I recently wrote a book review on The Murder of Lehman Brothers by Joseph Tibman. Mr. Tibman was a senior investment banker at Lehman Brothers for 20 years and experienced the boom and collapse of the firm firsthand. Joseph Tibman is a pseudonym. Mr. Tibman did not want to reveal his name and jeopardize his future career in finance. Joseph Tibman was kind enough to answer a few questions I had about Lehman Brothers and his thoughts on the current economic crisis. Below are few questions I asked him and his response.
Mr. Tibman mentioned it would be hard to put together numbers that show Lehman’s collapse. What you would see on Lehman's last balance sheet was $2.7 billion in subprime loans and $10 billion in Alt-A mortgages. A large category of assets on the investment bank's balance sheet were not clearly identified and therefore without looking at internal documents it was impossible to assess how precisely what these assets are. So it was hard to know exactly how exposed Lehman was. As mentioned in the book when Alex Kirk and Mike Gelband were brought back to the firm, when they got hard look at financials they were shocked because it was considerably worse than expected. Madeline Antoncic, head of risk management, had earlier tried to hedge Lehman’s risk, but was removed from her role due to management’s determination to accumulate real estate risk.
How long did you work at Lehman Brothers?
I Worked at Lehman Brothers for approximately twenty years. I was there when American express owned them, before the IPO.
Can you tell me about your role/ position there?
I worked in various roles in investment banking, which is typical for Lehman Brothers. But I cannot tell you more precisely what my role was there without jeopardizing my identity.
Did you ever have any contact with top management such as Joe Gregory or Dick Fuld?
Yes, I mention in the book I was not in the inner circle, but on occasions I was in meetings with them. My thoughts about these executives were shaped in part by those meetings. In my book I mention an early meeting with Fuld regarding a very serious topic, and he just had his eyes on a green display. Still, he was not entirely ignoring what was going on.
Who do you think were the biggest beneficiaries from the collapse of Lehman Brothers. Barclays (NYSE:BCS) who bought them for almost nothing, competitors like Goldman Sachs (NYSE:GS), etc.?
Probably the biggest beneficiaries were Nomura (NYSE:NMR) and Barclays. Nomura currently produces far more of its earnings outside of Japan than in the past. This is in large part due to their acquisition of Lehman Brothers’ European and Asian operations and has made them into a global player. BarCap went from being a U.K. bank to a meaningful investment bank in the U.K., a moderate player on the continent and a modest player in the U.S. to a far more global institution. BarCap has been moving former Lehman employees from the U.S. to Asia and Europe to strengthen its presence in those areas. BarCap also got a lot of high quality people from Lehman Brothers.
Out of the major investment banks which do you think took on the most risk?
I think without having access to real numbers it is hard to say which firm was the most exposed. For example, the weekend Lehman filed for bankruptcy; there was consensus among the non-Lehman people that the assets were not marked down correctly. I think it is fair to say there were clearly a lot of institutions that did not transparently account for their risk positions. Goldman which was had bet against subprime also held on to subprime positions protected by buying CDSs from AIG (NYSE:AIG), and had AIG gone bankrupt Goldman would have taken huge losses.
In general, with financial statements, it is hard to make clear sense of hedges.
Bank of America (NYSE:BAC) currently has $7B in securities that are temporarily impaired. That basically means they have 7 billion in assets that are underwater and are hoping the market value will recover. To the extent that these assets may be illiquid it is very hard to determine their real value. Without access to all the internal numbers and without being able to evaluate all on a consistent basis it would be hard to say who had the greatest risk position. My guess is that Lehman and Bear were in worse shape than Merrill but I by no means know that for a fact.
During Lehman’s last days, JP Morgan (NYSE:JPM), Lehman’s clearer, demanded that Lehman provide more collateral that Lehman did not have.
What is your position on TARP?
