Lehman Brothers Book Reviews

Recently I took the time to read through the two books recently released about the fall of Lehman Brothers -- A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Lawrence McDonald, and The Murder of Lehman Brothers by Joseph Tibman. The author of the former was a vice president in the firm's distressed-debt department, which means he was at the bottom of the upper class of Lehman employees, and in the good days he was a guy making 7 figures a year. The author of the latter, Joseph Tibman, is unknown, as that name is simply a pen name for "Joe The Investment Banker Man" in an attempt to retain his anonymity. He was, however, an investment banker for Lehman Brothers over the several years prior to and leading up to the firm's collapse. Both stories give some decent insight and stories, clearly from insiders with each their own perspective on what happened over the final few years for the 150-year-old firm that went bankrupt to spark the U.S. market collapse late in 2008.

A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers is the first book I read on this topic, obviously of special interest to me since I worked at Lehman for its final few years of existence myself and have my own set of experiences, preconceived notions and ideas about just what went wrong and when at the storied investment bank. I enjoyed this book, as it tells a good story from start to finish, albeit IMO focusing a bit too much up front on McDonald's former life before he got his start in investment banking as a convertible bond specialist. But McDonald does a good job of telling the story from the insider's perspective of Lehman's amassing of hundreds of billions of dollars of toxic real estate assets. The author does I think a very good job of giving a basic understanding of the derivative type of financial products which got the country's banks into this mess in the first place -- CMBS, RMBS, CDS, securitization of bonds in general, etc. -- and what Lehman Brothers' role was in the expansion of such financial instruments. McDonald worked in the fixed income division of Lehman, which is where all the shit hit the proverbial fan in 2007-2008, and as a result you really do get a very cool look from the inside from a guy who literally sat on Lehman's proprietary trading desk over Lehman's final few years, including several moments of foreshadowing where, according to the author, the directors in his area called the financial crisis a good couple of years before everything finally collapsed. The particularly good inside stuff in this book includes the stories behind some of the big trades made by Lehman with its own account both for and against subprime mortgage companies over the several months as the credit crunch first began in mid 2007 and into 2008, and especially the details of the secret meeting of 20 or so of Lehman's top managing directors in late Spring 2008 at a swank restaurant in the Upper East Side of Manhattan where it was decided that CEO and COO Dick Fuld and Joe Gregory were going to be overthrown.

One of the downsides to getting this particular insider's view, however, is I think the importance that McDonald seems to put on his group having seen the light all along with respect to the bets Lehman Brothers (and many other large banks) were making on real estate assets. To believe this author, his group and his group alone knew all along that Lehman was betting the firm on U.S. and eventually globally real estate prices continuing their inexorable march upwards, they regularly tried to scream it out to anyone who would listen, but unfortunately his smart leadership continually got pooh-poohed, silenced, or even pushed out of the firm if they did not simply back down from their calls for better risk management. In truth I am sure the reality is somewhere less clear than that, but for whatever reason this is the spin we get from reading A Colossal Failure of Common Sense, which to me smacks of self-servitude and untruth.

The other big downside to this particular book is that McDonald was laid off early in 2008 as the fixed income market deteriorated, and that is where the inside scoop and other details of the daily goings-on of the core of the firm really start to grow thin, because the author was no longer employed by Lehman Brothers and was no longer around in the thick of the battle day in and day out. And unfortunately for McDonald, mid-March -- just after he was laid off -- was the beginning of far and away the craziest, most volatile and ultimately most interesting part of the whole Lehman Brothers saga, including the collapse of Bear Stearns and then the several months of slow-motion downward sprial that eventually led to Lehman Brothers' bankruptcy and liquidation. To have all this great inside insight into what things were really like at the firm from 2005-2008, but then not have any personal insights regarding the period from March 2008 through to September when the firm filed its historic bankruptcy, causes this book ultimately to land far short of its potential if written by someone who stuck around the four walls of 745 7th Avenue all the way through to The End.

The Murder of Lehman Brothers does not suffer from this particular problem. Although the author intimates that he, too, lost his job in the wake of Lehman Brothers' bankruptcy declaration and subsequent sale of the U.S. investment banking business to the UK's Barclays Captial, he at least was present all through 2008, which is really where the rubber met the road on the fall of the company, and ultimately it's what everybody wants to read the most about. Joseph Tibman represents himself as a longtime Lehmanite, different from McDonald who only joined in 2005 while the credit bubble was still ramping up, and as such he includes some more details of the recent history of the firm, and in particular the rise to power of Dick Fuld as CEO of evnetually the nation's fourth largest investment bank. Tibman, like McDonald, does a good job of describing the process behind Lehman's amassing of billions of dollars of overinflated real estate assets. Tibman, being a more senior officer of the company than McDonald (who was just a vice president), also has probably better insights into the character of the leadership of the firm, the changes in the company's CFO, lead Risk Manager and COO along the way and what was really going on behind the scenes with each.

