Lehman: "Bad Risk Management in a Sea of Financial Excess"

(MoneyWatch)  (Note: This post first appeared in BNET's Sterling Performance blog.)
"Lehman decided to play chicken with the market -- and they lost."
In what's been likened to Black Monday (1987) today around 5,000 UK-based employees will lose their jobs as 158-year-old investment bank Lehman Brothers filed for bankruptcy protection under Chaper 11 of the US Bankruptcy Code.

All of the employees in London's Canary Wharf, as well as those at Lehman Brothers' subsidiary, Capstone Mortgage Services in High Wycombe, are likely to find themselves out of a job. "I'll now try to move into another industry," said one.

It's a far cry from a year ago, when the bank was valued at some $47bn and was the largest trader on the London Stock Exchange. Eleventh hour discussions with Barclays and Bank of America faltered yesterday when it became clear the US government could not guarantee the troubled bank's assets.

It is, of course, the majority of Lehman Brothers' 25,000 employees who stand to lose the most, along with 411,000 shareholders, George Soros among them -- he was among those who expected a rebound and doubled his shares in Lehman earlier this year.

The Bank of England has made ?£5bn available and the European Central Bank added 30bn euros to keep liquidity flowing in the City.

In a refreshing act of solidarity, 10 leading banks, including Credit Suisse, Citigroup and Deutsche Bank, are pooling their money to create an emergency borrowing fund of $70bn.

Dr Housing Bubble blames Lehman's sub-prime mortage exposure. "It is up in the air whether they held onto to these assets because of a foolish investment move or whether there simply wasn't a market for these assets."

Plenty accuse CEO Richard Fuld (apparently nicknamed "the Gorilla") of hubris, as well as for waiting too long to write off these 'bad bets'. Greenlight Capital's outspoken David Einhorn raised alarm bells earlier this year about the bank's lack of transparency when it came to declaring its liabilities. "Other than the charismatic value of the leadership and maybe the popularity of the company, Lehman's exposures are worse than Bear [Stearn]'s on an apples-to-apples basis," he told a reporter in June.

"It makes me rather sad to see this organisation brought to its knees as a result of what I'll call a lack of control, poor management of internal risk and ultimate self-interest," former Lehman's employee Walter Gerasimowicz told Bloomberg.

(It's unfortunate, under the circumstances, that Fuld's board positions include one for a charity called Robin Hood, "targeting poverty in New York City".)

The Reasoned Sceptic plays no favourites in apportioning blame. "Lehman, Bear Stearns and Merrill Lynch all exhibited horrifically bad risk management in a sea of financial excess and excess capacity." Blame here goes straight to the board, then, whose members include Sir Christopher Gent. But there's a silver lining, says Anatole Kaletsky, arguing that the financial transactions between banks and hedge funds have "less effect on the availability of credit to non-financial businesses than might be imagined."

Had the US government bailed out Lehman or Merrill Lynch, there would've been a "massive regulatory overhaul" to appease taxpayers for having to take on the banks' risks. As it is, the longer term effects are likely to be less drastic, argues Tracy Corrigan.

But as investment banks cede supremacy to the commercial concerns, will the 'star' system -- with its high bonus culture and short-term focus -- also go the way of the dinosaur?