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Congressional Scrutiny, The blame game: Richard Fuld vs Henry Waxman

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 6, 2008

I think ‘lack of capable leadership’ is the real reason this company failed. Fuld knew the street was short LEH stock, and they were betting on him not taking the correct action, which would have been to purge the firm’s books of all bad assets, regardless of how cheap he had to sell them. First and foremost, a trader must know when to cut his losses, and take decisive action when called for, regardless of how painful. Fuld dawdled, hoped, and prayed, and lost the entire company.

Lehman Brothers Holdings Inc. chief executive Richard Fuld blamed the bankruptcy of his company on a “lack of confidence” in congressional testimony on Monday. He and other executives “did everything we could to protect the firm,” including closing its mortgage origination business and reducing some leverage, Fuld said in testimony prepared for delivery at a House Committee on Oversight and Government Reform. Committee Chairman Henry Waxman, D-Calif., however, cited an analysis showing that Lehman saw warning signs but didn’t move fast enough to contain them.“I feel horrible about what happened,” he said in prepared remarks submitted to the the House Committee on Oversight and Government Reform.

“Ultimately what happened to Lehman Brothers was caused by a lack of confidence,” Fuld said. “This was not a lack of confidence in just Lehman Brothers, but part of what has been called a storm of fear enveloping the entire investment banking field and our financial institutions generally.”

The House panel is conducting two days of hearings examining the collapse of Lehman and insurance giant AIG. Committee Chairman Henry Waxman described Lehman as “a company in which there was no accountability for failure.”

He read portions of company documents indicating that a recommendation that top execs forgo bonuses was ignored. Instead, Waxman said, Lehman’s compensation board received a request on Sept. 11 – four days before the company declared bankruptcy – requesting that three execs be given $20 million in additional payments. “In other words, even as Mr. Fuld was pleading with Secretary Paulson for a federal rescue, Lehman continued to squander millions on executive compensation,” Waxman said.

“Mr. Fuld will do fine,” he said. “But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis.” Fuld will likely be grilled today about his own pay package, which totalled more than $40 million last year. According to an analysis by Equilar, a research firm, Fuld was paid nearly $465 million from 1993 through 2007.

But Rep. Henry Waxman, who was chairing the hearings for the House Oversight and Government Reform Committee, was having none of it. He upbraided Fuld for his high-living lifestyle while his company was going under. Referring to Fuld’s several homes and an art collection worth millions, Waxman said, “It seems that the system worked for you, but it didn’t seem to work for the rest of the country or the taxpayers.” For his part, Fuld blamed the fall of Lehman on a lack of confidence in the financial system as a whole and naked short selling fueled by false rumors.

Lehman had waged a war of words against hedge fund manager David Einhorn of Greenlight Capital. As early as last year, Einhorn said that Lehman was not revealing how much they were exposed to the subprime mortgage crisis. Waxman said that at the beginning of the year, when liquidity was already a problem at the investment bank, Fuld depleted Lehman assets with more than $10 billion of year-end bonuses, stock buybacks and dividend payments.

Waxman has invited five fund managers, all of whome who earned over $1 billion last year, to testify about the role of hedge funds in the financial markets and their regulatory and tax status. The CEOs of the nation’s three largest credit rating agencies have been invited to discuss their part in the financial excesses on Wall Street, as well. And former Federal Reserve chairman Alan Greenspan, former Treasury cecretary John Snow, and current SEC chairman Christopher Cox have been asked to testify in regards to the responsibility of federal regulators in the financial crisis.

“Lax oversight and reckless investments on Wall Street are causing massive disruption throughout our economy,” said Waxman in a statement. “Our hearings will examine what went wrong and who should be held to account.”

Inquiries into Lehman Brothers are clearly just the beginning of what proves to be a long process on Capitol Hill to ferret out players and blame. Waxman and his committee are out to hold those deserving accountable — although we’re pretty sure the blame will be felt far and wide when all is said and done. “This was not a lack of confidence in just Lehman Brothers, but part of what has been called ‘a storm of fear’ enveloping the entire investment banking field and our financial institutions generally,” said Fuld, in prepared testimony released by the House Committee on Oversight and Government Reform.

“I take full responsibility for the decisions that I made and for the actions that I took, based on the information that we had at the time,” he said. “With the benefit of hindsight would I have done this differently? Yes, I would have.”

The committee, chaired by Rep. Henry Waxman, D-Calif., is examining the cause and effect of the Sept. 15 bankruptcy of Lehman – and who is to blame for it. Lehman executives understood the seriousness of the firm’s dire financial state but “didn’t act fast enough” to prevent the collapse, Waxman said. The firm, in the days before it filed for bankruptcy, sought board approval to pay three departing executives more than $20 million, according to Waxman.

Waxman asked Fuld if it was true he made between $400 and $500 million running the company since 2000, referencing Fuld’s vacation homes in Florida and his impressive art collection.

Lehman Brothers filed for bankruptcy last month. “You did well when the company did well and you did well when the company did poorly,” said Waxman.

“Is that fair?”

Fuld pushed back from the allegation that he made $500 million during the time period, arguing that his cash compensation was closer to $60 million, which he admitted was “still a large number.” In his opening statement, Fuld expressed regret that he could not save the company he had been with since 1966.

The only difference between Lehman and the rest of them is that Lehman was the example. The rest, Bear, Merrill, Morgan and, yes, Goldman, were saved by the “white night” – the American taxpayer. All of these firms (but to a lesser extent Goldman) had bad assets to contend with. The only difference is that we will own those assets now and the firms left standing and their shareholders will be sitting quite pretty.

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