Is anyone else shaken up by the news on Lehman? I'm really starting to wonder whether it would be a smart idea to hold off applications for a year.

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The news on Lehman

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gixxer1000

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23 Sep 2008, 13:10

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I guess we just disagree. 1st I'm not blaming Fuld for this problem. I think I made it clear that we are all to blame. But just because you make people money in the good times doesn't make it right.

Under your philosophy I could start a business and grow it to 100 employees for 10 years during which time everyone is making money. So then in the next couple years I could pile on massive amounts of debts to pump my company full of cash and then use that unearned cash to pay everyone including myself millions of dollars. And now that my company owes all this money I simply go bankrupt and keep all the money and let the taxpayers pay the debt.

"his failure will still be greater than most everyone on this planets successes" :shock:

And why is that. Did he invent the wheel or fire. Does he save lives or cure diseases. You tell me how the world would be vastly different had he not taken the that job at Lehman. The company would have collapsed without him? No, Another guy with similar experience would be in his position and would have probably made the same mistakes.

Please tell me which of you has ever run anything successfully this large and complex? Can you even imagine how hard that job would be if you were suddenly put in the top spot? Would you 'screw it up' to?

So your argument is that because this job is so complex it doesn't matter if he gets it right or gets it wrong he should get paid millions regardless. You open by saying he earned that money in good times. So what about the bad times? If you make people money you make millions but if you lose people money you keep making millions?

There were plenty of tremendously smart people working for him that also failed to do their job.

I agree. But the problem is that they too will keep all the money they made while as you put it "failed to do their job." I want a job that I can fail at and still get rich.

And it's not like Richard Fuld was an incompetent CEO for 14 years.

I also agree here. Which is why I'm not saying he should return his bonuses from 10 years ago.

pelihu

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23 Sep 2008, 13:25

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Just to clarify, Lehman had a record year in 2007 - virtually all of the investment banks did.

gixxer1000

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23 Sep 2008, 13:48

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pelihu

Just to clarify, Lehman had a record year in 2007 - virtually all of the investment banks did.

That's my point, then didn't truly have a record year.

I guess I look at it this way. If in 2007 my mortgage is $1M and some appraiser tells me my house is worth $10M then I could say I'm worth $9M. So I decide to take out a home equity loan for that $9M and pay it to myself. Wow, this is a record year. So then 2008 comes around and the appraiser tells me I'm sorry, that house you bought for $1M that I told you is worth $10M is really only worth the $1M. So now I owe $10M on a $1M house because I spent the other $9M. Boy I sure am glad that 2007 was record year.

It's not like these banks are all of sudden losing money. They are writing down the value of assets that were garbage. The same inflated assets they used to justify record growth. So essentially you take crappy assets, say their worth a lot and get everyone to agree. With all these phony assets you now have record profits on your books that you use to pay yourself and all your buddies. And then when it's found out that the assets are phony you mark them down to what they are really worth and the look for a bail out. All the while you and your buddies get to keep the money you made.

Now I'm sure its more complicated than that, but to us common folk on main street thats the way we see it. I don't proclaim to be smart enough to know whether a bail out is or isn't need. I just know I'd rather be on the other side of this deal.

jb32

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23 Sep 2008, 14:20

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gixxer1000

Under your philosophy I could start a business and grow it to 100 employees for 10 years during which time everyone is making money. So then in the next couple years I could pile on massive amounts of debts to pump my company full of cash and then use that unearned cash to pay everyone including myself millions of dollars. And now that my company owes all this money I simply go bankrupt and keep all the money and let the taxpayers pay the debt.

Of course i never stated anything of the sorts in my reply, but in fact you could if you wanted to. It may not be ethical, heck, it may not even be legal, but if we're on hypothetical's then no one is stopping you. Of course taxpayers don't usually pick up the tab in a bankruptcy.

But on the other hand exactly how does this relate to Lehman? Because if you look at Lehman's historical results, their debt-to-equity ratio in 1994 (when they spun off Amex) was approximately 21-1 and through the LTM of 2008 was only 14-1. Lehman was never leveraged over 22-1 in any full financial year since 1996 and actually reduced their leverage every year from 2000 until they filed for bankruptcy.

And which taxpayers are paying for Lehman's debt?

gixxer1000

If you want to be a cynic and make asinine statements, then by all means. However, his life is filled with more accomplishment than most people's ever will and that is a fact.

gixxer1000

You open by saying he earned that money in good times. So what about the bad times? If you make people money you make millions but if you lose people money you keep making millions?

