Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Dick Fuld

Joe Gregory At Least Sells Something

Joe Gregory, the former President of Lehman Brothers and long-time confidant to former CEO Dick Fuld, apparently had more difficult financial times since he was forced to resign from the failed investment bank in June 2008. As noted in this previous TCM post Possible Bankruptcy for Joe Gregory of Lehman Brothers, "one might surmise that Joe Gregory was as good at managing his own personal finances as he was at managing the leveraged risks of Lehman Brothers."

From the November 13th 2009 edition of The Wall Street Journal comes news that Joe Gregory has had some success in liquidating at least some of his various property holdings. The 2.5-acre oceanfront estate in Bridgehampton, N.Y., remains on the market with an asking price of $27.9 million. However, at least the property in Vermont is now sold. One wonders when and at what price the Bridgehampton house will eventually be sold.

Former Lehman Brothers Holdings Inc. president Joseph M. Gregory has gone into contract on his seven-acre Manchester, Vt., estate, which he listed for $2.48 million.

Mr. Gregory has also sold his guest house, across the street from the main house. After more than 30 years at Lehman, Mr. Gregory resigned from his post in June 2008; Lehman filed for bankruptcy-court protection from creditors in mid-September.

Mr. Gregory bought the seven-acre Vermont property for $675,000 in 1993, according to public records. A six-bedroom farm-style house sits on the property, which also has a barn with a three-bedroom guest apartment above. The guest house went for $715,000, 10% less than his asking price. He bought that two-acre property for $180,000 in 2000. Sunny Breen of Main Street Realty represented Mr. Gregory in both deals.

Vanity Fair: Profiles In Panic

In the January 2009 issue of Vanity Fair, reporter Michael Shnayerson has penned another excellent article, this time entitled Profiles in Panic. This article goes into some detail about how the downturn that intensified in September is affecting the Wall Street types who were living high on the hog in a gilded era. That era is very definitely changing as many are just happy to still have a job and not be one of the more 100,000 world-wide in financial services that have been laid off. It is a well written article definitely worth reading in its entirety.

In the middle of the article, the narrative turned to the sudden bankruptcy of Lehman Brothers. Perhaps no man better represented the excesses and hubris of this gilded era than the former number two at Lehman Brothers, President and COO Joe Gregory. From the article,

If the gilded age has come to an end this fall, surely Lehman’s demise—with its bankruptcy filing on that Monday morning of September l5, 2008—was the tipping point. It panicked the money markets, froze global credit, and sent stock prices spiraling down.

Lehman’s 31st floor—where Fuld and his top executives worked—was by all accounts a quiet place, especially by midafternoon, one managing director recalls dryly. Among Fuld’s loyalists, no one was more loyal than his number two, chief operating officer Joe Gregory, whose story, even more than Fuld’s, seems emblematic of the age now past. If Tom Wolfe were writing a sequel to The Bonfire of the Vanities, Gregory would be his man.

Gregory, 56, was a legend at Lehman—less for his business exploits than for his lifestyle. He had several homes: a principal residence in Lloyd Harbor, on Long Island’s North Shore; an oceanfront McMansion in Bridgehampton; a ski home in Manchester, Vermont; an apartment at 610 Park Avenue; and reportedly a house in Pennsylvania. “He had a kid who went to a small school in Pennsylvania,” a former senior colleague recalls. “Joe didn’t like the hotel, so he bought [a] house in town. It was probably only $500,000, but he paid for it so that, on the maybe two trips a year he took there, he’d have a nice place to stay. And then he had it redecorated!” The colleague says he heard it on good authority that Gregory’s after-tax expenses approached $15 million per year. That, he heard, was exclusive of mortgages. (Gregory’s lawyer declined to comment on e-mails from Vanity Fair.)

