Tuesday, September 15, 2009

Eulogy for Lehman Brothers: Hasta la Vista, Baby

Posted on Kamakura's website by Donald van Deventer:

For many recent employees of Lehman Brothers, September 15 will bring a sad remembrance of its failure one year ago. For many of us veterans from the old days of Lehman Brothers, the greed and corruption and crude corporate infighting that we saw raises another question. How did a firm that was totally out of control 20 years ago survive as long as it did? As Arnold Schwarzenegger’s character said in the 1991 classic Terminator 2, “Hasta la Vista Baby.” This blog highlights some of the most unforgettable memories of three years at Lehman.

I spent the first ten years of my career in Los Angeles as a banker. From 1977 to 1982, I was at Security Pacific, then the sixth largest bank holding company in the United States. The bank was so straight-laced that the saying was, “Have a beer at lunch, don’t bother to come back.” From 1982 to 1987, I was at First Interstate Bancorp, ending up as senior vice president of the Funding Department for the parent company, then the 7th largest bank holding company. Under CEO Joe Pinola and my boss, the CFO Don M. Griffith, the place was filled with honest hardworking people who were trying to do the right thing. The only hint of scandal was on Monday mornings, when I would arrive to find evidence on my office couch that someone had brought their date up to the 58th floor to “see the view.” After Pinola and Griffith retired, the occasional petty thief reared his head. After one of Don Griffith’s successors (“Mr. X.”) as CFO resigned from the company, a large number of computers disappeared from the finance department. This happened immediately after it was announced that Wells Fargo was buying the firm we were constantly being told not to call “FIB.” The police were tipped off and found the PCs in Mr. X’s garage. But that was kid stuff compared to what I saw at Lehman. People in different offices of Lehman at different times in its history may have had a different experience than I had—I certainly hope so. Here’s the PG-13 version of some of the things that happened to me. The names of the bad guys have been changed. They know who they are.

The Prologue: Being Recruited by Lehman in Tokyo in 1987

I let my boss at First Interstate know in late 1986 that I was going to leave FIB, as much fun as it was. I told him I thought someone was going to buy FIB and fire all of the head office staff, especially in finance, so there was no reason to stick around. I couldn’t spell “retention bonus” to save my life. It was the height of the Tokyo bubble and I was ready to go. It was also Bonfire of the Vanities in New York and no one in New York wanted to drop off the map to Tokyo. I got a bunch of offers but the most memorable part of the recruiting process was a dinner with the Fixed Income Department at Lehman Tokyo (then called “Shearson Lehman American Express”) to celebrate their great 1986. There were about 15 people at the dinner in a small French restaurant on the back streets of Roppongi. The host was “Andy,” the American head of fixed income. The group was 80% North American and it got wild pretty fast. We were in an upstairs room with white plaster walls and a brick fire place, which was going full blast, because January in Tokyo can be pretty cold. The crowd was completely drunk in about 45 minutes, except for me because I was interviewing for a job. Before long the traders, whose average age was about 28, were grabbing charcoal out of the fire place and covering the walls in graffiti. After that, 13 of the 15 spent the rest of the dinner admiring a wooden sheep covered with the wool fleece of a lamb and ridiculing the second most senior fixed income guy. The assault was led by A and J, and they tried to make M, a very serious and sincere guy, feel as bad as possible.

The dinner ended when the room was so filled with smoke that no one could stand it anymore. Andy and I were the last ones out, because he was in charge of getting me to join the firm. We were just slamming the door on our cab when the Japanese chef at the restaurant came screaming out the door holding a meat cleaver. Andy, much to my surprise, was dumb enough to roll down the window to see why the guy was so angry (Andy had forgotten the graffiti). My Japanese was much better to Andy’s and I explained that someone had stolen the wooden sheep and the chef wanted it back. Andy grabbed a bunch of 10,000 yen bills out of his pocket, shoved it at the chef, and we raced off.

About six hours later, the next morning, I showed up at the Tokyo office for my formal interview. There was the sheep, right in the middle of the trading floor, balanced on the Bloomberg terminals between A and J. There were no illusions. If I joined Lehman, I knew I was destined for a place with the ambiance of a juvenile detention center.

J did OK. 10 years later, they made him the head of fixed income in Tokyo. After that he became the head of one of the largest overseas offices in the Lehman empire.