In who's employment agreement does it say that a person owe's the company money if the company loses money? Why would anyone ever take that job? Yeah, you still get paid even if the company loses money, that's how it works. Also, CEO bonuses are usually paid on many different metrics depending on the company's goals for the year. Specific to Fuld, he takes about 95% of his bonus in restricted shares that vest over 3 years (meaning you can't sell them for 3 years). When stocks go up, he makes lots of money. When his stock goes down, he make less money (and in this case, he lost a lot of money).

As an example: He may get paid $1 million in stock vested over 3 years if Lehman finishes in the top 3 of the European fixed income league tables. Lehman overall may have a terrible year, but that was a goal for the company and he earned it. Just a tip: Boards don't always line up CEO pay with maximizing shareholder value in the next year. They sometimes look longer term than next year.

jb32

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23 Sep 2008, 14:42

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gixxer1000

pelihu

Just to clarify, Lehman had a record year in 2007 - virtually all of the investment banks did.

It's different, Lehman's and the other banks' assets were much more liquid than your house and they also had other lines of business and made money on millions of transactions and fees. However, to modify your example, we can make it similar to what IBs did. If you had taken that $9 m and invested it and bought more hard assets, then you would be closer to the role of an investment bank, but if you blew it on trips and dinners with no real book value, then yes, you would be screwed. But if you bought depreciating assets that depreciated much faster than you imagined they ever would, then you would be more like an investment bank.

Just as a note, this was from the 2008 Lehman Brother's compensation plan describing 2007:
- Delivered record net revenue, net income, and EPS for the 4th consecutive year
- Delivered a 10% increase in net revenue, to $19.3 billion
- Achieved record net revenues across ALL lines of business
- Reported record non-US net revenues, which accounted for 50% of overall firm net revenues
- 5 year total shareholder return of 92% was second only to GS among IBs
- Total shareholder return from 1999-2008 was 297%, averaging 17% a year

Sounds like a good run to me?

gixxer1000

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23 Sep 2008, 17:09

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I'm not trying to single out Lehman. I just used Fuld as an example because I recently read and article on him and had the information in my head. Substitute AIG instead. If I recall correctly there was speculation that Lehman could get a bail out, but obviously they didn't. I making a broad generalization of the industry as a whole in response to the proposed $700B bail out.

"If you had taken that $9 m and invested it and bought more hard assets, then you would be closer to the role of an investment bank,"

Regardless, you took something and said it was worth more than what it was and then used the inflated value to buy more assets. Without the inflated value you would have never been able to make those profits.

If you want to be a cynic and make asinine statements, then by all means. However, his life is filled with more accomplishment than most people's ever will and that is a fact.

What the heck are these accomplishments other than making money? How is this a fact? I guess we have a different sense of accomplishments.

In who's employment agreement does it say that a person owe's the company money if the company loses money? Why would anyone ever take that job? Yeah, you still get paid even if the company loses money, that's how it works.

I agree in general. But to me the problem is that way CEO's and workers are paid isn't the same. Your paid for an output. But a CEO can say let's ship 20K jobs overseas saving us $1M a year. Since I saved us this money I have created this wealth and I'm entitled to a portion of it. If the worker comes up with the same idea do you compensate them additionaly, No (which is why people are running to use the comment box). If were going to compensate you for being right but can't penalize you for being wrong then why is the job so hard? Worse case scenario is you get fired. So what's to keep you from focusing on short-term profits even at expense of the long term viability of the company? So what if the company fails years down the road and the shareholders values goes to $0.00 as long as you make $20 million for a few years.

Just as a note, this was from the 2008 Lehman Brother's compensation plan describing 2007:
- Delivered record net revenue, net income, and EPS for the 4th consecutive year
- Delivered a 10% increase in net revenue, to $19.3 billion
- Achieved record net revenues across ALL lines of business
- Reported record non-US net revenues, which accounted for 50% of overall firm net revenues
- 5 year total shareholder return of 92% was second only to GS among IBs
- Total shareholder return from 1999-2008 was 297%, averaging 17% a year

Sounds like a good run to me?

If it was such a good run then why are they bankrupt months later :?:

You can jump out the window of a 60 story high rise and think you're flying for 59 floors, but it's the last floor that gets you.

If all of these record profits could be handed out without the inflated assets then why can't they simply take the loss? They spent money that they didn't have. They were at the roulette table making bets with money they didn't have. When they were winning it was easy money. But when they lost the bet and had to pay up the Casino realized the chips weren't real and threw them out.

jb32

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23 Sep 2008, 18:59

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Well, the majority of people don't just work for a paycheck, but if you do then great, you are in the minority. The reason the CEO is paid differently is the responsibility they must bear because ultimately the buck stops with them. If the decision to outsource ends up disastorous for for the company, they certainly won't be punishing the guy who left the comment in the suggestion box, but you can be sure the shareholders will take notice of the CEO and his career could be ruined with one bad decision. Of course if being a CEO were so easy, then why wouldn't every company grow as fast as Google? Why wouldn't every company focus on building shareholder value over the long-term if it were so easy to do? Why wouldn't every company produce record earnings every year? Why was hank Greenburg so successful and Martin Sullivan so bad? Why was Jack Welch so good and Jeffrey Immelt just mediocre? Because the job is damn difficult, plain and simple.