Lehman Brothers and Dick Fuld: Burning Down His House

In the event that the reader has not seen the excellent New York magazine article Burning Down The House written by Steve Fishman about the last months of Lehman Brothers, go read it now. The sub-title is "Is Lehman CEO Dick Fuld the true villain in the collapse of Wall Street, or is he being sacrificed for the sins of his peers?"

Toomre Capital Markets LLC ("TCM") believes that this is one of the better articles that explains some of what went on behind the scenes that led to the collapse of the fourth largest investment bank in September 2008. Lars Toomre at one point worked with or reported to some of the principal characters of this story. Several reporters have contacted Lars for information and background information on these characters. However, other than sharing some recollections about Bart McDade with the Wall Street Journal, Lars has declined. Rather TCM has written a number of articles about Lehman Brothers (including the very popular post Possible Bankruptcy for Joe Gregory of Lehman Brothers). An index of the various Lehman Brothers articles can be found here.

This article starts out with a description of a luncheon meeting that Dick Fuld had in June 2008 with a number of investment bankers that was arranged by the head of investment banking head Hugh Skip McGee. Two days earlier the investment bank had announced its first quarterly loss in fourteen years. The loss of $2.8 billion caused the stock to plummet again, 21 percent in a couple of days. The message to Dick Fuld was simple: "The board of directors is going to be under pressure. … It has to deliver a head to the street." Supposedly Dick Fuld shot back (as his veins on his neck popped), "I've given you fourteen years of earnings. I have one bad quarter. This is how you respond?" Yet the next day he canned both the then CFO Erin Callan and his long-time crony and then COO and President Joe Gregory.

Three months after that luncheon, Lehman Brothers on September 15 "filed for bankruptcy, the largest in history and a devastating blow to an already fragile financial system. Fuld became a symbol of failure, the face of arrogant, blindered, massively overleveraged Wall Street. Fuld is blamed for betting the farm on the way up, then stubbornly refusing to recognize the company’s dire straits on the way down. A few weeks after the bankruptcy, Congress summoned him to Washington for a deeply humiliating inquisition." Subsequently, "three sets of prosecutors launched investigations of Fuld and Lehman, probing whether shareholders had been duped."

The article goes on to make the point that in some sense Dick Fuld also is a victim. Apparently Fuld has been having trouble sleeping as he repeatedly goes over and tries to decipher the "mystery", his description of the firm's sudden collapse. "Why didn’t the government save Lehman the way it saved so many others, Bear Stearns and AIG and, just last week, Citigroup? Fuld and his allies can’t help but blame Paulson, whom he’d trusted and, until the end, viewed as an ally and even a friend. Yet Paulson, for reasons Fuld doesn’t yet understand, participated in making him the scapegoat." However, apparently "Mostly, he sits and replays Lehman’s calamitous end. 'What could I have done differently?' he thinks. 'In certain conversations, what should I have said, what could I have done?' How, he wonders, did it all go so disastrously wrong?"

Toomre Capital Markets LLC might suggest that Dick Fuld made the critical mistake of trusting too much his protégé and the firm's Mr. Inside Joe Gregory. TCM has previously written about Joe Gregory's decision to remove Michael Gelband in the spring of 2007 as the global head of the fixed-income division in the post Initial Reflections on Demise of Lehman Brothers. Apparently, Gregory did not want to cut back on the fixed-income's risk profile and may in fact have wanted to expand the risk to use the resulting profits to further fund the firm's aggressive overseas expansion.

History Often Repeats Itself

Many people believe that history often repeats itself. Maybe the exact details are not the same, but the two time periods in question share many common characteristics. For example, many economists point to the parallels between the current economic crisis and the period of 1932-33 when President Hoover was in the tail end of his term and about to be succeeded by Franklin Roosevelt with his "New Deal" thoughts about change to get the economy functioning again. As a result of potential parallels between various points in time, some people study various historical events, people and time periods to gain a better understanding of how current events might be handled so as to prevent the mistakes of the past. The history of the financial markets is a case in point.