The black and white answer is that TARP was a good thing. The failure of Lehman would be a footnote compared to AIG and many other institutions, had the Government not passed TARP. The government has done a very bad job of managing it since then. The government was not efficient, but in terms of TARP or no TARP I am happier with TARP. TARP was absolutely necessary to prevent a complete meltdown. Had AIG not been saved Merrill would have come next, Morgan Stanley (NYSE:MS) appeared to have been on the ropes which would have led to a serious domino effect, likely including the collapse of Goldman and others.
Ken Lewis never wanted to buy Lehman. He wanted to buy Merrill because he wanted their retail brokerage network; in addition Merrill was much more of heavyweight in investment banking than Bank of America. It’s staggering that shortly after the deal was struck with BofA [came the realization that Merrill] was in such poor shape that they had to receive another 20 billion from the Government.
Lehman was a case of bad timing. There was no political will to back another bailout, after Bear sterns, Freddie Mac (FRE) and Fannie Mae (FNM). By the time Lehman came around it was difficult for the Government to justify politically another bailout. The negative of Lehman going under has less to do with Lehman itself, than the magnitude of pain it caused worldwide. People in Lehman ended off better than some in other firms because many people at Lehman retained their jobs at BarCap. Many people who were laid off from Lehman got packages.
Do you think the banks are out of the woods yet?
I expect many bankruptcies over the next few years and this of course will affect the banks. During the 2000s many people were taking on huge risks to make money. The investment banks were doing deals because investors were willing to buy paper that was extremely risky. The institutional investors had to go into these funds, because investors would abandon funds with lower yields. So this caused institutional investors to buy up LBOs, and it will be hard for many LBOs to refinance as their debt begins to mature.
Ongoing problems with subprime and adjustable rate mortgages will also cause ongoing defaults in the coming years.
Since you have a great amount of expertise in investment banking, I want to know what would you propose the Government do to prevent a crisis like this occurring in the future?
There is no perfect answer. In terms of legislation I think we need a complete rebuild of the regulatory structure. I think the unwinding to get back to Glass Stegall would be impractical. I think there should be a super regulator to oversee every type of financial institution. Within the super regulator you would have people who specialize in different areas, so a team could assess the area of risk they are familiar with. The problem is getting there because the people in congress don’t have a clue about finance. I think it would help if congressional finance committees utilized people who were expert in finance and economics. Not people on Wall Street because there will be conflict of interest.
Until you have effective legislation in place nothing will help. Private equity, hedge funds, etc need to be regulated to prevent profiteering at the expense of others. The bottom line is you need a super regulator of all market participants that exist now and that will materialize as markets evolve, in the future. Regulators must pay some number of people a large enough sum to attract quality. If you did this, returns to tax payers would be far greater than the cost. However, you will still have people who get paid less than they would working in the private sector.
Under the Bush administration there was a policy not to enforce securities regulation. Many good people were so frustrated by this that they left their posts in SEC. It will be difficult to replicate the experience of these people.
In terms of the Fed, Greenspan who said he thought the banks would police themselves shows you the mindset of the organization that was supposed to be the top regulator.
There will always be loopholes that people try to use. However, I look at the recent market environment as something close to anarchy. This provides incentive for unethical acts. We need sound rules and laws, as well as police to enforce them.
Do you ever plan on revealing your identity?
I don’t have any specific plans even though I never liked writing under a pseudonym. I never planned on writing a book but felt I had to. I hope one day I will be able to reveal it.
There were several reasons for writing the book. One reason I did is so that those without a background in finance could understand why we had a financial crisis, what is broken and what needs to be fixed.
There is a very small group of people who understand this, but most voters don’t. A top election issues is always the economy. Most people, through no fault of their own, don’t understand how our economy and financial system are operating. I hope such readers will be better equipped to judge the candidates the next time they step into an election booth.
I personally enjoyed the book very much which recommended in a book review I did several days ago.
Joseph Tibman’s blog is here
Disclosure: Long JPM