Letting Dick Fuld off the hook
In an audacious argument, Lehman's bankruptcy lawyer argues that the former Lehman CEO should be absolved of responsibility for its collapse.
NEW YORK (Fortune) -- It wasn't Dick Fuld's fault. No, not at all. How could anyone stop a financial tsunami? That's the audacious argument posed by Harvey Miller, lead bankruptcy attorney for the firm Weil Gotshal and advocate extraordinaire in mounting the first vigorous public defense of Dick Fuld, the widely discredited former CEO of Lehman Brothers. Miller effectively tries to absolve Fuld, his client, of any and all blame for the demise of the 158-year-old investment bank.
Miller, 75, is the lead attorney for Lehman Brothers Holdings Inc., the debtor, in the Lehman bankruptcy - the largest ever - now winding its way through the U.S. Bankruptcy Court in the southern district of New York. In his role, Miller is obliged to represent the interests of all stakeholders: including creditors, who have lost many billions, current and former employees and shareholders. Although Fuld relinquished his CEO title to Bryan Marsal, a turnaround expert, on Jan. 1, Fuld remains on the debtor's board of directors and thus is one of Miller's stakeholders in the case.
Although the matter of Fuld's responsibility for what happened at Lehman - from both a legal and a moral standpoint - is still very much unresolved, the avuncular and hard-nosed Miller decided that the time had come to publish his version of what caused the Lehman holding company to succumb to a Chapter 11 bankruptcy filing during the wee hours of Sept. 15, 2008. On Jan. 5, Miller made his argument in a 25-page response to a previous motion by Thomas DiNapoli, New York State Comptroller, who was asking that Judge James Peck appoint a trustee or examiner, or both, in the case. Miller wrote emphatically that DiNapoli and others are wrong to blame Fuld.
Miller called DiNapoli's effort to have a trustee appointed "fatally defective" and full of "unsupported blunderbuss" in accusing Fuld of "gargantuan misconduct, incompetence and mismanagement without a single shred of supporting proof." Miller wrote that DiNapoli "blithely ignores that under the long term leadership of Mr. Fuld, Lehman had become one of the premier independent investment banking concerns in the world and had steadily provided significant returns to its investors, employees and shareholders."
Miller then conjured up every victim's favorite cliché for the devastation that has hit Wall Street. "The Comptroller fails to recognize that Lehman was a victim of a financial tsunami that was beyond its control," Miller wrote. "...Likewise, the Comptroller is oblivious to the critical facts that caused the financial meltdown that engulfed Lehman and, generally, the financial markets, including [among other things], the failure of the government authorities to appropriately regulate and oversee financial markets and the deficiencies of the rating agencies."
The gist of Miller's defense of Fuld is that nobody in the Western world foresaw the financial calamity that befell capitalism starting in the summer of 2007, so how could the CEO of Lehman Brothers be expected to have anticipated it? DiNapoli, Miller continued, was "wearing blinders" and ignored the "actual facts" of what happened, including that "the Chairman of the Federal Reserve System and the United States Treasury Department, as well as others, failed to foresee the oncoming financial tsunami, as did most of the economists and the financial analysts." (Miller blithely overlooks all the sages who actually did foretell the financial disaster.)
Miller wondered why the Fed and the Treasury decided to subsequently bail out AIG, the large insurer, but not Lehman, which under Fuld's leadership had increased its market capitalization to $45 billion at the end of 2007, from $2 billion when Fuld took over as CEO in 1994. What Miller makes no allowance for, of course, are the numerous poor decisions that Fuld and his top executives made through the years to lard up Lehman's balance sheet with billions of dollars of illiquid commercial real-estate, LBO and mortgage-backed securities that became increasingly difficult to value, and then to sell, while all the while relying on short-term debt to finance the daily needs of the business.
Fuld could have made the decision at any point to have Lehman focus, say, on M&A advisory and asset-management in the same way that Michel David-Weill did at Lazard. True, he would likely have had to forego some of the $484 million in salary and bonuses Lehman paid him during his last five years at the helm, but a smaller, less leveraged and less capital-intensive Lehman would likely still be around. Fuld, though, made other choices.
Concluded Miller, after also blaming "an extraordinary run on the bank," for Lehman's denouement: "Consequently, what Lehman's demise demonstrates is that in a world of complex, extremely large financial transactions -involving novel and highly esoteric and sophisticated securities that trade at a velocity of speed unknown 20 years ago - the manner in which banking businesses are conducted has changed and, further, the historical model of a large investment bank that does not have depository accounts may not be able to withstand sudden and severe downturns in the financial markets. Thus, the era of independent investment banks may have ended, accelerated perhaps by the repeal of the Glass-Steagall Act in 1999. In that context, it must be conceded that a major factor in the Lehman situation is the economic circumstances of the global economy that precipitated Lehman's demise."
DiNapoli's take on the roles of Fuld and Lehman's board could not be more different. As sole trustee of the $156 billion New York State Common Retirement Fund, the third-largest pension fund in the U.S., DiNapoli became a party-in-interest in the Lehman bankruptcy by virtue of the 4.55 million shares of Lehman common stock owned by the pension fund - and the hundreds of millions of dollars lost subsequently.
"Mr. Fuld's decisions drove the Company toward ruin, as his Board stood idly by, generally ill-equipped to advise or guide Mr. Fuld or senior management to a new course," DiNapoli's attorneys at Entwistle & Cappucci wrote in their brief. "As Mr. Fuld's pattern of poor decisions and disastrous strategies continued, many of the Directors lacked the expertise and proficiency in dealing with the current financial markets that would enable them to meaningfully supervise him or circumscribe his activities. By 2006 and 2007, many hand-selected Directors had served for more than a decade, and their entrenchment and complacency rendered them unable to offer independent judgment in the face of strong-willed senior management."
"Without question," DiNapoli continued, "Mr. Fuld's stewardship of the Company was a large factor in its demise, and the Board's failure in its oversight duties allowed Mr. Fuld and other executives to mismanage the Company. [T]he Board's failure to circumscribe Mr. Fuld's almost limitless power over the Company ensured Lehman's failure and when the Company was facing ruin, the Board failed to ensure that Mr. Fuld and senior management were preparing in advance for the real possibility of bankruptcy..."
The matter of exploring Fuld's role in the demise of Lehman, among other weighty subjects, will now fall to Anton Valukas, a former federal prosecutor and the chairman of Jenner & Block, a Chicago law firm. On Jan. 20, while much of the world was pre-occupied with the inauguration of President Obama, Judge Peck named Valukas to be the examiner in the Lehman bankruptcy and ordered him to have a work plan in place by Feb. 10. Valukas will have free reign - and a nearly limitless budget (Enron's bankruptcy examiner billed more than $100 million) - to figure out what happened and why.
Unlike the criminal investigations of Lehman now underway by the U.S. attorneys in Brooklyn, Manhattan and Newark, New Jersey, Valukas will not be able to prosecute the people found to have committed wrongdoing, should there be anyone. But his report - expected to be voluminous - will be made public and can be used by federal prosecutors and creditor attorneys as the basis for future lawsuits.
Surely Harvey Miller is as curious as the rest of us to discover what really happened to cause Lehman's downfall, and perhaps he will even wait to read Valukas' report before popping off again about Fuld's role in it.