TOPICS > Economy

A Look Back at the Collapse of Lehman Brothers

September 14, 2009 at 3:38 PM EDT
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Lehman Brothers survived the Civil War, the Great Depression, two World Wars, and the attacks of 9/11, yet under the leadership of Richard Fuld the investment bank went from storied Wall Street firm to catalyst of last year's economic crisis. What went wrong? Paul Solman reports.

JUDY WOODRUFF: And still to come on the NewsHour tonight: the partisan divide; and the father of the green revolution.

That follows two takes on the financial crisis: what happened, and what’s next. Economics correspondent Paul Solman begins with a look back at the biggest bankruptcy in American history. It’s part of his series on “Making Sense of Financial News.”

PAUL SOLMAN: Just one year ago, the day Lehman Brothers collapsed and Wall Street catapulted towards catastrophe, New York artist Geoffrey Raymond made his way to Lehman headquarters.

GEOFFREY RAYMOND: I’m walking up 49th Street. I turn the corner, and Broadway is completely full of TV trucks with their cones up and this and that. And it’s a massive media spectacle. And I set up my Richard Fuld painting and joined the fray.

PAUL SOLMAN: Fuld was Lehman’s CEO, wildly blamed for driving Lehman off a cliff and the world along with it. Raymond, who’d quit P.R. to become an artist, had been painting the wizards of finance because he figured they’d sell.

But as Wall Street buckled, he thought his usual fusion of Jackson Pollock and Chuck Close could use a few added touches from the man on the street.

GEOFFREY RAYMOND: Would you like to write on my painting? It’s a portrait of Richard Fuld. I paint controversial Wall Street guys, and then I let the community comment.

MAN ON THE STREET: Worth $300 million? That’s pretty funny.

PAUL SOLMAN: A year later, having sold his first Fuld to a Lehman banker who left the firm in disgust before its demise, Raymond is back on the street with a second version.

GEOFFREY RAYMOND: Gentlemen, come write something on my painting. Life is short.

PAUL SOLMAN: Soliciting comments once more.

GEOFFREY RAYMOND: The only rule is, don’t write on the face.

PAUL SOLMAN: Strikingly, much of the world, or that slice of it which sight-sees on Wall Street, still curses Fuld and Lehman for our collective year of horror, and so does former Lehman V.P. Lawrence McDonald, one of a group of skeptics within the firm during the salad days.

Era of 'gross negligence'

LAWRENCE MCDONALD: At the end of the day, I think there was gross negligence of the highest order at Lehman Brothers, in terms of ignoring the growing problems of subprime. There were people that tried to stop this madness. There were people that tried. One by one by one, they were squashed like grapes, and they were silenced. At Lehman Brothers, you kept your head down, you did your job, or you lost both.

PAUL SOLMAN: In fact, McDonald, who's written a book on Lehman's collapse, was a member of Lehman's distressed debt group, which made bets against bonds like mortgage-backed securities, treating them as insecurities, you might say.

LAWRENCE MCDONALD: And in 2008, that group made over $2 billion, and a lot of that was made betting against what the executives were doing up on that 31st floor. So the people that I worked with were betting against these toxic assets. And the people on 31st floor were getting deeper and deeper and deeper into it.

PAUL SOLMAN: Greed is good?


PAUL SOLMAN: But were you serious or is it?

MAN ON THE STREET: No, I mean, it's like sarcasm. You know, money...


MAN ON THE STREET: Yes, sarcasm.

PAUL SOLMAN: McDonald says Fuld became so intoxicated with the money to be made in the real estate boom Lehman had helped fuel, he was desperate for the firm itself to invest in it.

LAWRENCE MCDONALD: Lehman Brothers survived the Civil War, the Great Depression, World War I, World War II, 9/11 because it was in the moving business. It was an investment bank. It raised money for companies, brought companies public, simple business. You know, Campbell Soup wants to build a new plant out on the Midwest. Lehman Brothers gives them $10 million and sells $10 million worth of bonds or stocks and collects a fee.

That's the moving business. It's a very, very safe, traditional business. Around 2001, 2002, 2003, Lehman Brothers got deeper and deeper and deeper into the storage business, complex trades and credit derivatives, credit CMBS, like complex securities in commercial real estate, residential real estate.

PAUL SOLMAN: Moreover, says Lehman lawyer Harvey Miller, Lehman was buying these real estate bonds on credit, short-term loans it took out with a meager 2.5 percent down.

Relying on credit

HARVEY MILLER, Weil, Gotshal and Manges: It relied entirely upon credit, and it was leveraged very high. At one point, I think Lehman was 40 to 1.

PAUL SOLMAN: Forty to one, meaning that for every dollar that Lehman put in, they borrowed 40 from someone else?

HARVEY MILLER: Exactly. When the market changed 3 percent, a company like Lehman goes from let's call it solvency to almost insolvency.

MAN ON THE STREET: I wish I could, like, royally screw over a bank and put loads of people out of work, and still be ridiculously rich. That would be a job. I could do that.

PAUL SOLMAN: Angry as many still are, people on the street may not understand the nuances of modern financial engineering. But then, says McDonald, neither did the top brass at Lehman.