With all of the senior-level focus of The Murder of Lehman Brothers, though, Tibman ends up focusing more on that but less on telling a good story, which shows as his book almost reads more like a factual report whereas McDonald's attempt to chronicle the fall of Lehman reads more like a novel. And although Tibman does not attempt to make his own department look like the only people in the company who foresaw the firm's impending doom and tried to stop it, Tibman does in his own way spend a little too much time glorifying the investment banker lifestyle that he was ingrained with. Believe me, I've worked plenty of hard and potentially mind-numbing jobs in my day and I most definitely do not need a speech about how i-bankers are the best because they live in the moment with each deal, totally engrossing themselves, available 24-7, weekends, holidays, vacations, you name it. That sounds an awful lot like my current job as well as those I have held recently, and that bit gets a bit old for me just like McDonald's insistence on trumpeting up his own people and managers like they were the all-knowing ones trying to save the world.

In the end, there are a couple of themes conspicuously common to both books that I thought makes them worth mentioning here. First and foremost, the utter and complete hatred and disbelief towards Dick Fuld, and even more surprising, his #2 in command guy Joe Gregory. Each book absolutely shreds Fuld, depicting him as completely out of touch with what his firm was actually investing in and the positions it was taking, with Tibman repeatedly referring to Fuld's "castle" up on the 31st floor at the Lehman headquarters and how he continually withdrew from seeing anyone but his top lieutenants. Each book also saves special criticism for Joe Gregory, a guy I used to see all the time in my days at the firm, with both authors essentially blaming Gregory for the firm's insistence on building up its real estate portfolio, even in some cases without Fuld's active knowledge or blessing. This surprised me, as I can tell you that within the firm Gregory was not identified as being particularly responsible other than as someone who simply carried out the orders of his superior in Dick Fuld.

The other person who gets absolutely lambasted in both books is Treasury Secretary Hank Paulson, the man behind the massive financial bailout package as well as the guy at the helm when Lehman Brothers ended up being allowed to fall. Basically, both authors prominently advance the favorite invective among former Lehman employees that Hank Paulson made the most disastrous financial decision in the history of the country in allowing Lehman Brothers to fail, and both authors go on to place the blame for the resulting crumbling in equity prices around the world squarely on the mantle of that decision being made. On this point I believe both authors totally miss the mark and like I said each falls victim in my view to the standard response of Lehman employees whose lives were thrown into total tumult as a result of the bankruptcy. But even with the benefit of hindsight, even having seen what happened to asset prices immediately following Lehman's failure, not only do I not think Hank Paulson "caused" the last and worst wave of the crisis by allowing Lehman to fall, but I tend to think of not bailing out Lehman as the one bright spot in what was otherwise a comically horrible run of decisions coming out of Treasury, the Fed and the rest of the Bush administration during late 2008. It's sad to me in a way that the authors of both of the books to come out detailing the fall of Lehman Brothers are unable to divorce themselves from the dogma that Lehman internally fed to its minions for months and months leading up to the firm's eventual downfall. But back at the time, basically nobody I know wanted the government (read that as "us taxpayers") to bail out Lehman Brothers, and the moral hazard argument simply has to stop somewhere lest we risk every financial institution knowing that they can risk whatever they want, act as recklessly as possible in pursuit of high returns, comfortable in the knowledge that the government will save them if things go sour. So no, I don't agree at all with the conclusion of both Lehman books that Paulson's greatest mistake was in allowing Lehman to fail. As I said at the time right here in the blog, I think Lehman should have been allowed to fail, after its CEO made very obvious gaffe after very obvious gaffe as his back got pushed closer and closer to the wall all through the spring and summer of 2008, and in fact I only wish that Hank Paulson had done a little more of "let failing" and a little less of "bailing out" than he did do throughout the financial crisis in 2008.

