The New York Times published an edited extract from Andrew Ross Sorkin’s Too Big Too Fail (man, that book is so large, they can release a ton in advance and still have a book and a half of reading left over). This section is on some of Dick Fuld’s efforts to save Lehman.
The Japanese tell their children, “You should hear one thing and understand ten.” Sorkin’s snippet reveals quite a lot.
It was obvious to even outsiders in the late stages of the unravelling of Lehman was that Fuld missed possible deals because he set his price targets too high. One of the cardinal rules of dealmaking is everything can be solved by price. He probably could have unloaded Neuberger Berman and limped along for a while. He could have sold a stake to the Koreans. Would these moves in August have rescued the firm? As an independent player, no, but a sale of all or part of the firm still would have been a better outcome, and realistic conversations might have led to a sale of more operations, and saved more jobs. Bear’s employees did get something for their stock holdings, and a minority kept their jobs. Now Bear did get a government backstop, but that was after the investment bank was clearly terminal.
But three things are striking about the Sorkin-provided details:
First, Fuld (and presumably the underlying business) was desperate as of early July. Sorkin has Fuld arranging for contacts to be made to possible buyers like Bank of America on a Saturday. Huh? He was clearly flailing about, yet not offering a price or deal terms commensurate with his obviously panicked state.
Second, Paulson and Geithner were aware of Fuld’s desperation. The Wall Street Journal reported earlier that Fuld was calling Paulson almost daily (and suggested Paulson was somewhat puzzled). The Sorkin excerpt shows Fuld petitioning the Fed via Geithner to become a bank holding company:
Mr. Fuld's outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested an idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Mr. Cohen had explained, would make it easier for Lehman to borrow money from the Fed "just like Citigroup or JPMorgan."
Mr. Cohen, a 64-year-old, mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. Pacing in his hotel room in Philadelphia before the wedding of his niece that night, he joined the call between Lehman and the New York Fed.
"We're giving serious consideration to becoming a bank holding company," Mr. Fuld started out by saying. "We think it would put us in a much better place." He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the regulations.
Mr. Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive. "Have you considered all the implications?" he asked.
Mr. Baxter, who had cut short a trip to Martha's Vineyard to participate, walked through some of the requirements, which would transform Lehman's aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.
Regardless of the technical issues, Mr. Geithner said, "I'm a little worried you could be seen as acting in desperation," and the signal that Lehman would send to the markets with such a move.
Mr. Fuld ended his call deflated. Later that evening, Mr. Fuld called Mr. Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding.
Yves here. If Geithner and his colleagues didn’t get that Fuld was at the end of his rope, they were choosing to ignore an elephant in the room. Now they may have been completely unwilling to consider the petition and this was the easiest way to signal their opposition (taking Fuld through a long list of requirements, some of which presumably would have been pretty painful, was another message).
But this speaks to a question we have raised again and again: why was there no serious assessment of what a Lehman bankruptcy would mean? After Bear went down, everyone knew Lehman was next on the list, with Merrill and UBS also known to be wobbly. Why didn’t the Fed, Treasury, and SEC together demand certain types of information from all big US regulated capital markets players (including JP Morgan and Goldman, perceived to be the healthiest, so as not to be singling out the weaker members of the herd?). This is a massive oversight. Relying on luck, which is what assuming all would be well after the Bear debacle, is no substitute for having a strategy. There was clear urgency in July. Even a month of assessment and evaluation of options (it probably would have taken two weeks to orchestrate the information requests among the agencies) would have been better than nothing. But the Freddie/Fannie unwind was moving to front burner, that probably consumed a lot of available bandwidth.
And we have the third, and peculiarly most obvious point to anyone who has had some exposure to deals, but one that Sorkin does not bring forward: what the hell was Fuld doing trying to negotiate his own deals? This is a mistake CEOs make all the time, and it never ceases to amaze me.
