Financial Scam - Lehman

Values Based Leadership: Cases

Dilemma of Richard Fuld

In 1966, Richard “Dick” Fuld Jr., arrived in NY to work as an intern. Dick Fuld was driven and good at what he did. Steadily and resolutely he worked his way into being the CEO in 1993. Under him Lehman grew from raising money and managing mergers and acquisitions for clients, into using borrowed money to play the markets. He had one simple ambition – to take over his rivals Merrill Lynch, Morgan Stanley, and Goldman Sachs.

In 1993, the firm suffered a loss of $102 million on sales of $5.3 billion. In 2007, profits are $4.2 billion on revenue of $19.3 billion. In 1994, one Lehman share was worth $4. By 2007, it rose to $84. His own pay surged to $40 million in 2007 from $12.5 million in 2002. He did it by expanding Lehman’s offerings into more lucrative, but risky products.

Fuld expands more risk taking to increase the wealth of his shareholders. He also wants big bucks – the multi-million dollar bonuses for himself and his team. Lehman, at this point has $18 million of real money and $760 billion of leverage i.e. Lehman’s leverage increase from 18x to 44x. Financial analysts and media are very concerned about Lehman’s quality of assets. Fuld’s senior executives are warning him about the potential risks.

On the other hand, in 40 years, Dick Fuld has brought Lehman brothers from a loss making company to a profitable giant. All on his own. Should he listen to himself or everybody else this time?

Background:The credit crisis brings two groups of people together – homeowners and investors. Homeowners represent their mortgages, and investors represent their money. These mortgages represent houses and this money represents large institutions – like pension funds, sovereign funds, insurance companies, mutual funds, etc. These groups are brought together through the financial system a bunch of banks and brokers commonly referred to Wall Street.After the September 11 attacks in 2001, The US Central Bank,...