The last thing I would mention is that I also think both books did a sorry job of capturing some of the more generalized, less mortgage-specific mistakes that in my personal view as my own sort of insider clearly led to Lehman's downfall. For starters, Lehman Brothers, more than any other bank and frankly more than any other company I've ever heard of, insisted on clearly differentiating between the worth of its "front-office" people -- the revenue centers for the firm -- and the "back office" -- the cost centers. Sure, every large company has a lot of both, but at Lehman this differentiation was purposefully palpable -- almost like a modern-day caste system -- and not a day went by when you weren't impacted by it in some way. The firm's headquarters at 50th and 7th Ave in midtown was essentially reserved only for the revenue people. If you weren't directly generating revenue for the firm -- ie, if you weren't in the fixed income or equities divisions, a trader or a banker in some form -- then you could not even sit in the same building as the revenue guys. Instead of the posh Lehman-owned space in the HQ building, us back office folk were relegated to rented space on floors of other nearby buildings, sans the amenities and sans the cachet of working over at 745. The back office people had a nice holiday party ever year, but you should have seen the investment bankers' party which was always held on the same night but at a much more expensive (and fancy) location. The back office had a separate summer intern program from which I hired an intern in each of my three full years at the firm, but again the events, the expenditure, the opportunities were nothing compared to the business units' summer program, which was lavish to a fault. And the end result of all this palpable and deliberate focus on the non-revenue guys being second class citizens within Lehman had a dastardly effect on the firm in 2008, because among other things, the back office squarely included the Legal, Audit and Risk functions for the firm. When I see such a massive and clear failure of the firm to adequately protect itself in a period of flux in the marketplace, and yet the very functions like Legal, Audit and Risk being treated as lowlifes by the Brahman bankers and traders, more or less ignored for the most part company-wide, it becomes crystal clear that this was a major oversight on the part of Lehman's management that surely had a noticeable effect in the firm's last couple of years. Being a trader and a banker, the authors of these two Lehman books were both too hopelessly on the inside (and at the top) of this quasi-caste system to even see it for what it was, but the in my view the firm suffered immeasurably from this top-down belittling of the importance of the firm's back office functions to the long-term survival of the company.

The other factor which was totally ignored in each book but which I contend played a major role in the downfall of Lehman Brothers was the inexperience of the people in management positions at the firm, another thing I have also written about extensively here before. This was a bank where, for whatever reason, a ton of junior-type of people and less-skilled people received promotions and were, by the time the mid-2000s rolled along, occupying many positions of importance within the firm. I personally worked with multiple managers in the risk management function of the bank who were young -- as in, "never before seen a bear market" young, or "weren't even working in finance when the dot com bubble burst not that long ago" young. It was hard enough for any experienced risk manager to be able to decipher the mess of subprime and Alt-A mortgages that were packed into these complex mortgage backed securities that Lehman was amassing and selling in its last few years. To ask a young kid, someone who's never even lived through a time when the market's general bias is downwards, who's never lived through a real-life financial crisis of some kind, to be able to appreciate that risk, let alone to adequately hedge against it, is sheer folly. Similarly, not just some but most of the manager- level traders I used to work for at Lehman were young guys -- in their 30s, some even their 20s, and these were the guys being entrusted to run many areas of the firm's trading desks, to make decisions that impacted the firm's revenues and profits in a direct way during what proved to be a violent inflection point in the marketplace. Shit, even my own boss at Lehman was a 30-something, a guy with absolutely zero prior management experience, and boy did that ever show in how he ran our group. And this was not atypical at all at Lehman -- in retrospect, it was like a bunch of little kids trying to masquerade as if they were running the firm, doing all the "big people" jobs that they all could not believe they were able to land at such young, inexperienced times of their lives. And the result? Extreme pain.

In all, I did enjoy reading both A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Lawrence McDonald, and The Murder of Lehman Brothers by Joseph Tibman, but it's hard for me to know how much of that is translatable to those who were not also on the inside while the whole thing went down in 2008. The McDonald book overall is a better story -- more of a true novel, as I mentioned above -- while the Tibman book does a much better job of describing the details of what the final six months or so was like for people working inside Lehman during the firm's final slow-motion collapse to nothing. Each book contains some good discussion of what went wrong with the firm's bloated real estate portfolio, and each is full of the standard ex-Lehmanite rhetoric about our former CEO and what an egotistical, blinded buffoon he clearly was. But at the same time I think each author missed a golden opportunity to really tell the story of what took down this firm, probably because each of them was hopelessly on the inside of the systemic problems I was able to see as so prevalent so easily in my time at Lehman Brothers.

I would be interested in comments from anyone who might have read either or both books, or any other similar reading regarding last year's massive changes in the investment banking landscape.

Vacation

It's vacation time again for the Hammer Family. This week we are packing up and taking the girls on their first real vacation since they are both what I would consider "grown up", at least to some degree. And by that I mean at least that they will remember this trip for more than a few weeks after we return home. I mean, we took a trip to the Southwest a couple of years ago -- I actually remember watching the very end of the Mookie at night from our living room -- but my little one was just a mere babe, sleeping in the crib in the bathroom as I recall while we tiptoed around desperately trying to avoid waking her up. This week, we're going tropical on their asses, heading to the Caribbean for a week to get away from it all, relax and show the girls a good time in the islands as it has gotten effing cold in a hurry here in New York.