Now why is it a bad idea for a CEO or for most principals to negotiate their own deals? Most people are terrible negotiators. And I have to tell you, most people in M&A are not as good as they think they are. They don’t really negotiate all that much. They structure deals, value them, sell, but a lot of the negotiating takes place through the lawyers (many of the key points are negotiated in the negotiations over reps and warranties and the details of the definitive agreement). Most M&A transactions do not have that much negotiating, relative to all the other stuff that goes on in a deal, for most professionals to get that much practice.
But CEOs on average are FAR less practiced at negotiating, and Fuld is by temperament and experience particularly poorly suited for that role. He comes out of commercial paper (which is a very simple “placement” business; negotiating was never a skill he had to develop), he was known for being hyper aggressive and surrounding himself with yes men; he’d have even less give and take on a daily basis than most top executives.
There are other reasons not to negotiate your own deal. Even if I were a good negotiator (and I’m not, but I am a good transaction tactician), I’m loath to negotiate on my own behalf, and many good negotiators I know try not to. You have too much at stake, you lose the detachment you need to be effective.
Another crucial reason is you have FAR more leeway going through a negotiator. They can explore ideas with the other side with far less of a sense of commitment than if principals deal directly.
The one exception to this rule is industries where people negotiate all day. I’ve have some clients in the media business (cable) and they are frighteningly good, since horse-trading is a much bigger part of the fabric of their business than in other fields.
Back to Fuld. I’m simply gobsmacked at how he carried on. For instance, why did Fuld speak to Geithner and Baxter? This was completely nuts, a display of ego and utter stupidity. Fuld has the best connected, most trusted (by the Fed, anyhow, which is what counts) BANK regulatory lawyer in the US in Rodg Cohen. I’m personally not a fan of the man (long story involving a client here, won’t bore you with details) but Cohen would be the guy to broker a deal like that. If anyone could have pulled it off, he could have. If Fuld felt he had to be on the call, he should have let Rodg lead and kept his bloody trap shut as much as possible. But instead he conducts the call with no Cohen, apparently not even any Cohen laying of the groundwork.
Now it may be that Sorkin has this wrong, that Cohen served up the idea only under duress and didn’t want to carry the message. That’s unlikely, since lawyers often are asked to serve up low-odds ideas. But given that Fuld made all the calls on all the deals Sorkin discusses here, it appears he insisted on making his own pitches.
And again, while Sorkin may have had to streamline to keep his very big book from tuning into a three volume saga, the number of proposals Fuld made in a short succession also suggests that Fuld was winging it, throwing out ideas to see what might stick. Yes, it’s a good idea to start with an elevator pitch, and then elaborate if you get an initial positive or at least neutral response, but there seems to have been NO thinking, no detail beyond the high concept. Again (and this is just common sense), there seems to have been little consideration of “what’s in it for the other side,” as in some concrete discussion of fit/synergies, at least an indication of an awareness of possible structural/organizational issues, etc. These all seemed to be seat of the pants with NO backup! Check this out:
Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley…Mr. Fuld asked candidly: "Can't we try to do something together?" It was a bold question and Mr. Mack had suspected it was the reason for the call…
"We'll come over to your offices," Mr. Fuld, clearly anxious, said.
"No, no, that makes no sense. What if someone sees you coming into the building?" Mr. Mack asked. "We're not going to do that. Come to my house, we'll all meet at my house."
…There was Walid Chammah and James Gorman, the firm's co-presidents; Paul Taubman, the firm's head of investment banking; and Mitch Petrick, head of corporate credit and principal investments.
Bart McDade, Mr. Fuld's new No. 2, showed up next, dressed in a golf shirt and khakis. Skip McGee, the firm's head of investment banking, was running late; his driver got lost.
As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.
Mr. Fuld looked at Mr. Mack as if to say, It's your house, you start. Mr. Mack imperturbably glared back, You asked for the meeting. It's your show.
"Well, I'll kick it off," Mr. Fuld finally said. "I'm not even sure why we're here, but let's give it a shot."
"Maybe there's nothing to do," Mr. Mack said in frustration as he noticed the discomfort around the room.
