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Viewpoint: Lehman as a modern-day cautionary tale

Alec Haverstick

10 December 2008

The fault, dear Brutus, lies not in our stars but in ourselves -Shakespeare. Alec Haverstick is a managing partner of Boxwood Strategic Advisors, a New York-based advisory to ultra-high-net-worth individuals and families.

I've just re-read an article in last month's issue of New York Magazine that attempts, as its subtitle says, to determine whether "Lehman CEO Dick Fuld the true villain in the collapse of Wall Street."

As a former managing director of Lehman, and as someone who spent five years sitting down the hall from Fuld, I found that article fascinating beyond the natural but prurient interest we take in the fall of someone who seems to have flown too close to the sun.

I found the article especially interesting because, in its effort to assign blame, it ignores a problem of long standing at Lehman -- one that dogs many founder-led and privately-owned |image2|firms today. I mean the unwillingness or inability of other top executives to present the founder with effective, fact-based advice, and the founder's unwillingness or inability to accept such advice when given.

Timely reminders

Make no mistake: Dick Fuld was the founder of Lehman as we've known it in recent years. It was his firm. And, from its "founding" as a spinoff from American Express in 1994 to its demise a few months ago, Lehman acted more like a privately held, family firm than a public company, despite its big-board listing.

To be sure, the "family" in question wasn't descended from Heinrich, Emanuel and Mayer Lehman -- brothers who emigrated from Bavaria in the mid-nineteenth century to set up as cotton, coffee and tobacco factors in the U.S. Rather, the modern Lehman family was a core of self-selected individuals who had worked together for decades: first as members of Lehman Commercial Paper Inc., then as leaders of the firm's fixed-income powerhouse and, finally as the team that ran the firm right over a cliff.

Dick was the "father," a kind of Washingtonian figure who had led the family from the Valley Forge of Amex to Independence in a Shining City of riches they could hardly believe. But Washington had Hamilton, Madison and Adams; in Great Britain, Queen Victoria had Disraeli. Even in ancient Rome, historians tell us, generals awarded with triumphal processions for great victories would be assigned a slave whose job was to keep pace with the imperator's war chariot and intone over the din of the crowd, "You are not a god; you are not a god."

But Fuld had no such counselors, no such reminders. What he had was Joe Gregory, Lehman's COO until this past June.

Gregory was "first among equals" in the group that surrounded and supported Fuld, the chosen son of the Lehman family. In a Tennyson poem, he might have been Telemachus to Fuld's Ulysses. In Shakespeare, he might have been Brutus to Fuld's Caesar. Whatever the analogy, Joe was the leading representative of Lehman family groupthink. He had access to Fuld not granted to any of the others, and the leader sang his praises.

When I Left Lehman in 2000, Gregory was just on his way to becoming Fuld's most trusted advisor. But by the time Lehman went bankrupt, Lehman had in effect become "Dick Fuld & Son." Fuld trusted no one as he trusted Gregory. Their relationship, so personally cordial -- even familial -- was profoundly dysfunctional from a professional standpoint, and it was a major factor in the firm's demise.

The fall of Lehman is a modern cautionary tale. What happened there might be seen, in one sense, as a microcosm of what recently happened to our country where an insular group of "true believers" lost touch with an electorate it had promised to serve. It may be, as New York Magazine suggests, a microcosm of the forces of insularity driving Wall Street's collapse.

Founderitis

But I see it as something more than that. To me, it's an example of a syndrome that we at Boxwood call "founderitis." That's an infectious virus that eats away at the core of family wealth and gives life to the old adage "shirtsleeves to shirtsleeves three generations." Characteristics of founderitis include:

A "pater familias" who has grown out of touch with his enterprise Retainers -- family members or employees -- who, for reasons of their own, are unwilling or unable to steer him back on course A focus on personal wealth building rather than on clients and customers An increasingly problematic liquidity position resulting either from too much debt or insufficient cash flow An increasing focus on endeavors outside core businesses and core competencies Many varied and subtle forms denial

We're seeing an epidemic of founderitis these days. Sufferers include entrepreneurs who prospered through the use of extensive leverage, families that don't know how to rein in spending, investors who made private-equity bets where capital calls exceed available cash, and executives who borrowed against concentrated positions and now face margin calls.

Like Fuld, these people simply couldn't believe that what has happened could ever happen -- and, if it ever did happen, it wouldn't happen to them. Right up to the end, Fuld believed Lehman was different; that he could pull it through this time as he had pulled it through before, and that what had happened to Bear Stearns would not, could not, happen to his firm.

Was this mere hubris? Pride and arrogance came into it, but, like so many other powerful business builders, Fuld was also the victim of bad advice from the "son" he trusted and loved so much. When Fuld needed a reality check, it fell to Gregory to provide it.

But then how do you tell the man who gave you everything that his firm is going down the tubes?

So, before we condemn, perhaps we should consider whether we're not all of us Dick Fulds. Aren't we all just looking for advisors we can trust? And there's the rub: it's so much easier, so much more gratifying, to engage advisors that please and flatter us than to seek out the rare ones with guts enough to look power in the face and speak truth to it. -FWR

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