For the record, Richard Fuld's accomplishments:

Board of Directors of the Federal Reserve Bank of New York
Chairmen and CEO of Lehman Brothers
At the age of 37 Fuld became the supervisor of both the fixed-income and the equities divisions, overseeing all trading at Lehman
Executive Committee of the Board of Directors of The Partnership for New York City
International Business Council of the World Economic Forum and The Business Council
Board of Trustees of Middlebury College
Board of Trustees NewYork-Presbyterian Hospital
Board of Directors of the Robin Hood Foundation
Air Force Pilot
#1 CEO in the Brokers & Asset Managers category, 2006 & 2004
Named to Barron's "The World's Most Respected CEOs" list every year of its existence
Married, 3 children
Part-Time MBA while working at Lehman - NYU Stern
BS - Colorado

Since I'm not his biographer, I'm not going any deeper than this, but I believe my point is made.

gixxer1000

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23 Sep 2008, 20:00

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Well, the majority of people don't just work for a paycheck, but if you do then great, you are in the minority.

Uhh the 95th percentile for income is under $160K with the bulk of that income coming in by way of salary. I know most people heading to bshcool live in this crazy world where they think >30% bonuses are average but the majority of America works for a paycheck.

If the decision to outsource ends up disastorous for for the company, they certainly won't be punishing the guy who left the comment in the suggestion box, but you can be sure the shareholders will take notice of the CEO and his career could be ruined with one bad decision.

Not before he collects millions before they figure out is was the wrong move and millions more when the fire him.

Why was hank Greenburg so successful and Martin Sullivan so bad? Why was Jack Welch so good and Jeffrey Immelt just mediocre? Because the job is damn difficult, plain and simple.

I never said the job wasn't hard and that some people weren't better than others. But you seem to be making my point. When Mark Sullivan became CEO the stock price was $61.92 and it closed at $34.01 on the day he left. That 45% decline was three times the decline of the NYSE financial index over the same period. So shareholders suffered an aggregate loss of $58.4 million per day and yet Sullivan made a salary of $1M is 2007 and a total of $13.7M in bonuses between 2006 and 2007. He gets $15M for walking away and another $4M in prorated bonuses. Throw in long term stock and cash incentives bringing the total to $47M. This doesn't include an additional $17M in pension payment and deferred compensation. Pretty good for the guy who you think sucks and produced absolutely nothing for shareholders.

gixxer1000

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23 Sep 2008, 20:19

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jb32

For the record, Richard Fuld's accomplishments:

Board of Directors of the Federal Reserve Bank of New York
Chairmen and CEO of Lehman Brothers
At the age of 37 Fuld became the supervisor of both the fixed-income and the equities divisions, overseeing all trading at Lehman
Executive Committee of the Board of Directors of The Partnership for New York City
International Business Council of the World Economic Forum and The Business Council
Board of Trustees of Middlebury College
Board of Trustees NewYork-Presbyterian Hospital
Board of Directors of the Robin Hood Foundation
Air Force Pilot
#1 CEO in the Brokers & Asset Managers category, 2006 & 2004
Named to Barron's "The World's Most Respected CEOs" list every year of its existence
Married, 3 children
Part-Time MBA while working at Lehman - NYU Stern
BS - Colorado

Since I'm not his biographer, I'm not going any deeper than this, but I believe my point is made.

I think you seem to be missing my point. You said that this guys accomplishments (actually his failure) is greater than most everyone on this planets success. What's so special about his accomplishments. He was in the Air Force, he got an MBA, he worked his way up to CEO and he serves on a bunch of boards. How does this or his failure qualify as better than those of most the people on the planet? Get of his sack. Brett Favre is one of the best quarterbacks ever. But saying his superbowl lost to the Broncos is greater that most everyones on this planets success is ridiculous. And you could make a list of his accomplishments that put Fuld's to shame. But people qualify accomplishments different. I would never be pretentious enough to say that someones accomplishments are greater than someone else's.

Nerdboy

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24 Sep 2008, 00:38

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jb32

...long list...

Since I'm not his biographer, I'm not going any deeper than this, but I believe my point is made.

If your point was "this guy was a hugely successful manager and made lots of money" then you point was pretty well obvious to start with. However, I don't think you understood gixxer's point about the alleged record year.