My First Day at Lehman in 1987: The Day I Decided to Quit

I took the Lehman offer and went to work on my first day. I was a senior vice president in the investment banking department, and I was assigned to cover about half the big banks, the 3 power companies, NTT, Tokyo Gas, Sony, Canon, and Fujitsu. After 12 hours in the office we went off to an Italian restaurant that’s still around, a place called Sabatini, in Aoyama. There were 8 people there, 3 from a prestigious European firm and the rest from Lehman. The Europeans had just arrived in Tokyo that afternoon. I couldn’t hear much of what was going on, because as Japanese culture dictated, I was at the junior seat at the table. Most of the first year I was in Tokyo, the only thing the Japanese branch manager Matsui thought he needed to teach me was where to sit at a business dinner, which varied by your rank, the ranks of those from Lehman, and the ranks of the people on the client side.

On that day, it was easy. I was in the junior seat and that was fine. I was jet lagged and by 10 pm the business day was 15 hours old. Suddenly everybody started to laugh. I turned to the Lehman guy next to me and said “What’s so funny?” He asked me, “Are you going to go?” I was clueless, and I said “What are you talking about? This is my first day on the job and I don’t know anything.” He explained it like this. “The clients have just reminded us of their need for ‘special services’ from the Japanese girls at the local ‘soap land.’ Tanaka-san on our side always arranges this for them, because the clients have made it clear that if those services are not provided by Lehman, they’ll take their Japanese business somewhere else. So the question is this—Tanaka-san is going to go, and so are a bunch of the rest of us. Are you going to go or not?”

I used jetlag to beg off, and I decided to quit Lehman that night. As an expat in a very expensive city, it took three years to buy a house, rent office space, come up with a business plan, and all the other stuff I had to do before I could actually leave Lehman. But the elapsed time from my first paid minute at Lehman until I decided to quit was 16 hours. I didn’t get a Harvard Ph.D. to work as a pimp.

Lehman Compensation: Direct and Indirect

It took me a while to figure out the compensation system at Lehman. After a while, it was clear that bonuses were very random and had only about a 5 percent correlation with your skill. The offset to that was the fact that the bonus was high enough that Albert Einstein wouldn’t have cared that Barney the dinosaur was making twice as much. Still, everyone around me was bitching that they were underpaid.

The branch manager when I was there was a bigger than life character, a lovable rogue. He looked and sounded exactly like Hideki Matsui, the centerfielder for the New York Yankees now, so I’ll call him Matsui. We were doing a couple of client calls together in late morning, so I hopped in his chauffer driven limousine and we stopped first at an elegant ryotei (a very fancy restaurant which is typically run by very beautiful and elegant ladies with near geisha status). It was only 10 in the morning and the place was closed, but Matsui had something to do. Much to my surprise, he asked me to come in with him rather than waiting in the car. We ended up in a small tatami room talking to one of the most beautiful women I have ever seen. She was a kimono clad beauty and obviously she and Matsui knew each other very very very well. She was distraught, and the conversation was too complicated for my Japanese at the time so I wasn’t sure what was going on. At the end, Matsui passed her a very thick sealed envelope, mumbled a long apology, and we got back in the Mercedes.

“Did you follow what was going on?” Matsui asked. Nope, I told him, and he explained. “She asked me for years and years to spend some time with her, and I kept telling her no. Finally I did ‘go out’ with her [he used a cruder phrase in Japanese, often translated as “bop”] but I don’t want to hang around with her any more. So I gave her a few million yen as an apology.”

The chauffer seemed to take all this in as normal and Matsui turned to discussing Saito-san’s compensation. Saito-san was technically my boss, so I just shut up and listened to what Matsui had to say. “Saito-san is always bitching about his compensation, even though he’s very well paid. His problem is that he just doesn’t do what I tell him. I told him ‘Look, just take out a mortgage on your condominium in Hiroo and take the money and buy the stock I tell you to when I tell you to. If you do that, you’ll have more money than you’ll ever need.’ “ He turned back to me, just shaking his head at what a fool Saito-san was for not doing as Matsui said. I concluded, but of course couldn’t prove, that Matsui was an insider in the rampant stock price manipulation of the day and that Saito-san missed a 100% chance to win the lottery.

Supplementing Your Income as an Investment Banker

Matsui called me into his office another time to talk about something, but before he did, he started complaining about Gambino. Gambino was another American investment banker who made John Gotti look like Mother Theresa. It had taken about 10 minutes for me to figure out that Gambino would lie to anyone about anything, sometimes because he thought that would increase his bonus, but often just for fun. He once bragged that he took someone from Lehman New York on a three day tour of the ancient city of Kyoto. Gambino explained that he gave detailed answers to questions about the 2000 year history of Kyoto for three days, never failing to answer in detail. How’d you do that, we asked. “I made it all up,” grinned Gambino.

Today, Matsui was really on Gambino’s case. “I know he’s falsified every expense report he’d ever submitted and I am so pissed off that I can’t prove it.” I knew that Matsui was right, because I’d see Gambino do it. He’d go out strictly for personal purposes and spend $500 to $1000 on a dinner, with one of the investment banking associates in tow. Then the associate would be the witness that there was a client there. Petty stuff. Must have cost Lehman $50,000 a year.

Lehman Tokyo’s IT Strategy

By the time I’d left First Interstate in 1987, the funding department at First Interstate had more PCs than we had people. When I arrived at Lehman’s Tokyo Investment Banking department, they had about 5 PCs in a sea of about 40 people. I explained to “Charles,” the British managing director running investment banking at the time, that I needed a machine to do my job. “Why?” he asked, “Those things are for secretaries.” I almost blew a gasket explaining to him what a small fraction of my total compensation had to be saved to break even on a PC. He finally gave in and got me one, although he tried to take it away later. I finally told him that if he took the machine away, I was quitting on the spot.

Supplementing Your Income as Only Senior Management Could Do

One day about 9 am, I had an imminent deal brewing and I needed to clear the final terms with Matsui. I went to his secretary, who’d been around since the Meiji era, and asked for 10 minutes of Matsui’s time. I could see him in the office, but she said “He’s busy all day.” I could see inside the office, and there was nobody there. I raised my eyebrows in a question and she smiled. “You can only see Matsui if you go to this hostess bar in the Ginza tonight. Your appointment is 9:15 pm.” I said, “You can’t be serious.” She blushed and explained that Matsui’s “friend” worked there.

I walked past Matsui’s office about 20 times that day, and most of the time his office was empty. Armed with the frustration of that knowledge, I showed up in the Ginza at 9:15 pm and found that the place was one of the largest and most elegant hostess bars I had ever seen. There were at least 50 girls working there, any one of whom could have been Miss Universe if they could afford to take a pay cut that big. There was a long line of Lehman people waiting, at least 10. I finally got to the head of the line and Matsui came up to me with a stunning Korean-Japanese girl would couldn’t have been more than 28 years old. “This is my friend,” he explained. “She’s the mama-san,” meaning the boss. We had our meeting, it took about 15 minutes, and at standard high end Ginza bubble hostess bar rates, that would have cost Lehman Tokyo about $1000.

The next day it all started to make sense to me. How does a 28 year old start a high end bar with a monthly salary expense of $1 million a month for 50 Miss Universes? By having a partner like Matsui who owned 99% of the place. If there were 10 of us from Lehman and the bar billed normally, that was $10,000 in one day and Matsui’s share was 99%. No one ever talked about it openly, not if you wanted to get a bonus anyway. So I couldn’t confirm it, but from the looks on people’s faces I was the last one at Lehman to find out.

Jimmy Three Sticks

James D. Robinson III, CEO of American Express, parent of Lehman, was on his way to Tokyo. Rumor had it that this was part of his campaign to be named Secretary of the Treasury, which involved pushing Jimmy Three Sticks’ (as he was known within Lehman) plan to solve the third world debt crisis. I was to take JDR III to all of the major banks that I covered to meet with their CEOs, along with the president of American Express Japan. The problem was that every one of those banks was very pissed at American Express because they had just announced that the Amex card could be used to access yen deposits in Nomura Securities’ new yen money market fund. One afternoon, the day before Jimmy III was to meet with the CEO of Kyowa Bank (later merged into what is now known as Resona Bank) a senior managing director named Shimizu-san called me directly. That was the current day equivalent of a direct call from the Pope. Senior managing directors only talked to Matsui, not to the likes of lowly senior vice presidents in investment banking. “Don-san,” he explained, “When Mr. Robinson comes tomorrow, we don’t want to talk about the Nomura money fund. We don’t want to hear anything. Nothing. Not a word. If he utters one sentence about it, Mr. Robinson is not going to like what happens.” Amazing. He wasn’t threatening me. He was threatening the CEO of American Express.

This was big time. I called the CEO at Amex Japan and couldn’t get him. I sent him an e-mail (primitive interoffice e-mail, as that’s all we had) and a fax telling him what had happened. He called me back and we went through it by phone. Then I called Shimizu and explained all that I had done. “Shimizu-san, in addition, I’ll explain this for the fifth time to Mr. Robinson in the car. Even though I do that, I have to warn you Mr. Robinson is going to do whatever he wants to do, and I want you to understand I have no control over that.” It was a good thing I explained that, because the next day, even after my explanation, Jimmy Three Sticks raised the Nomura fund. Shimizu barely managed to avoid a heart attack, and Jimmy Three Sticks was probably never closer to a fist fight in his professional career. I haven’t seen so much yelling in one meeting in my life. The Kyowa CEO was ready to kill Jimmy III. And that’s who was telling the Lehman CEO what to do.