"Getting away from it all" has really taken on new meaning this year. I've written quite a bit about this over the past several months, but from a stress perspective and just generally considering all the things I have had to worry about in 2008, this is easily the worst year I've had since, well, since I don't know. High school maybe? The year I was born was tough too, come to think of it. I mean, I couldn't walk, I couldn't talk, I didn't even know where I was or who I was. 0 was definitely a rough year. But 2008 is right up there with the worst of 'em. I am definitely one of the lucky ones who has a solid family situation with a great family and a bunch of A+ friends who have been there for me all through this year. And lord knows it could have been much worse, with me narrowly escaping the Lehman Brothers situation just weeks before the bankruptcy declaration, and I probably could have easily lost my job a couple of times over the past several months if things didn't go the right way. But between having it out with my boss to start off calendar year 2008, interviewing and getting job offers from two companies whose stocks have absolutey gone into the toilet this year thanks to the hammering of the financial services sector, before turning them both down for a big promotion at Lehman, and then having to sit and watch the slow-motion taking apart of that firm over the following several months from the inside, it was quite a first half of the year already.

And little did I know, things hadn't even started to really go downhill yet.

Throughout the summer, Lehman's stock tumbmled to fresh low after fresh low. There were many days when the stock price was so all anyone was looking at that we couldn't even consider doing any actual work. Sadly, there were so many of those days that it almost lost its effect, inuring us to that feeling of fear, of panic really, of total hopelessness. Eventually I gave up and started looking for another job again, which brought with it even more stress to go along with dealing with the day-to-day grind at Lehman. Then Hammer Wife and I decided it was time to move the family out of the city, adding yet another huge layer of difficulty to what was already a real pressure-cooker of a life I had going on.

In the end it all worked out, as we managed to get a great house just four days before the school year started, also four days before I started at my new job, which turned out to be fortuitous as it was exactly six days into my new job when Lehman Brothers went under, sparing off this sick plunge for stock prices that is still yet to reach its bottom. That said, a new job and a new house and all of course have brought with them their own new stresses that most of you out there are more than familiar with. And now the massive economic slowdown, I feel like I'm fighting for my job all over again. It has just been one thing after another after another for me almost since the minute that 2008 began.

And again, don't get me wrong -- I am well aware of how many people out there are grappling with things far worse than I. Millions of Americans are flat-out unemployed. People are sick, or worse yet, their families. Family problems, personal and emotional problems. Shit, just from a job perspective, guys like mutual fund managers and hedge fund managers have had it far worse than me this year, I freely understand that. But it's not a competition, and I'm not trying to say I have it worse or better than anyone else. All I'm saying is, I've been feeling for a long time like I need to just get the fawk away, from everything. Hopefully this week will bring me the quantum of solace I am looking for.

So as usual when I'm away, I don't know for sure just how much I'll be blogging while I'm gone. It looks like I will be bringing my laptop on our trip, and I learned this weekend that our hotel does in fact have high-speed internet in every room. So I may be totally off the grid for a few days, or I may be totally blogging every day like usual. Or it could be something in the middle, which I've done before, where I just link up some old posts or some posts in a certain category that I'm thinking about this week. We'll just have to wait and see. But either way, this is a week about relaxing and winding down for me, about adding to the huge list of awesome memories with my family, and giving my incredible girls a whole bunch of experiences they've never come close to taking in before. And no matter what happens with the blog this week, I will be back and better than ever next week with more of the same blogdonkery you've been getting here day in, day out for nearly four years.

Have a great week everyone, and an awesome Thanksgiving if I'm not around.

Denial

So, slow weekend in the financial sector, huh?

OK so my pledge to you is that on Tuesday I am going to get it up and write about some fucking poker in this space for the first time in a week. It has been impossible for me to find that within me since this whole miserable mess began to unfold a week ago today, but on Tuesday I plan to force myself to change that and give you guys what you really come here to read about every day -- poker.

For now, suffice it to say that I am hurting. For the sixth straight day, you can expect me to be good n drunk already by the time I lurch off the commuter train at my new suburban home. I can't really deal with reality without it. In a way, today's shocking bankruptcy declaration by Lehman Brothers will be a calming influence on my life and really on the lives of many of the people more directly involved as employees in the company. I need something else to focus on all day while I toil away at my new job, other than the constantly-updating real-time LEH quote always ticking on my screen. Mostly downward, since I started the new job to tell the truth. I need to start focusing on helping my friends and former employees over there move on with their lives, start finding new jobs or new endeavors, be it school, a complete change of industry, whatever. And heaven forbid on my own life, imagine that.

One lasting aspect I cannot get out of my head from all this deals with Lehman assholeprickmotherfuckerhopehedies CEO Dick Fuld's raging denialism. I wrote last week about the fact that Merrill Lynch bit the bullet and sold $30 billion of troubled mortgage assets earlier this summer to Lone Star, an entity that specializes in making such purchases, for 22 cents on the dollar. And how in fact, the price was cheaper than that, because Merrill took the additional step of financing about 16 cents of those 22 cents on the dollar they received. They basically sold $30 billion of mortgages to Lone Star for $6 billion, and they lent Lone Star $5 billion of that $6 billion as it is, including giving Lone Star the right to put a significant portion of those securities back to Merrill if they price dropped significantly from current values as of the time of the sale. Many people would describe (and have described) this as selling the mortgage assets for 6 cents on the dollar, and I would not necessarily disagree with that characterization.