Economies have had periods of prosperity and contraction throughout all known history. Some of the contractions have been caused by excess supplies of some type of inventory; others have resulted from fears about the availability of credit or fears about the soundness of the banking system. Less frequently, the periods of contraction have been led by a complete collapse in the demand for products and services (like what appears to be happening during this credit crisis). Hence, it is often useful to have a better understanding of historical events and people.

Recently President-elect Barack Obama has been announcing the new members of this economic team, such as Timothy Geithner, Larry Summers and Paul Volcker. As a result, Toomre Capital Markets LLC ("TCM") has been reviewing just what did happen in the Korean crisis of 1997 (and which resulted in the in-coming Treasury Secretary Timothy Geithner rising to the attention of Robert Rubin and Larry Summers)? Or what were the forgotten details of Paul Volcker's "Saturday Night Massacre" in October of 1979 that inflicted large losses on many Wall Street houses as he suddenly raised short-term interest rates?

Possible Gossip About Joe Gregory of Lehman Brothers??

The New York Post is published by Rupert Murdoch and is well-known in the New York City area for its Page Six section which reports on various gossip items that might be appealing to the greater community. In the November 10th 2008 edition of Page Six, the following tidbit appeared under the section Just Asking:

WHICH wife of a top Lehman executive went on a $132,000 shopping spree at the Americana Manhasset Mall the day after her hubby filed for bankruptcy?

Toomre Capital Markets LLC ("TCM") has written previously about the Possible Bankruptcy for Joe Gregory of Lehman Brothers. Mr. Gregory was the former President and Chief Operating Officer of Lehman Brothers who Dick Fuld relieved of his position back in June 2008 simultaneous with the replacement of then Chief Financial Officer, Erin Callan.

Barack Obama In; Dick Fuld Out

On the day after the election of Barack Obama as the next President of the United States, The Washington Post examined why he won in an article entitled Measured Response To Financial Crisis Sealed the Election. The conclusion of the article is that Barack Obama won because of the sudden collapse of Lehman Brothers on September 15th. That bankruptcy filing triggered "the biggest corporate collapse in U.S. history and an international financial meltdown", ultimately transforming the presidential race.

Is it any surprise then on the day after Obama's election, Bloomberg News reports that Lehman Brothers' much vilified Chairman and CEO Dick Fuld will be "terminated" by the bankrupt company by year-end without any bonus or severance pay?

Dick Fuld has been rightly criticized for driving the fourth largest investment bank into the ground and for the seemingly "large" amount of compensation he received over the years. For instance, Dick Fuld was openly criticized at an Oct. 6 hearing by Henry Waxman, chairman of the House Committee on Oversight and Government Reform, for taking excessive pay, which was estimated at $484.8 million since 2000. He is also being investigated long with 12 other individuals by three federal criminal probes focusing on Lehman Brothers.

Surely, Dick Fuld has become a regular punching bag on Wall Street. Both there and on Main Street, Fuld's various failures and excesses have been ridiculed by politicians, the media, and fellow bankers and executives to illustrate what is wrong with the way Wall Street operates. Equally well, Main Street citizens are quite angry about the Wall Street types who made many times the annual compensation of professionals in other lines of work like academics or engineering.

However, does not this vilification of Dick Fuld seem like a bit much? Many on Main Street have little appreciation of how the mortgage securitization process lowered homeowner mortgage rates for many years. That process saved hundreds and sometimes thousands of dollars each month on both residential and commercial real estate. Spread across the many mortgages in the United States this "benefit" to Main Street offsets some of the amazing "profits" that Wall Street rang up in an environment of particularly low volatility and risk premiums.

