The Lehman Lesson – “Over Leveraging Kills”

15 09 2008

What went wrong with the storied investment-banking firm is a warning for all of Wall Street.
By Allan Sloan and Roddy Boyd
Last Updated: September 15, 2008: 8:13 AM EDT

(Fortune Magazine) — The sad fate of Lehman Brothers is a cautionary tale of what’s gone wrong with Wall Street.

Lehman ended up on the financial scrapheap because it played – and ultimately lost – a dangerous game involving high-stakes bets and huge borrowings. The firm’s reported profits grew nicely through last year. But to keep its profits growing, Lehman was taking on more and more risk.

Lehman (LEH, Fortune 500) borrowed too much money, put too much of it into deals of dubious quality, and then insisted for months that all was well when it was apparent that all wasn’t well. Monday’s bankruptcy filing is a sad end for a firm once regarded as prudent and well managed.

The saddest thing of all is that decades ago Dick Fuld, now Lehman’s CEO, bitterly opposed having the firm do big, aggressive deals with its own capital. But as we said in July, during one of Lehman’s recurring crises, Fuld’s decision to do the risky things that he opposed in the 1980s hurt Lehman badly.

Back then, Fuld’s trading faction from the old Lehman Brothers was struggling against the firm’s banker faction, led by Steve Schwarzman and Pete Peterson.

The bankers wanted the firm to use its own capital to do deals. The traders opposed it.

The trader-banker war so weakened Lehman that it sold out to American Express (AXP, Fortune 500) in 1984. Fuld, a Lehman lifer, stayed on, while Schwarzman and Peterson went off to found the Blackstone Group (BX) and become billionaires.

In 1994, AmEx, giving up its “financial supermarket” strategy, spun off a small, undercapitalized firm called Lehman Brothers, with Fuld as CEO. (That’s why, despite what you read, Lehman wasn’t a 158-year-old firm; it was a 14-year-old firm with a 158-year-old name.) Lehman’s leverage – borrowings relative to capital – grew and grew, even as other firms were cutting back as the credit crunch worsened.

For example, last October, with the real estate collapse well underway, Lehman (in partnership with the Tishman Speyer real estate firm) paid a whopping $22.2 billion to do a leveraged buyout of a big apartment developer, Archstone. Losses on the deal began to surface almost immediately. Alas, we can’t give you Fuld’s take on all this; he’s declined to talk with us for months.

Lehman looked as if it would be able to survive more or less intact after the Federal Reserve Board announced in March that it would make huge loans available to eligible investment banks. This came shortly after the Fed and the Treasury forced a fire sale of Bear Stearns, and let it be known that the timing was no coincidence.

But Lehman never fully regained the market’s confidence, Fed and Treasury support notwithstanding.

That leads us to a second Wall Street lesson from Lehman: that the Fed and Treasury can no longer control events as they once could.


Lehman’s dying hours

15 09 2008

As the clock ticks down, workers file out of a Times Square skyscraper carrying what they can.
By Andy Serwer, managing editor
Last Updated: September 15, 2008: 7:27 AM EDT

NEW YORK (Fortune) — The last hours, minutes really, of one the world’s largest investment banks make for a pretty unusual spectacle.

I’m standing outside Lehman Brothers (LEH, Fortune 500) headquarters on 7th Ave and 50th street in New York City, watching Lehman Brothers die.

Employees, some in suits, others in casual clothes, are filing out with all they can carry as time runs out.

They are walking down the sidewalk past police barricades as scores of New Yorkers and tourists gawk, some asking, “Which star is coming out?” – not knowing what’s going on.

A big cop issues the standard “keep moving” line to those of us who stop to gaze. He tells the crowd, “Go home. There is no one famous coming out. You are looking at a whole bunch of people who just lost their jobs.”

Some of the people behind the barricades are loved ones – their faces distraught, their cars waiting to pick up their significant others and their boxes. One banker carries out a pair of green Lehman umbrellas, a paltry trophy.

Few parting employees are in a mood to talk – either they’re still adhering to CEO Dick Fuld’s tight-lipped, ‘We’re all in this together’ policy or they’re just exhausted and in major pain.

“No comment,” is the standard line. A TV producer tries in vain to get interviews. I managed to ask one guy how he felt: “Look at all of us with boxes,” he said with a grimace. “What do you think?”

As the night wears on, dozens of younger workers start coming out of the building. One yells, ‘Jackals,” not knowing that the crowd is made up mostly of relatives or clueless onlookers. A pair of employees walk out carrying orchids.