As I mentioned last week, ever since the day Merrill announced this major asset sale, Lehman and CEO Dickhead Fuld have been on the market, trying to sell up to $40 billion of its own troubled mortgage portfolio. But Penis Fuld would not accept less than 85-90 cents on the dollar for his portfolio, despite the precedent set by Merrill just a couple of months ago. As a result, no deal has come close to being reached, and Lehman now declares bankruptcy while holding some $60 billion of distressed mortgages on its books.

And just look at what fucking went down this weekend. Friday closed out with Bank of America being rumored to be the frontrunner to buy Lehman Brothers, which after last week's disastrous stock market performance could probably have been purchased by BofA for what? A billion dollars maybe? Less even? $500 million? Well, over the weekend BofA got its first look at Lehman's mortgage book, and what they saw was not pretty. It was so bad that by Saturday afternoon, BofA had already backed away and removed itself from its candidacy to buy Lehman, at any price. Immediately, some were speculating late on Saturday that BofA was still reeling from its horrific purchase of mortgage specialist Countrywide Financial last year, near the height of the market, and/or that BofA had capital and liquidity problems of its own, and just could not scrape together the cash to purchase Lehman Brothers in these troubled times.

Well lookie what happened. Not only did BofA have the interest and the willingness to buy a large U.S. investment bank, but they had fifty fucking billion dollars to do it. But they didn't buy Lehman, with its $60 billion of liquid shit on its books. Instead they bought Merrill, the company whose astute management bit the bullet and solid their shit for literally pennies on the dollar a few months ago. Just like I said last week, that's a guy who is a leader, someone who is willing to take the short-term hit in exchange for the long-term gain to the value of his company. Cock Fuld, on the other hand, is a jackass who let hubris blind him from doing the very thing that could have saved at least some semblance of his company from disappearing, like it now will. Friday BofA was going to buy Lehman, which they could have gotten for a billion dollars or less, and then on Sunday they instead decided it was a better value for them to spend more than 50 times as much to buy Lehman's competitor who had a horrible mortgage portfolio until a few months ago when they took their medicine and just did what they had to do to get rid of it.

Denial. Anyone familiar with substance abuse or other forms of addiction will know that this always remains step one of addicts dealing with any problem. The human condition simply predisposes us all to be tempted to just deny deny deny our problems, and they maybe will go away. But in this case, Prick Fuld's denial got him everything he would never want for himself and the company that he's been with since fucking 1969. And now the 25,000 employees whom he told to trust him in a company-wide conference call earlier this summer just found out what happens when you put your trust in the hands of a known denialist. What a sick, sick ending to one of the saddest stories in Wall Street's history.

Back tomorrow with some real life poker content. That is my pledge to you.

Panic

Too upset to write about poker today. Lehman shares are down another 40% this morning, and the calls from my friends there have turned from sad and scared, to panicked and frantic. Seeing five tv camera crews outside the front doors of the headquarters now two days in a row in the morning as I walk by on my way to my new job isn't helping matters either. Meanwhile, this story is exactly what I am most concerned about with the stock plunging yet again for the fourth day in a row -- and once you go and read that story, keep in mind that those figures are just for the period ending on August 31. That is, a good two weeks before all the shit has his the fan this week. Just wait till the numbers come out for the month of September for this stuff. And if you read between the lines in this story as well, once again I fear the writing is on the wall for the 160-year-old investment bank. Does that last story, the the optimistic title and all, not sound exactly like the dreaded "vote of confidence" that usually comes from ownership a day or two before firing a head coach or manager of a sports team?

Anyways, that's all I've got for today. I finished The Poker Tournament Formula II this morning on the train on the way into work, and I have got tons of stuff coming from that book that you will see here in the near future. I just have to wait until I have it in me to write it all down.

Gotta Know When to Fold 'em

Sorry guys, I know this is a poker blog and of course I am all about writing about poker, but this Lehman stuff is really on my mind today and I'm going to write some more about it today. This is actually stuff that's been swirling around my head for some time over the past couple of months, and me writing this all down is really much more for me than for you guys, so bear with me. I promise this will not turn in to a Lehman Brothers blog or a stock market blog or anything. But if you're at all interested in my perspective on things with the biggest debacle in the stock market right now, feel free to read on for my thoughts.