"No, no, no," Mr. Fuld hurriedly interjected. "We should talk."
He began by discussing the possibility of selling Neuberger Berman, Lehman's asset management business and one of its crown jewels. He also suggested that Morgan might buy Lehman's headquarters on Seventh Avenue "” the same building that had been Morgan Stanley's until Philip Purcell, the firm's former C.E.O., sold it to Lehman after 9/11. The irony would be rich.
"Well," said Mr. Mack, not entirely sure what Mr. Fuld was proposing, "there are ways we can, you know, there are ways we can work together." ….
But the meeting ended with no agreement and what seemed like no incentive to keep talking. "Was he offering to merge with us?" Mr. Mack asked after the Lehman executives departed.
"This is delusional," Mr. Gorman told his Morgan Stanley colleagues.
Yves here. By virtue of having had Japanese clients, I have probably seen more offensively overpriced turkeys than the average person. But even with people peddling utter rubbish (which they no doubt knew to be utter rubbish), and the Japanese occasionally being so bold as to say so (Kansai Japanese do that) I cannot recall a meeting going every remotely as poorly as this one did. This is clumsy and embarrassing, and it is unfortunate that Sorkin either did not appreciate that, or that he felt that the narrative style he chose prevented him from saying so directly.
But it still makes for very voyeuristic reading.
I think you do a disservice to traders, who sometimes are quite good negotiators. (My theory is that because traders are congenitally paranoid, they are scared of doing any deal that the other party seems to like. So when you have an ex-trader who is patient – as well as having learned to harness his paranoia – you can have quite a formidable negotiator.)
Also, Fuld was a commercial paper guy – so basically, not much of a trading job at all – so, as I say, you do traders a disservice by placing Fuld in their ranks.
I’ve had a lot of traders as clients (FX, derivatives, emerging markets, hedge funds, money markets), and I have to beg to differ. Really good negotiators are quite deliberate about what style they adopt at any point in the negotiation (and these are amazing split second decisions on what chord to strike). They operate at two levels, they have a meta “what is the real game here and how do I play it” and can also keep the substantive bit going. That facility of being able to look from (at least) two vantages simultaneously and make a conscious choice about personal style (do I play jocular, reasonable, aggressive, etc.) is very rare. Too many people think mere aggression is effective negotiation (I am not saying you do necessarily, but some seeing your comment might infer that). Many of the best negotiators I have seen do quite the reverse, lull their opponents into false security, pretend to be less effective than they are, get them to make disclosures or agree on minor issues that sets the stage for larger concessions (these are simplifications of more complex strategies, but you get the drift).
Traders pretty much without exception have only one style, and I have never run across one that has the multidimensional sense I have seen in top negotiators. It is not something they need or even encounter in their day job, it does not call for persuasion skills (they may, however, have a finely honed ability to detect weakness or hesitation, but the lack of persuasive/influence skills is a big gap, and severely limits their repertoire).
You are 100% re CP, that CP is ONLY a placement function, no trading. That is an important correction, I will amend the post.
I agree that in terms of the full repertoire of negotiating skills, traders are not your likely candidates. My frame of reference is from working with an ex-trader who negotiated some relatively small-fry acquisitions for a large bank. He was very effective, and rarely aggressive (if folks here think that aggression is the default characteristic they should attach to traders, they perhaps shouldn’t believe the stereotypes!). So my frame is limited, no doubt you have a better sample from which to draw a conclusion, but I’d still argue that in the right circumstances – though probably not a mega transaction like selling an IB! – an ex-trader can cut it.
One last point re. Fuld is that from all accounts he was deeply emotionally attached to the firm… so all the more reason to let Cromwell-Sullivan handle the negotiation.
The elephant in the room here is that in-house counsel was completely absent at both Bear and Lehman right before their respective demises, or at least, in the case of Lehman, terminally narcissistic and incapable of making any meaningful contribution to the firm short of holding a Town Hall touting his closeness to Fuld.
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