On Sept. 15, 2008, the world learned a debt-riddled Lehman Brothers would be no more. The Dow dropped more than 500 points that day, and a month later the index was off about 25%.
And that was only the beginning.
The corporate carnage that followed doesn’t deserve rehashing, since nearly every investor has a personal point of outrage. There was a death sentence for dividends, including a 68% cut in General Electric (NYSE:GE). There was the race to the bottom in the entire financial sector, with American International Group (NYSE:AIG) plunging 90% in seven trading days that fall. The list goes on.
Three years removed from one of the most market-moving events in the history of Wall Street, a casual observer might think that the chaos after Lehman redefined how the global economy functions. By now, we should have made meaningful progress at fixing this mess and protecting against future abuses, right?
Don’t fool yourself. Our global economy is hardly safer or stronger, the key players in the financial crisis have walked away without consequence, and our politicians have seemingly learned nothing from deep losses we’re still trying to gain back.
Fat Cats Still Getting Away With It
One of the most galling facts about Lehman’s bankruptcy was that it was preventable. I’m not talking about how the company should have refused to lever up 20 or 30 times over on subprime mortgage investments. I refer to the lack of a simple handshake between a buyer and Lehman Brothers’ fat cat CEO Dick Fuld.
Fuld stubbornly refused offers up until the very end, either out of ego or a naïve conviction that his company was worth more than suitors were offering. Those potential investors that could have saved the company included Barclays (NYSE:BCS), the state-run Korea Development Bank and even the saintly Warren Buffett.
According to now-famous reports, Buffett apparently told Dick Fuld that if he was going to plow a few billion into the bank, he wanted Lehman executives to invest under the same terms. Fuld refused. Understandably, Buffett wanted nothing to do with a company where management didn’t have the same skin in the game — and he took his funds instead to Goldman Sachs (NYSE:GS), where he made a lucrative $5 billion buy-in.
And that’s just one story. As put by fellow banker William Smith, CEO of Smith Asset Management in New York, “Dick Fuld really blew it. How many opportunities did he have to sell Lehman?”
Smith should know. He started his career in 1991 at then-named Shearson Lehman Brothers before starting his own firm.
The epilogue to this tale is even more outrageous. Dick Fuld walked away with upward of $484 million in salary, bonuses and stock options earned from 2000 to the 2008 collapse of Lehman — though in Congressional hearings, he lamented that because of Lehman’s demise, his actual holdings were “only” $350 million. That included a $22 million bonus in March, just six months before the company disappeared forever.
Yet no civil or criminal penalties have been levied against Fuld and his ilk. In fact, just this week Lehman executives had the audacity to petition a bankruptcy judge to release $90 million in insurance funds from the defunct bank so they can settle fraud allegations brought by investors.
That’s right — Fuld walks away with hundreds of millions of dollars while driving Lehman into the ground, but he wants a judge to pick through the wreckage of the bankrupt company to satisfy investors who lost everything — protecting his own personal pocketbook in the process.
It’s sickening. It’s unjust. And unfortunately, because Fuld got away with this, it surely will happen again.
Greece Could Be Lehman 2.0
In 2007, the idea of a 150-year-old investment bank worth $60 billion one day and worth zero 19 months later seemed patently absurd. But it happened. And more recently, bankruptcy in one-third of the euro zone seemed equally ridiculous. But that’s what we now face.
The so-called PIIGS of the euro zone — Portugal, Ireland, Italy, Greece and Spain — make up 135 million of the currency union’s 300 million residents. The nations also account for roughly $4.5 of the $12.5 billion in nominal GDP for the euro zone, according to recent World Bank figures. All of these nations are facing serious debt trouble, and the sad reality is that “contagion” is more than a buzzword. If one domino falls with Greece defaulting on its debt, the rest could soon follow as panic sets in and credit is refused to the rest of the troubled PIIGS states.
Germany would be stupid to abandon Greece because of this possibility, but that doesn’t mean a Greek default won’t happen.
Consider that credit default swaps on Greek debt were as high as 3,500 basis points last Friday — and that it costs $5.6 million up front and $100,000 annually to insure $10 million of Greek debt for five years. The market clearly sees the threat of a breakdown as very real.