So I just hung up from listening in on the big conference call this morning that Lehman Brothers held for the investing public regarding its future plans and the truly hideous quarter it reported today. My lord what a clusterfuck. The company lost more than $5.60 a share in Q3, more than basically all of the analysts were predicting even after the company obviously leaked information to various parts of the market over the past month or so that the quarter was going to be truly fugly. One of the highlights of the quarter included an astonishing $7.8 billion of gross writedowns, by far the worst quarter yet in the company's history -- surpassing Q2 of this year and now marking only the second time in the company's history as a public company that it has posted a loss -- and bringing the company's total asset writedowns in the past year to around $14 billion. The total loss so far in 2008 is nearly $7 billion for the firm as a whole, and who knows where things go from here, as fiscal Q4 which just started Sep. 1 has not exactly begun with a bang in the financial markets, so say the least.

But the more disturbing part of this morning's announcement from Lehman management is the lack of any concrete new news regarding the company's plans to fix the problems it faces going forward. Obviously the company needs excess capital -- 8 to 10 billion dollars worth by some analysts' estimates -- to cover the huge losses it has experienced and continues to experience this year. And yet, there is no word of any stock sales, to foreign investors in Asia, the Middle East or otherwise. No news of a concrete sale of the asset management business that has been rumored and now appears to be true according to this morning's conference call. And no word of sales of any of the troubled mortgage assets held by the company, in the small sum of, oh, just another $70 billion worth.

Read that again. Seventy billion dollars of troubled mortgages held by Lehman Brothers on its books right now. Still. One of my favorite parts of the company's plans to deal with this mess is the new idea to spin off these mortgage assets into a separate company called Real Estate Investments Global. Now tell me, who the fizzity fuck is gonna want to own that piece of doggie turd? They couldn't find people to invest in that pig no matter what they tried. So what are they going to do to find buyers for that separate public company? Simple! They're going to spin it off to the existing shareholders of Lehman Brothers stock. Basically force the creation of a market of buyers for this garbage by spinning it for free directly to the existing shareholders. Most of whom who have a single brain cell in their fucking heads will immediately sell the shit, I'm sure, but if it allows Lehman to get the troubled assets off of their books, then hey, just go for it. This is very similar to a move Lehman made earlier this summer when it spun off a couple of new entities it called "hedge funds", and basically funded them with a bunch of risky, hard to value, overvalued and troubled assets that Lehman itself desperately wanted to get off of its own books. Never mind the fact that these two spinoff entities were all composed of Lehman employees, using Lehman computers, networks and other assets, and all sat in Lehman's office space. But with those moves, the troubled assets got off of Lehman's books, and that's all this quick-fix CEO was looking for at the time. Well now it has all come home to roost.

One thing that Lehman specifically denied all through its conference call this morning is that the company is not seeing capital outflows from its asset management business and that counterparties are still perfectly willing to trade with it despite its recent troubles and despite the company's stock literally plunging 50% in Tuesday's trading action. Well you know what? I'm gonna have to call a big fat fucking bullshit on that one. You tell me -- if you had $10 million invested in Lehman Brothers before this week began, you tell me, is that money still sitting with Lehman now? To be more realistic, what if you had ten billion dollars with Lehman, as many of the large money managers, pension and hedge funds have under management? Is all $10 billion still sitting in Lehman's coffers somewhere? When there are plenty of other, more stable financial institutions out there where you could keep that money and not have the completely constant worry of whether your money will still be there tomorrow, and whether the company will still even be in business tomorrow? Of course not. For the company to say they're not seeing any outflows is not surprising, and I can't blame them for lying. They have to lie on this one point. If the CEO gets on the phone and tells the world that customers are taking their money out, then suddenly this is Bear Stearns, and the company will be gone -- yes, gone -- in two days just like Bear was. But for anyone to believe this story is preposterous to a significant degree. Of course people are taking their money and running from Lehman right now. And they would be fools not to, given what's gone on with the stock over the past year, over the past six months, over the past 3 months, over the past month, and now especially over the past few days.

Moreover, Goldman and Merrill and Morgan Stanley can come out all they want like they did after the close of trading on Tuesday and claim that they are all still willing counterparties to trades with Lehman Brothers on the other side. Suuuuuuuuure they are. Goldman and Merrill and Morgan may be a lot of things, but they aren't stupid, and they don't just throw money down the toilet when they clearly know that's what it is. I'm sure, thanks in no small part to extreme pressure from the Federal Reserve over the past 24 hours and over the past several months, that these other three large-cap investment banks are still willing to do some trades with Lehman, generally speaking. But if you think after Tuesday's trading action that this morning, Goldman is lined up to enter into, say, a 10-year interest rate swap with Lehman Brothers worth $15 billion, then you my friend are a jackass. What these companies will do, while still being willing to enter into small, short-term trades with Lehman, is they will immediately begin pulling in their exposure to Lehman by limiting the number of large trades, and certainly the number of long-term trades they will enter into with the company. They have to. They could arguably be sued by shareholders for not doing this, given how obvious and prevalent and public the problems with Lehman's future have become now this week. So sure they all say the right thing, the thing the Fed I'm sure coerced them all into proclaiming publicly yesterday after the market closed, but behind closed doors these companies are acting to preserve their own capital as much as they can, which is exactly what they should be doing. If you were a shareholder in Goldman Sachs right now, would you want them taking $15 billion of exposure to Lehman's troubles in a 10-year swap transaction? Think about that one for about 0.00005 seconds.