The Lucky Lehman Brothers Dozen: Subpoenas

At the Thursday October 16th 2008 hearing before the judge overseeing the bankruptcy of Lehman Brothers, the lead bankruptcy lawyer representing Lehman Brothers, Attorney Harvey Miller from Weil Gotschal, indicated that the firm is presently the focus of three grand jury investigations. According to Attorney Miller, the Southern and Eastern Districts of New York as well as the New Jersey U.S. Attorney offices are looking into various undisclosed aspects of Lehman Brothers' collapse.

In conjunction with these investigations, apparently a dozen subpoenas have been issued to a dozen current and former senior executives. New reports have subsequently suggested that CEO Dick Fuld and former-CFO Erin Callan are included on that list. Others have speculated whether former-COO Joe Gregory, the former head of Lehman Mortgage Capital Ted Janulis and Mark Walsh, the former head of the Lehman CMBS real estate business, might or might have received such subpoenas. CNBC reported that Joe Gregory's successor, Bart McDade had not received such a summons from Federal investigators.

Like many other observers of the demise of Lehman Brothers, Toomre Capital Markets LLC ("TCM") wonders who else was on the list of the lucky dozen to receive such Lehman Brothers subpoenas.

FBI Investigates AIG and Lehman Brothers Failures

On Wednesday September 24th 2008, The TimesOnline website is reporting that FBI Investigates Fannie Mae and Lehman Brothers. Apparently the Federal Bureau of Investigation ("FBI") has launched an inquiry into Fannie Mae and Freddie Mac, the mortgage companies; Lehman Brothers, the bust investment bank; and AIG, the nationalized insurance company.

"It is understood that investigators are trying to ascertain whether fraud helped caused some of the troubles at the four groups. The investigation includes whether executives deliberately misled the stock market about the health of their businesses." At AIG, news reports in the past ten days or so have suggested that the former senior management did not appreciate until just recently the full extent of the problems in their derivatives subsidiary AIG Financial Products. That led to the effective take-over of AIG.

Lehman Brothers apparently failed because market participants had little confidence in where its mortgage assets were marked-to-market. News reports about the meetings at the New York Federal Reserve Bank during the weekend of September 14th suggested that a number of market participants from other investment banks were surprised to see the relatively "rich" (or high) prices to which many of Lehman Brother's mortgage assets were marked. It has been suggested that from CEO Dick Fuld, President Bart McDade, (and former-COO Joe Gregory before him), former-CFO Erin Callan, and others down to the recently-retired global head of the Mortgage Capital division, Ted Janulis, all saw gold in what many others viewed as lumps of coal.

No doubt one or more of these executives will be answering questions for the FBI about possible allegations that there were mis-statements of asset values, particularly in the mortgage area. David Einhorn of the hedge fund Greenlight Capital raised numerous questions about the valuation of mortgage assets at Lehman Brothers after its first-quarter 2008 earnings report. At the time, various Lehman Brothers executives strongly rejected his allegations.

Initial Reflections on Demise of Lehman Brothers

The weekend of September 14th 2008 certainly will be known as a most remarkable weekend for American high finance. Both Lehman Brothers and Merrill Lynch have disappeared; the first to bankruptcy, the second to a Fed-directed merger with Bank of America. Several people have contacted Lars Toomre to ask various questions about might lie ahead in the near and longer-term future, and what "I" might know.

As a former employee of Lehman Brothers, I am sad to see that franchise disappear seemingly into thin air. Yet as readers of this blog no doubt are aware, I have been very contemptuous particularly of the former Capital Market managements of Citigroup, Merrill Lynch and UBS and their risk management teams. Clearly, the leaders of those firms really did not understand what types and amounts of risk they were taking on with all of their accumulation of sub-prime mortgages, CDOs, SIVs and other structured finance products. Why they had to own so many billions of these products made no sense except if they were making the bet that they could make a spread between the asset yields and where those products could be funded.