Six months earlier and five blocks away, a similar scene played out as Bear Stearns collapsed. Tonight I’m wondering how many more crash and burn nights like this Wall Street, the markets and our economy can take.

Pinoy Financial Quotient”, pass or fail?

2 09 2008

“pinoy Financial quotient”, pass or fail?

Sounds like a school examination, isn’t it? Yes it is an examination, But it’s actually beyond that. In my previous article, I roughly mentioned about Filipinos having low “financial IQ”. We are aware of the term IQ (intellectual quotient) and EQ (emotional quotient), But are we aware of this term Fin-Q (Financial Quotient)? This Fin-Q actually pertains to determining whether we are financially healthy; being financially secure and functioning well. Being financially healthy has to do with the intelligence of how to manage our finances, having the right attitude towards our finances; budgeting, saving, and financial planning.

Based on a study made by Citibank last January 2008, Filipinos have very low financial quotient. We have scored 47.8 points out of the possible 100 points. Some of the findings according to the survey are as follows; budgeting is not a habit for Filipinos. They don’t have monthly budget, and if they do, they do not stick to it. Secondly, insurance is not a priority-making us vulnerable to a much higher financial crisis. Savings is not automatic; they do not set aside money during salary day. In addition, Filipinos don’t have retirement plans, some have not started planning. It is either they don’t have an idea of how much they need for retirement, or they have some savings but don’t know if it is enough. The lack of this plan can be attributed to our culture of tending to look after or depending on our family especially to the adult children in case of need and retirement. Most of us also have savings that are not enough in cases of emergencies or retrenchment.

Do you share the same habits and attitudes as the rest of our countrymen? Personally, I felt very sympathetic when I saw the figures. This maybe one of the reasons why Filipinos seem to not better their condition. The scope of the result of the survey is very broad to tackle each and every aspect of it. The main thing here is that we should start examining ourselves and find steps to better our financial standing. Below are just some steps to consider to at least improve our Fin-Q individually.

Initially, it is necessary to assess our financial status. Determine what you have and how much you are getting monthly. Planning is the key to any goal that we want to meet. Sit down and figure out a budget for yourself/family monthly. Take control of your finances. Get a grip on your day-to-day spending. Take a look of what needs to be improved. The more you learn about how to manage your money, the more power you’ll have over financial pressure . . . and the less likely you are to succumb to that giant bag of potato chips or branded items. Write down everything you spend for a month, cut back on things you don’t need, and start saving the money left over or use it to reduce your debt more quickly.

It really pays to have a systematic savings program. Set aside money for savings then put a limit on your spending. Some of us save only after all the expenses have been incurred. Make it a habit to save on a monthly basis before you spend the rest of it. As much as possible, do not incur debts. Spend within your means. Pay on time if you are using a credit card so that you don’t have to pay for the charges and unnecessary interests. The recommended amount of savings is 20% of your salary. You can put this first in your savings account then you can opt to invest later in instruments that can give you a much higher returns. Build a cash cushion worth three months to six months of your living expenses in case of an emergency. If you don’t have an emergency fund, a spoilt fridge or damaged laptop can seriously upset your finances.

Another strong point that was stressed in the results of the survey is the insurance coverage. This term if not strange for Filipinos, suggests negative connotation. But we should leverage on this industry. The risk that we may encounter especially if there are people depending on us is very high. Taking up insurance coverage will transfer these risks to these companies. If something happens to us, we will not be thrown into much financial crisis. It is also a way of protecting our assets and our hard-earned monies, so we don’t need to spend and worry if something happens to us.

Lastly would be retirement planning. This is also something that does not concern most of our kababayans. They don’t plan at all and they are not aware of how much they need to have for a comfortable lifestyle. Take out the mindset of depending on our children to take care of us someday. Find out how you can start to save for your retirement and how much you need. It is better to start early and leverage on the compounding interest. The first thing to do would be determining what kind of retirement lifestyle you want to have. Seek the help of a financial consultant with this matter.

Financial planning is the key to financial health. However, a plan will remain a plan unless you take action. More importantly, review the changes that you may have along the way. Change your plans to suit your current status and needs, and then start again at the basic step. It is never too late to take steps to be financially healthy. Start today! Achieve your financial freedom. Let us start to do our part personally and in turn affect the nation in a much wider sense.


Noriel Malacaman is an alumnus of UP Los Banos. He is currently working as a Financial Consultant representing the leading financial services company in Singapore. Email: noriel_malacaman@yahoo.comThis e-mail address is being protected from spam bots, you need JavaScript enabled to view it , HP: 96585754, PinoySG username: noriel_malacaman