I've never written about this before here, but one of the saddest things that's gone on at Lehman Brothers during the past year as the credit crunch has deeply impacted business at the bank is the paralysis among so many of the employees there, who know deep down they should be looking for employment elsewhere but who simply cannot get themselves to unfreeze and take the plunge. And I say "sad" because that's just what it is, people who are simply paralyzed by fear, or by circumstances, or both into inaction. I personally know it to be a fact that most of the people at any real level of seniority at Lehman have been making way way more money than they are otherwise worth in the marketplace. This is a cold, hard fact coming from someone who has implicit knowledge of exactly what I speak about here. My old boss, for example, I know what he does and I know what those jobs pay elsewhere outside of the investment banking world, and I can tell you with absolutely no hesitation at all that he has made a good 200, 250k more a year at Lehman over the past couple of years than he would ever make at any job he could ever get if he leaves right now. Ever. He probably makes a lot more there right now than he will ever, ever make again in any job in the rest of his life. No joke and no exaggeration there. I also know that his boss makes about 350k to 400k more than he could ever make if he left Lehman Brothers right now, doing what he does. I mean it, I am talking about hundreds of thousands of dollars more than what they are really worth. And that guy's boss, whom I also personally know, makes a good 500k or more above what he could expect to make anywhere else.

Now putting aside the obvious problems associated with the fact that this company who is quickly running out of cash is somehow paying all of its employees two to three times or more than what they're actually worth, this mass overpayment of the senior-level people has contributed more than anything else to the paralysis among employees that I personally observed over the past year at the bank. Take the first guy I mentioned above as an example. He's known for a while that things are bad -- beyond bad even, horrible is probably a better word -- at the company for some time. For months, literally. He knows that the prospects for the company recovering to any semblance of its former self, and the prospects for him continuing to make the money he's been making there these past few years, are very low. He knows this. But he has been making literally $250,000 more than he could make if he leaves for any other company on the earth. Period. So in his mind, if there is even a 1% chance that his job at Lehman Brothers might persist, and that he might be able one day in a few years when things have calmed down and perhaps Lehman finds a way to survive to get back to making that kind of redonkulously inflated compensation again, he feels like he simply cannot leave. He can't bring himself to give up this ridiculous cash cow that's been dropped in his lap over the past few years. Think about it -- the thought of him willingly leaving that 250k a year on the table and taking a job for the "measly" money that he is actually worth for what he does, while someone else gets his grossly overpaying job, makes him want to throw up in his mouth. He can't face it. His boss can't face leaving his 600k a year job for the 200k he is worth anywhere else in the world, if there is even the slightest chance that he could have stayed and kept making 600k a year (and more) for the rest of his life if things turn around. The thought of giving these ridiculously over-inflated incomes up is making all the people making any kind of big bucks at the firm freeze in their tracks. And I have to tell you, sitting around and watching that go on with everyone around me as clear as a bell, that has to be one of the saddest things of all to me given my own perspective on things. These people just can't bring themselves to leave, even though they've seen the writing on the wall for quite some time.

Which takes me to I guess my last point for today, and after all this there actually is a poker point to it all. It's like the famous Kenny Rogers song, "The Gambler" -- what does he say in that? "You've gotta know when to hold em, know when to fold em." Maybe my poker experience helps me to see these things more clearly than some others out there, I don't know. But as a rule I know when I'm beat. I know when to hold em, and I also know when to fold 'em. Now it's true, I'm not making as much money as a lot of the people I mentioned earlier in this post at Lehman, and maybe my thought process would have been different if I were. But I don't think so, and I know it shouldn't have been. I know the people I mentioned above will never again make the kind of money at Lehman that they'd gotten used to over the past few years. As the absolute best case scenario -- something which I would rate as maybe a 5-10% chance at this point, nothing more -- maybe Lehman somehow finds a way to remain independent through all this bullshit and maybe in some number of years -- and I don't mean anytime real soon -- these guys could be making some real money again. But for me, I'm not interested in waiting five years or more for that, a 5-10% shot as it is, and I knew I had other options. So I got out, found a better job at a far more stable company at this point, in a far more stable industry, and in the end I will clearly make more money at the new place over the next few years than I would staying in the investment banking world. But so many of the people I spent the past three years of my life working with just don't get it. They've got down the part about knowing when to hold 'em, but they just dont know when to fold 'em. But just like I can lay down those pocket Tens on the board of TJQ when I've got two allins ahead of me and one player still to act behind me after there was a raise and a reraise already before the flop, I hung 'em up at the bank and have moved on to better things. I can only hope most of my old friends at Lehman can do the same soon.

