Thursday, September 11, 2008

Lehman's "Franchise" & Good Bank/Bad Bank Structure

The Wall Street Journal carried several articles concerning Lehman yesterday. The two elements of the firm's activities yesterday on which I would like to focus are Fuld's remarks, and the evolving 'good bank/bad bank' structure proposed for the firm.

According to the Journal,

"A subdued-sounding Mr. Fuld acknowledged that "losses created by these concentrated legacy assets have clouded the underlying value of our franchise," distracting clients, trading partners and employees. "While they continue to stand with us, we nevertheless cannot put the strength of our franchise and their continued trust at risk." "

Who is Fuld kidding?

"Legacy assets?"
"Underlying value of our franchise?"

Where does Fuld think his 'legacy assets' came from? Did he go to the men's room for the last five years, came out and suddenly saw them on the firm's balance sheet?

What, specifically, amidst this residue of Lehman's appalling risk management, does Fuld think is the firm's 'franchise?'

Franchise typically refers to some intangible value. In this case, an outgrowth of respect for management skill and/or talent. Where is Lehman's? How do you argue for any skill in a firm which, by virtue of Fuld's ego, expanded way beyond it's original capabilities in bonds, to embrace the fast-growing mortgage securitization business, as well as buy an asset management unit, too.

Guess what the firm's 'restructuring' entails? Selling a big part of the asset management business and hiving off the disastrous mortgage-related assets into a 'bad Lehman.' Leaving the original non-mortgage, fixed-income business as the 'good Lehman.'

Apparently, it is Dick Fuld's fervent wish and hope that, having cast his major blunder adrift as a separate entity, investors and counterparties will revalue his firm's 'franchise' and let him go back to business as usual.

But it's going to be the same Dick Fuld, minus some of his former employees, operating the 'good Lehman,' who built the 'bad Lehman.'

So, why should anyone believe it will be different now? Lehman, as a firm, has gone through these cycles for decades. The split between Lew Glucksman's traders and Pete (now Blackstone) Peterson's investment bankers drove the old Lehman into the arms of American Express' James Robinson.

Lehman has a history of making mistakes after the fat years, then careening to disaster in the lean years thereafter. This time is really no different.

In fact, I suppose you could even argue that Fuld's pride at being continuously employed by Lehman for so many years assures you that this flawed corporate gene is embedded in him by now.

Lehman can try to split its rotten mortgage assets into a 'bad Lehman,' stick it to shareholders as a special, separate piece of equity, and pretend that the 'good Lehman' is now all better. They can try to retain part of the asset management unit.

But step back and look at the whole picture. Dick Fuld ran Lehman out of control. He got out of his depth, splurged on mortgage assets at precisely the wrong time, and tossed good risk management out of the window.

Now, he claims the core 'franchise' of the firm he has nearly ruined really needs to be saved, due to that core value. The core value Fuld maintains he really has this time.

This is the kind of stupid, myth-based, sentimental thinking that gets business people in trouble. Last night, I sat with my business partner and listed the investment banks operating when I left graduate school, but no longer with us as identifiable firms- Kidder Peabody, First Boston, Salomon Brothers, Drexel Burnham Lambert, and Bear Stearns. Morgan Stanley and Lehman are now seen swirling around the drain, Lehman the closer of the two. Let's not get all misty-eyed over the loss of another one or two publicly-listed investment banks, shall we?

Lehman should simply be dismembered, assets sold, and allowed to sink quietly into oblivion, along with its inept senior management, never to prey on shareholders again.

No comments: