THE CRASH OF LEHMAN BROTHERS: THE PROBLEMS WITH RICHARD FULD & A LOOK INTO

THE LEADERSHIP OF KENNETH CHENAULT

Portfolio Project

By Jane Gerber Source: http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html

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HISTORY OF LEHMAN BROTHERS

Lehman Brothers was founded by brothers Henry, Emanuel, and Mayer Lehman in 1850.

Henry set up a general store in Montgomery, Alabama in 1844 and was later joined by his brothers.

The firm moved to New York City after the Civil War and grew into one of Wall Street’s investment giants.

(The New York Times, 2010)

Source: http://en.wikipedia.org/wiki/File:Lehman_Brothers_Times_Square_by_David_Shankbone.jpg

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LEHMAN BROTHERS

Lehman Brothers was a global financial services firm which participated in:

investment banking;

equity and fixed-income sales;

research and trading;

investment management;

private equity; and

private banking.

Lehman Brothers grew to be the fourth-largest investment bank in the United States.

(BBC News, 2008)

Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3m8E8E2l93A

LEHMAN BROTHERS

The firm operated at a wholesale level, dealing

with governments, companies, and other

financial institutions.

The firm employed 25,000 people worldwide.

The firm was heavily invested in securities

linked to the U.S. Mortgage market.

(BBC News, 2008)

LEHMAN’S TRACK RECORD

Until June of 2008, Lehman Brothers had not reported a quarterly loss even once.

The firm had survived many of our nation’s economic crises, like the railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse of Long-Term Capital Management in the 1990s.

The collapse of the giant investment bank came as a major shock for the entire world markets that plunged after Lehman filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan.

(Sheern, 2008)

WHAT WENT WRONG? Lehman Brothers was strangled

by a massive credit crisis and fast plummeting real estate prices.

The $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.

The firm was hit by a large dose of bad luck, pride, arrogance, and greed.

Primarily, the pride and greed of its chief executive officer Richard Fuld.

(Sheern, 2008)

Source: http://news.monstersandcritics.com/business/features/article_1430965.php/In_photos_Lehman_Brothers_Files_for_Bankruptcy

LEADERSHIP PROBLEMS - CEO RICHARD FULD

The 62-year-old CEO did not take the telltale signs of impending doom very seriously.

He rejected many bids to save Lehman because he thought his bank was worth more than Wall Street gave it credit for.

Fuld was nick-named “The Gorilla” for his foul temper, intimidating presence and tough talk.

(Sheern, 2008) Source: Google images

CEO RICHARD FULD

Fuld’s testimony before the U.S. House Committee was shameless and appalling. He blamed everyone but himself (Swaine, 2008).

Fuld faced angry questioning from the committee members. He was asked, “Your company is now bankrupt, our economy is in crisis, but you keep $480 million. I have a very basic question for you, is that fair?” (Swaine, 2008, para. 8).

From the years 1993 to 2007, Fuld is reported to have received nearly half a billion dollars in total compensation. In 2007, Fuld was reported to have been paid a total of $5,000,000, which included a base salary of $750,000 and a cash bonus of $4,250,000 (Story, 2009).

Fuld just sold his $13 million dollar Florida home to his wife for, reportedly, $10 (Story, 2009).

CNN named Fuld as one of the "Ten Most Wanted: Culprits of the Collapse" of the 2008 financial collapse in the United States (Rediff Business, 2009, p. 2, para. 4). Mr. Fuld has been accused of doing too little too late to save the firm (Story, 2009).

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LEADERSHIP PROBLEMS

There are four key internal biases that lead to poor decision making: Inappropriate prejudgments;

Inappropriate experience;

Self interest; and

Attachments.

Inappropriate experience is an attitude of “what worked before will work again”.

Fuld was arrogant and refused to heed the warning signs that bad business decisions lead to larger problems.

Fuld needed to take this opportunity to make hard changes to the business and resisting risks would have been supremely beneficial in this case.

(Boyle, 2008)

WOULD NEW LEADERSHIP HAVE HELPED THE

LEHMAN SITUATION?

The firm needed a leader who could set aside

his own pride for the sake of the company.

The firm needed a leader who made well-

thought out decisions and who evaluated risks.

The firm needed a leader who could take a pay

cut when times got bad.

INTRODUCING KENNETH CHENAULT

Ken Chenault has been the CEO of American Express since April 2001.

He started at American Express in 1981 and progressed through several different departments before becoming CEO.

Under Chenault, American Express has maintained the highest market capitalization of all global financial services firms.

(Chester, 2005)

Source: Google images

HOW IS CHENAULT SO SUCCESSFUL?

Chenault explains his success, "Today's

business climate reflects unprecedented levels

of uncertainty and change. Business models

have to change every three to four years and

leaders must have a long-term perspective that

focuses on structural flexibility and adaptation,

rather than the preoccupation with meeting

quarterly financial benchmarks,” (Chester,

2005, para. 2). If you quote, don’t forget to

include the paragraph or

page number of where you

found the quote.

LEADERSHIP VALUES

Integrity: Chenault believes that integrity means a lot more than just being honest. Integrity embodies consistency in words and actions.

Courage: A leader must speak out and challenge others. Chenault likes to surround himself with people who are willing to question the status quo.

Positive Communication: Chenault believes a leader clearly defines reality and gives hope.

Chenault urges leaders to realize that we must know who we are and what we stand for. “If you don’t have strong values and a sense of self,” he insisted, “you will fall off a cliff later in your career” (para. 6).