"You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done."

No Utility Today

I had another post already written for today talking some more about utility odds in tournaments and responding to some of the commentary to my post from yesterday, but you know what? Fuck utility odds. Just look at this shit instead:

LEHMAN BROS HLD(NYSE: LEH)
Last Trade: 9.29
Trade Time: 11:59AM ET Tuesday, Sep 9, 2008
Change: - 4.86 (34.35%)
Prev Close: 14.15
Open: 12.92
Day's Range: 8.00 - 13.10
52wk Range: 12.02 - 67.73
Volume: 137,421,857
Avg Vol (3m): 58,416,800
Market Cap: 6.86B

Is that fucking sick or what?

See, this is exactly why I recently left this company for a new employer. I saw a company that had a ton of problems, sure. Anyone could see that. And I think I could have lived with that on its own, maybe, if things seemed to be being dealt with adequately. But the biggest problem and the biggest reason I felt the need to get the fuck out of there is that I saw a senior management team at Lehman that was focused solely on denying its problems rather than doing whatever it had to do to fix them.

Look at Merrill Lynch -- a couple of months back they sold friggin $30 billion of shitty mortgages for literally 22 cents on the dollar, and at that they even financed 16 cents of the 22 cents on the dollar that they sold these for. It was a massive, sick haircut for them and a huge black mark for management and for the firm as a whole, but it got the company rid of a significant portion of the huge problem assets that had been plaguing the company for some time and were perceived (correctly, obviously) to be likely to continue plaguing them if they didnt get the mortgage assets off their books. So their management team bit the bullet and they just did it.

Lehman's CEO, on the other hand, has been reportedly shopping between $15-40 billion worth of Lehman's own messy mortgage portfolio for the past two months, basically ever since the day that the Merrill announcement first hit the wires. But by all reports, the donkey in charge at Lehman refuses to take more than a 5-10% discount on the current value of the mortgages, even while Merrill, a company in not nearly as desperate of shape as Lehman, took an 80% or more hit on its own very similar portfolio.

Similarly, Lehman has reportedly been in talks with KDB and a few other large banks in Korea and China about acquiring a controlling stake in Lehman (too lazy and pissed and upset to link these, but the stories are everywhere if you do a simple search on Google or Yahoo! Finance), and now those deals have fallen through, which is the proximate cause for today's huge, sickening selloff. But why have those talks ended without the capital infusion that Lehman so truly desperately needs? Because reportedly the donkey CEO is insisting on selling the shares for 50% above Lehman's book value. Without getting into the details of exactly how book value is calculated, suffice it to say for this dicussion that book value is a paper value, an accountant's calculation, based on the value of assets in the company at the levels they are currently marked to on the books. Lehman's book value is currently $34 a share. So the CEO basically wants someone to buy 50% of the shares in the company for $51 a share, when it is currently trading even before today at $13. Smarrrrrrrrrrrrt.

Current leadership at Lehman Brothers refuses to accept the basic fact of business that when a seller is a distressed seller, meaning that everyone out there, including all the potential buyers of what they're trying to sell, knows that the seller is desperate to conclude a transaction, that hurts the price that someone is willing to pay for whatever is on the market. This isn't my opinion, this isn't something which a man or a management team or an entire company can just "decide" does not apply to them. It just does. Lehman management also refuses to accept that it is at this point commong fucking knowledge that the company is not worth anywhere near the value of assets as currently listed on their books. These hubris-infused fools have literally sat by insisting on the world for their low-value assets and highly dubious stock price, all while the rest of the financial markets and now Lehman's own share price have crumbled all around them. And what are they left with now? That's right -- absolutely nothing.

It is criminal how negligently poor this company's response has been to all the bullshit of the past year. What Lehman's leadership is doing and has already done to so many thousands of the company's employees' lives cannot be forgiven or even forgotten. I care about the damage done to the investors in the company's shares over the past few years, sure, but at least those people knew when they were investing that they were taking a gamble. Anyone who's gotten in at any stock price over the past 14 or 15 months has certainly been (or should have been) well aware of the credit crisis and at least generally the ramifications that could be had on the world's big investment banks. But it's the employees of the company, whose jobs, livelihoods, whose families' financial security depends on the company, whom I feel for the most.

Right now I just hope that management of Lehman Brothers gets what's coming to them, either in this life or the next. Somebody should be held accountable not for the credit crisis per se, which surely cannot be blamed on any one person and obviously not on Lehman Brothers specifically, but for the reaction (or total lack thereof) that has gone down at Lehman over the past year, and more specifically over the past eight or nine months, that has now led us to that beautiful stock price quote at the top of this post.

Talk about a true real life donkey. Somebody get this guy a poker blog right away please.