on July 17, 2006
This is a classic tale of a company run into the ground because it had two CEOs and two different departments fighting one another for the juicy bonuses. Moreover, the CEOs had totally different characters and a completely different business vision. One was extrovert, overambitious, jealous, profoundly selfish, impulsive, volatile, dominated by lust for power, vindictive, an intriguer. The other was rather introvert, cold, too trusting, apersonal, a bad communicator, self-centered, rather an intellectual aristocrat.
The introvert was ousted by the extrovert, who wanted to run his own show.
The house of Lehman was divided in two different clans: the bankers who were rather fixed on medium and long term business with stable clients and the traders who were only fixed on the short term.
While the introvert CEO could stand above both business divisions in the battle for the bonuses, the extrovert was himself a trader and was rather despised by the bankers. When the latter took the rein, key banking personal left the company. The traders wanted to cash in their shares as quickly as possible and the company was gobbled up by a third party.
This story shows also that `human relations matter as much as the bottom-line.'
A very worth-while read.
1. 1983, Glucksman's primary interest was in preserving Lehman's independence and his own position of power, which he might best achieve by selling 50 percent or less of the business. Glucksman pushed Peterson out and trading represented 2/3 profits for Lehman. Market volatility characterized 1983, with thirty billion shares changing hands. Lehman was transforming from bankers holding 60 percent of stock to increasing percentage held by the traders. 90 percent of the stocks were traded by pensions, mutual funds, ContiGroup, Bankers trust, American Express, and investment banks.
2. Glucksman knew that Wall Street had changed. He knew that giant firms and money managers served as custodians of other peoples money and strove to maximize the return on their investment. Traders emerged to meet the demand. A trader buys and sells securities, bonds, options, stock, financial futures, commercial paper, certificates of deposit, treasury bills, and euro bonds for a fee or by gambling with the firms money. Make a market, buy, sell, and hedge, don't hesitate is the traders creed.
3. What kind of investment banking did Lehman want to be? Investment banking had changed. As the nation industrializes the most important element of corporate life is financing. Few of the inventor-entrepreneur class understood how to raise capital; they had limited access to financial institutions, investment banks for whom they could raise critical capital. Maturation of American Industry, new management class, and broad capital markets reversed the factors. Marketing and high technology operations replaced finance as the elements of major concern for CEOs. Lehman's traditionally high-margin products had been reduced to commodities where price and distribution were more important in selecting a banker than historic and social relationships.
4. Gustave Levy had made Goldman Sachs millions through the sell of commercial paper. Instead of borrowing money from a bank, corporations issued unsecured IOU loans, repayable in thirty days or more, for daily operations. Agents liked Lehman and Goldman Sachs collected a fee for placement of these IOUs with large investors. They also served an underwriting function , taking some of these accounts on their books to provide money for their clients. Underwriting means the agent inherit's the risk of default on their books, securing the loan, for their seller of the commercial paper and provide money to the buying client.
5. From Oct 1983 through Feb 1984 income totaled $7.1 million compared with $87 million a year earlier. Michael Schmertzler reported, "Management does not anticipate that the environment in which it is operating will necessarily improve this fiscal year. Indeed, trading and distribution losses could lead to consolidated losses in net income in certain months". By 1973, Lehman's commercial paper had reached $496 million in sales. This was the beginning of woe. Glucksman, like other traders had began playing with the firms money, betting that interest rates would drop. Glucksman was investing Lehmans own capital in certificates of deposit and other commercial paper, rather than just selling this paper to investors. A derivative, a winner and a loser, if interest rates dropped than Lehman would be the winner realizing massive gains and the New York State Housing Finance Agency the loser. The derivate pattern would carry forward until 2008, until losses would force Lehman to bankrupt.
6. Glucksman believed profits were best generated by expanding business, which meant confront every opportunity and having ample staff to do. In boom economies money is cheap, staffing ample, and profits easy.
7. Peterson believed that the nations mounting deficits would drive interest rates up, cripple productivity growth, and the interest charges consumed over 10 percent of the federal budget. Peterson presented a plan to cut $175 billion in spending cuts and tax increase, for President Reagan to present to congress. The central message was that massive federal borrowing was consuming savings needed for investment in new plants and equipment, new infrastructure, and new jobs and training.
8. Rising interest rates, coupled with a weak stock market and high overheads resulting from the 1982-83 boom, declining productivity, rising energy costs were depressing earning all over Wall Street. Brokerage houses were reporting losses in second quarter 1984: Merrill Lynch $32.8 million, Dean Whitter $25.8, and E.F. Hutton $7.8 million. Losses at Lehman forced the board to become anxious to sell the firm. The ultimate goal was find a buyer willing to pay $400 million for the company. Candidates included Shearson/American Express, E.F Hutton, and Paine Webber. Shearson's business was retail brokerage with individuals, and communications was mostly across telephone and teleprinter wires. Peter Cohen wanted Lehman. Lehman's strength was in banking, fixed-income trading, and dealer for US government securities. Shearson strength was cutting costs, 1984 saving $7.4 million.
9. In 1984, American Express was financial service power house earning $10 billion a year, reaching 130 countries.
10. March 1983, Lehman showed a lose of $5.5 million. The first six months operating and trading losses was $30 million. In 1984, Breckers fixed-income division had lost $27 million before being forced to sell to Merrill Lynch. The firm had invested heavily in securities gambling that interest rates would fall. The opposite was true as fed man Volker raised rates to fight inflation. Mark to market technique priced the current worth of securities in their portofolios. Lehman did not mark to market their short-dated money market securities, euro certificates of deposit, therefore, it was to Lehman's advantage to buy long-term securities with lower-cost short-term borrowings, thereby creating a current profit on the carry. The only risk was that the overnight interest rate would go higher than the interest rate on the longer-dated security.
11. Shearson offers $325 million for the purchase of Lehman and Lehman accepts the offer.