Lehman and Credit Risk 1987-1990

Peter Cohen was the CEO at Lehman for the years I was there, with the infamous Dick Fuld and Chris Petit backing him up. Peter came to Tokyo a lot, along with Fuld and Lou Gerstner, later CEO at IBM, who was working as President of American Express at the time. Lots of other people whose names you know passed through too, because Lehman was still benefitting from the aura of the Golden Age of Pete Peterson, even though the commercial paper guys led by Lew Glucksman had taken over the firm.

Glucksman didn’t stick long but his attitude toward risk outlived him. Commercial paper traders under Glucksman kept no inventory at the end of the day, because that meant that either the firm had a bad sales effort or they were mispricing product. The same was true on the corporate bond side. One time I went to see Andy in fixed income and asked him how come I was having such a hard time getting good bond spread quotes from the fixed income desk in New York. Andy explained they were never allowed to own any corporate bonds over night. That’s right. Zero inventory. Much more conservative than my prior employers Security Pacific and First Interstate, but then again, they both nearly went under, avoiding credit-risk induced failure with mergers under duress.

So how did Lehman go from zero credit risk in the fixed income group in the late 1980s to $693 billion in assets on September 15, 2008? I don’t know. I wasn’t there.

Insurance from the Top

After I realized that I was surrounded by peers whiling away their time with embezzlement, expense report falsification, prostitution as a marketing strategy, and stock price manipulation, I went to my best friend, the guy M who had been ridiculed the night of my recruiting dinner. “How can this go on so long without New York doing anything,” I asked him. “You idiot. Don’t you understand anything? When those guys from New York come over, Matsui takes them to soap land too. He’s got the goods on them. They can’t touch him.” It was time to get out, and I quit in 1990 to start Kamakura. My standards were too high to stay at Lehman but I wasn’t sure if anyone else would understand why I quit. I had drinks with my best Japanese client shortly after. He was a deputy general manager at one of the most conservative and reputable banks in Tokyo. “It’s a good thing you quit,” he said. “It’s the best way to keep your personal reputation as good as it is.” His advice was worth taking, and he’s now the CEO of one of the four largest banks in Japan.


About six months after I had quit to form my own firm, another close friend, an Englishman we’ll call David, was fired from Lehman for no good reason. About the same time, a senior vice president of the investment banking department Kitamura had approached one of the best associates in investment banking, a girl we’ll call Tanaka. Right in the office, he pulled on her blouse so that he could see her breasts. She stormed into the head of investment banking Saito’s office, and demanded that this svp Kitamura-san be fired. Saito did nothing so Tanaka walked out, went home, and called the world wide head of the associates program at Lehman in New York, a female VP. She too did nothing. Tanaka and her peers logged a lot of calls into me and I promised to take action. Tanaka was a smart, tough girl who had made the Texas state swimming finals when she was in high school. Kitamura picked on the wrong girl. I wrote a letter to the former head of investment banking, the Englishman Charles. Charles had returned to New York. He was such a devout Christian that one of the Japanese women in his church was stalking him in New York. “Dear Charles,” my letter started, “I understand that David has been fired. Knowing how important religious values are to you, how can David be fired when these three guys are still on the payroll:

  • Kitamura, who’s crudely sexually harassed Ms. Tanaka in the office in full view of the entire Tokyo investment banking department
  • Gambino, who’s spent most of the last five years falsifying his expense reports rather than generating any business for the firm
  • Ebuchi, who spends at least two hours a day sleeping at his desk in the investment banking department.”

I didn’t expect to hear anything back, and of course I didn’t. A few weeks later a friend in Lehman New York called and said “You’re letter’s getting widely circulated in New York.” “Oh yeah?” I said, “I bet I can guess what the reaction is.” “That’s right, I bet you can. They’re saying you’re psychologically disturbed,” he laughed. What happened to these guys?

  • David is now a managing director at one of the three largest banks in the USA with very heavy responsibilities
  • Kitamura was promoted to Managing Director at Lehman Tokyo
  • Gambino was promoted to a senior position at Lehman New York but was finally fired after years of great call reports, inflated expense reports, and no revenue
  • Ebuchi slept at Lehman for a few more years before moving to another firm
  • Matsui finally left Lehman and was black-balled from other investment banking jobs after a head hunting firm finally did reasonable due diligence. He lived in Bangkok for many years after and died a year ago
  • Tanaka has disappeared from sight. I don’t blame her.

Those are just a few of the PG-13 stories from that era. Maybe I was just lucky to have this window on Lehman. Maybe I’m just a blind man feeling the side of an elephant, unable to understand the true nature of the beast. Clearly the firm changed after I left. Thinking back, all I can say to the old Lehman is “Hasta la vista, baby.”

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