The fact that Lehman had a record year in 2007 does not mean anything. Everyone had a record year. Just about anyone in IB, real estate and a bunch of other sectors made record profits last year just by existing and doing what they normally do. If someone made huge profits because they happened to be at the right time in the right place, that's good for them, but I wouldn't count it as a serious accomplishment. If someone made huge profits as a result of a swelling asset bubble about to go bust, then that someone rightly deserves what's coming to them.

agold

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24 Sep 2008, 08:39

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I'm hearing a lot of banter from people saying that new regulations may significantly reduce IB revenues/profits, and therefore comp.

Can someone clarify this for me? From what I'm seeing, isn't it the S&T division at most of these banks that took the huge bets that failed? The investment banking division primarily just earns fees and does not involve very much risk, correct? Shouldn't any new regulations impact the S&T folks the most?

Are MBA students over-worrying as usual? It just seems to me like fees from IB advisory services, and therefore recruiting/comp, will pick right back up with the equity markets somewhere within the next 8-24 months?

kidderek

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24 Sep 2008, 08:46

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Take it for what it's worth, but S&T and IB are not mutually exclusive. Sales and traders aren't going out to solicit or create these products.

solaris1

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24 Sep 2008, 08:54

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All the "bankers" at my former investment bank received monthly trading P&L statements which went on to determine the final bonus numbers.

Perhaps I'm mistaken, but in terms of compensation, IB & S&T are more closely related than you might think.

kidderek

Take it for what it's worth, but S&T and IB are not mutually exclusive. Sales and traders aren't going out to solicit or create these products.

kryzak

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27 Sep 2008, 03:33

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Wow this was a good read! (Yes, it's 3:30am right now) Haas had a Financial Market "teach-in" the other day (see the other thread I posted in "B-School Life"), but I had 4 other conflicts (company presentations, clubs, etc...) at the time and I picked stuff that was more relevant to me. I kinda wished I went to that now (our dean hosted it, a former C-level exec at Goldman).

Anyway, the atmosphere here at Haas isn't too bad actually. We were joking last week that saying "I want to be an I Banker" seems to be a dirty word around campus (joking, of course), but there were still 2 full days of Investment Bank presentations the last 2 weeks (probably more boutique banks, since the big shots pulled out the day before they got bought or went bankrupt, like Lehman), and the IBankers are still plowing on (though we don't have that many of them). The tech hiring is still booming, people are still joining startups and starting businesses (the VC funds haven't really dried up much from what I've heard, at least for the Bay Area), lots of people going for consulting (no big surprise there), and Corporate Social Responsibility, Net Impact, Clean Energy, and Non-Profit are as strong as ever.

I guess there is a benefit of going to a school where finance (and somewhat consulting) is not as big of a focus, where Tech, Entrepreneurship, CSR, Energy, and GM are more valued.

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20 Nov 2008, 09:22

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https://finance.yahoo.com/news/JPMorgan- ... 32299.html

JPMorgan cuts investment banking jobs

NEW YORK (Reuters) - JPMorgan Chase & Co (NYSE:JPM - News) is cutting about 10 percent of its investment banking staff as the credit crunch and slowdown in the economy bite into bank earnings, people familiar with the situation said on Thursday.

The company will likely cut staff in line with competitors such as Goldman Sachs Group (NYSE:GS - News), which is cutting 10 percent, the sources said.

On Thursday, JPMorgan let go at least six equity sales officials from its New York desk, according to one person familiar with the matter.

The bank declined comment.

JPMorgan is seen as one of the Wall Street survivors. It has not had to make the severe writedowns on mortgage-related assets that other banks have reported.

But the bank took on about 6,000 staff from nearly-insolvent Bear Stearns Cos in March and has also added staff through its acquisition of failed thrift Washington Mutual Inc.

In its third-quarter earnings statement, the bank said its head count was 228,452, including just over 40,000 from WaMu.

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20 Nov 2008, 09:29

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Sounds about right. This shows that JPM and GS are really peers today. JPM has done a lot better than a majority of the banks out there.

jb32

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20 Nov 2008, 10:51

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I think its important as people see layoffs announced in investment banking that they distinguish between sales & trading and capital markets. Most of the layed off workers come from sales and trading and not advisory services. So, depending on what side of the house you want to be on determines how bad things are going to be going forward.

IHateTheGMAT

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20 Nov 2008, 11:43

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Don't forget about the 50,000 layoffs at Citi

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20 Nov 2008, 11:57

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IHateTheGMAT

Don't forget about the 50,000 layoffs at Citi

That's world wide and not just in US.

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20 Nov 2008, 12:00

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Half of these jobs cuts are expected to come from asset sales (selling business units) and half from lay-offs. Many will also come from attrition and failure to back-fill positions.