LAWRENCE MCDONALD: They had a deep, dark secret. They didn't want to be exposed for all that they didn't understand. We had lost Alamos-type nuclear physicists brainpower that thoroughly understood credit derivatives, thoroughly understood the leverage in the system. These people were ignored.

I mean, Richard Fuld, they had a private elevator. His driver would call Lehman Brothers at the front desk, and the front desk attendant would press a button, and one of the elevators in the southeast corner of the building would become frozen. A security guard would come over and hold it until Mr. Fuld arrived in the back door. He comes in through the back door, so there's only like 15 feet where King Richard Fuld is exposed to the rabble, I guess you'd call us.

HARVEY MILLER: Is that so unusual for a CEO?

PAUL SOLMAN: But didn't Fuld's firm bring down the whole house of cards? We asked Lehman lawyer Harvey Miller.

HARVEY MILLER: I think that's a very simplistic view of the world. You have to look at the entire financial community. And if you look at the Wall Street firms, trading became the big profit center. And it wasn't only just trading securities; it was trading for proprietary accounts. That's where the big money was. And as this continued, who became the CEOs of all of these firms? The traders, because they were producing all the profits.

PAUL SOLMAN: Dick Fuld was a trader.

HARVEY MILLER: He was a trader.

PAUL SOLMAN: As was Lloyd Blankfein, CEO of Goldman Sachs, and future Geoffrey Raymond subjects like Morgan Stanley CEO John Mack, former Merrill Lynch CEO Stanley O'Neal.

HARVEY MILLER: Stan O'Neal kept telling his people, "Why aren't we more like Lehman?" Well, yes, there was a managerial mistake in business judgment, in concentrating on derivatives, in concentrating on securitized real estate transactions, but that was on the premise that Mr. Greenspan and a lot of others said, "Don't worry about it. We have the perfect market. There will never be another depression." There is enough fault to go around so that you could fill up a train from here to Washington, D.C.

PAUL SOLMAN: In fact, says Harvard professor and former Wall Street regulator Robert Glauber, pretty much everybody was on board with Dick Fuld.

ROBERT GLAUBER: It's very easy in retrospect to look back and say, "My God, how could they have been so dumb?" But he wasn't that much more aggressive and more exposed than his competitors.

MAN ON THE STREET: He made $300 billion -- $300 million, didn't he?

GEOFFREY RAYMOND: You should write that on the painting.

MAN ON THE STREET: All right. I'll do it.

Too much at stake

PAUL SOLMAN: Dick Fuld, who declined to talk on camera, was brought before Congress after the collapse in pretty the same spirit of antipathy.

REP. DENNIS KUCINICH, D-Ohio: Did you mislead your investors? And I remind you, sir, you're under oath.

RICHARD FULD: No, sir. We did not mislead our investors. And to the best of my ability, at the time, given the information that I had, we made disclosures that we fully believed were accurate.

PAUL SOLMAN: Look, says Harvey Miller, Fuld believed in what he was doing.

HARVEY MILLER: I think you have to take into account that Dick Fuld, I think, owned 10 million shares of Lehman. He never sold a share.

PAUL SOLMAN: Yes, but when people hear that he took $300 million, $400 million out of the firm in bonuses in the years leading up to the crisis, there's not going to be a whole lot of sympathy for the fact that he lost money on the stock.

HARVEY MILLER: But you've got to look at the rest of the world. What were people making on Wall Street during the years that he was the CEO of a very successful financial institution?

PAUL SOLMAN: Yes, but a success that turned out to be a sham.

HARVEY MILLER: No, for years, it wasn't a sham.

ROBERT GLAUBER: Lehman, after all, performed extraordinarily well over many, many years of his tenure. Lehman came from very small to the fourth-largest investment bank. For many years, people were very impressed by that.

PAUL SOLMAN: Until Lehman's bets began to sour, making short-term creditors doubt its capital, collateral and credibility. And on that mid-September weekend of 2008, says Lawrence McDonald, Lehman brass finally saw the handwriting on the wall.

LAWRENCE MCDONALD: They were warning Tim Geithner, they were warning Hank Paulson, and they were warning Ben Bernanke, and said, "If you let Lehman fail, Lehman's going to be the one, big, massive domino. It's going to destroy the global economy, and it's going to take out a lot of banks with it."

PAUL SOLMAN: But the government did let Lehman fail, because it had to make an example of some firm? Because, according to some reports, Treasury Secretary Paulson didn't like or trust Dick Fuld? Whatever the reasons, the world economy froze almost immediately thereafter and still hasn't really recovered.

MAN ON THE STREET: You're an embarrassment. Burn in Hell.

PAUL SOLMAN: He's looking a little toasty already.

We had one last question for Lehman's lawyer.

Is Dick Fuld as mean as he is sometimes portrayed as looking?

HARVEY MILLER: My few meetings with Dick is he was a perfectly pleasant man, very depressed, very upset about what happened. I think those black shadows under his eyes come from not sleeping and saying, "How did this happen? What did I do? Could I have done anything else?"

PAUL SOLMAN: Just some of the many questions he and everyone else are still faced with a year after Lehman's collapse.