(Chester, 2005.)

PERSONALITY

Being a Team Player: Chenault believes leaders must not only be personable people who work well with others, but must learn to give cutting, honest feedback. A leader must know how to respectfully and productively engage in confrontation.

Adaptability: Chenault emphasizes the vital importance of remaining flexible and adaptable, particularly in the current economical climate.

Personal Development: A leader’s success is judged by the success of his or her followers. A leader is one who has not only mastered his or her own personal attributes, but is able to assist others in their own self-development.

(Chester, 2005)

DECISION-MAKING ABILITIES & EXPERTISE

Execution Skills: Chenault believes intelligence is not the same as the ability

to execute. It is easy to conceive strategic concepts, but the ability to

execute differentiates a leader from others(Chester, 2008).

Compassionate yet Decisive: Chenault understands that in volatile times,

leaders are closely scrutinized. A leader must have clear direction and must

not lose his or her composure, yet must also be compassionate(Chester,

2008).

Reflecting on his own career, Chenault suggests to other leaders to focus on

the task at hand and to do it thoroughly and excel. Then, hone in on one

small element of a job, organization, or process, and strive to transform it.

“In pursuing your long term aspirations,” he said, “think in incremental steps.

Pursue your passion, not ambition” (Chester, 2008, para. 14).

CHENAULT’S THOUGHTS ON THE LEHMAN

COLLAPSE

Chenault asks the critical questions to the CEOs of those failed

companies, “What were you doing with your balance sheet? How

did you think about leverage? What level of risk were you taking?

What changes did you make and were you willing to implement

them in good times” (Colvin, 2009, para. 37)?

“From a leadership standpoint, those

companies needed to be focused and

decisive back in the good times, not just

when things got bad. The hardest time to

bring about change is in the good times”

(Colvin, 2009, para. 37).

Source: Google images

CARRYING AMEX THROUGH THE CRISIS

American Express was in the middle of the financial meltdown a year ago, when Lehman failed and AIG had to be rescued. The company was on the verge of an absolute disaster and collapse.

Chenault had to change his priorities and decide the key areas which needed change. He went from being very focused on growth to issuing a mantra for the organization that we're going to stay liquid, stay profitable, and selectively invest in growth.

Chenault declined a bonus for 2008, although the other executives were paid multimillion dollar bonuses that year.

(Colvin, 2009)

CHENAULT VS. FULD

FULD CHENAULT

More focused on meeting quarterly

financial benchmarks than the big

picture.

Keeps doing the same things, refuses

to change his business model.

Continues to gamble on unsupported

securities and loans.

Arrogant and greedy – turning away

potential buyers because of pride.

Took a bonus of $4,250,000 in 2008.

Did too little too late to save the

organization.

Has a long-term perspective that

focuses on structural flexibility and

adaptation.

Willing to challenge the status quo.

Focused and decisive during good

times and bad.

Focused on staying profitable, cutting

costs and selectively investing in

growth.

Declined to take any bonus in 2008.

Believes in being ahead of the curve

and making changes even when things

seem good.

CHENAULT’S CHANGES TO LEHMAN BROTHERS

Chenault would have taken a closer look at the risky loans Lehman was offering .

Chenault would have made changes to the business model long before the company got in so deep.

Chenault would have made better business decisions.

Chenault would not have greedily taken a large bonus in order to help cut costs for the weakening company.

Chenault would have recognized when to sell or merge the organization, before everything was lost in bankruptcy.

CONCLUSION

In the end, Chenault has better leadership skills than many CEOs in the business world, including Richard Fuld.

His knowledge and skills would have been very beneficial to Lehman Brothers during the last few years.

He was able to save American Express during hard financial times.

He now faces a new challenge with President Obama’s new mandates on credit cards.

He will make the necessary changes to his organization and come out stronger than before.

REFERENCES

BBC News. (2008). Q & A: Lehman Brothers bank collapse. Retrieved from http://news.bbc.co.uk/2/hi/7615974.stm

Boyle, M. (2008, November 11). Bad management: Why managers make poor decisions. Retrieved from http://www.thinkingmanagers.com/lmr/bad-management-decisions

Chester, A. (2005). Kenneth Chenault, AMEX CEO, Speaks on leadership. Retrieved from http://media.www.whartonjournal.com/2.10095/kenneth-chenault-amex-ceo-speaks-on-leadership-1.1455143

Colvin, G. (2009). Crisis chief: AmEx's Chenault. Retrieved from http://money.cnn.com/2009/10/14/news/companies/american_express_chenault.fortune/index.htm

Rediff Business. (2009, May 14). World's 20 worst CEOs. Retrieved from http://business.rediff.com/slide-show/2009/may/14/slide-show-1-worlds-20-worst-ceos.htm

Sheern, T. (2008). What went wrong with Lehman Brothers. Retrieved from http://www.millionface.com/1/what-went-wrong-with-lehman-brothers/

Story, L. (2009, January 26). For $10, Fuld sold Florida mansion to his wife. Retrieved from http://www.nytimes.com/2009/01/26/business/26fuld.html

Swaine, J. (2008). Richard Fuld punch in face in Lehman Brothers gym. Retrieved from http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3150319/Richard-Fuld-punched-in-face-in-Lehman-Brothers-gym.html

The New York Times. (2010). Lehman Brothers Holdings, Inc. Retrieved from http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html