatic. Regulators, investors and media need to continue to focus on quantitative issues such as capital and liquidity over the personalities that once gave the industry its allure. New regulations, meanwhile, are constraining animal spirits.

Still, Wall Street investment banks may remain in a bubble. Since 2009, the securities industry has averaged a negative net capital return.

The industry of 2018 will be very different from the present day, says Roy C. Smith, a professor at New York University's Stern School of Business and former Goldman Sachs limited partner. He expects businesses like Merrill Lynch and Barclays' investment bank to eventually be split from their commercial banking parents. Firms such as Citigroup, JPMorgan, UBS, Deutsche Bank and Credit Suisse, may also reconsider whether they want to own trading businesses.

"Everybody has had a lot of that piss and vinegar from the investment banks taken out of them," Smith says of banking conglomerates.

Personalities like Fuld could return. However, for that to happen, the industry will have to shrink to the point where firms are no longer a threat to the wider economy.

Don't count on it.

-- Written by Antoine Gara in New York.

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