How Lehmann collapsed

Succinctly explained here:

Lehman's fall from grace was brutally fast. Until June, it had never even reported a quarterly loss as a public company.

As recently as March, [CEO Richard] Fuld was awarded a $22 million bonus for 2007 -- a generous pay package to be sure, but one that also reflected a year in which the bank's net profit had risen 5 percent to a record $4.2 billion.

But Lehman soon emerged as Wall Street's next domino as real estate loans and other toxic assets increasingly weighed on its balance sheet, especially after the collapse of Bear Stearns Cos Inc in March.

[...]

Lehman, until recently Wall Street's fourth-largest investment bank, for years did a big business in originating mortgages, re-packaging them and selling them onto other investors.

Lehman was the top U.S. underwriter of mortgage bonds in 2007 and 2006, grabbing about 10 percent of the market.

But as the U.S. housing market went from boom to bust, it ended up being unable to unload many of the most toxic loans.

"Dick went wrong three to four years ago when Lehman bought these assets, now he's paying the price," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon.

"I don't think he knew when he was investing in mortgages where this could lead, and how important confidence is."

At key junctures Fuld seems to have played a game of brinksmanship, refusing to accept offers that could have rescued the firm because they didn't reflect the value he saw in the bank.

Damian P.

Update: good interview on the subject here.

Posted by damian at September 15, 2008 05:55 PM