Back in the late fall of 2006 and early winter of 2007, I became extremely worried about the irrationality of the fixed-income markets. On February 5th 2007, I wrote the post It's All Fun and Games Until Someone Gets Hurt where I highlighted

Toomre Capital Markets LLC has been quite concerned about the irrationality of the United States fixed-income markets. Recently, the current coupon mortgage-backed security has traded with a negative option adjusted spread ("OAS"). Buyers of the current coupon MBS apparently were paying little heed to the fact that the underlying mortgages could be pre-paid. Rather the demand for nominal yield far outweighed the risk of prepayment. It will be very interesting to observe what happens with this market sector in the coming months as the Federal Reserve seemingly remains on hold. Is it a time to reach for yield? Or is it a time for safety ahead of one of the bond market's periodic up-heavals?

That post was followed up by one the next week entitled Hedge Funds, Investment Banks and the Value of Liquidity? In that post, I wrote "The financial markets now are full of much liquidity. Are investors, speculators and their bankers appreciating and pricing in liquidity risk? Toomre Capital Markets LLC would suggest that liquidity risk presently is greatly under-valued in the search for 'alpha', absolute return and portfolio yield. The stretch to get ten percent return (after fees) appears to be making rational people start to do irrational things."

Apparently, the folks running Lehman Brothers were not fully paying attention to what they were doing with their mortgage business. Somewhere in my reading of the past few days, I saw reference to why Michael Gelband resigned as the head of Lehman Brothers fixed-income division in June 2007. Apparently, the Lehman Brothers COO Joe Gregory did not want to reduce the risk profile of the fixed-income business (and may even have wanted to expand the risk even further to help fund the firm's global expansion plans).

Size of Lehman Brothers Bad Assets

Lehman Brothers is dying and effectively dead. In the next few hours the world will learn whether there is some type of forced rescue or whether this investment bank will be the first major institution that is "too big" and yet allowed to fail. The consequences of that failure are likely to rattle the markets in the United States, Europe and the Far East.

The Wall Street rumor website Dearlbreaker has a posting from early Sunday morning September 14th 2008 entitled We Have Reached A Deal For Lehman, Sources Say. That article starts, "We understand that a deal has been reached to divide Lehman Brothers into two entities, with a "bad bank" taking the toxic, real-estate assets amounting to around $85 billion. The deal will be financed without any government backing. Lehman chief executive Dick Fuld will resign."

Toomre Capital Markets LLC ("TCM") has watched the Lehman Brothers story evolve with some interest over the past year. This $85 billion number is far greater than Lars Toomre ever recalls being talked about before.

If this figure of bad assets is indeed accurate, Dick Fuld, Joe Gregory, Ted Janulis, Dave Sherr and all of the rest of the Lehman Brothers senior management (past and present) truly deserve to be taken out drawn, quartered and then shot. Where did this amount of "bad assets" come from?? My impression from all of the talk of liquidations is that were something on the order of $30 billion in troubled real estate holdings. If there truly was almost three times as much, that fact was not clearly communicated to the market participants. And if it was communicated, let me then repose the question, "Where the heck were Lehman Brothers' enterprise risk management controls that allowed the mortgage department to build such enormous positions???"

Employee Losses in Lehman Brothers Stock Holdings

My original Wall Street firm, Lehman Brothers, is in the process of melting down. Since the start of September 2008, the common stock has lost something close to 70% of its value. On the seventh anniversary of 9/11, the common stock closed at $4.22 per share. It appears highly likely that this investment bank's days as an independent are over, perhaps as early as this coming weekend.

The Lehman culture strongly preached the concept of team. Its employees were repeatedly encouraged to stay invested in the firm when a significant portion of their compensation was paid in the form of restricted common stock. In the time since its spin-off from American Express back in 1994, the employee's percentage of ownership apparently grew to be as large as thirty or percent or so. That percentage was diluted some by the additional equity capital raised earlier this year.

On Friday September 12th 2008, The Wall Street Journal wrote about how the decline in the stock price is effecting that ownership stake. The article is entitled The Lehman Stock Slide Hits Home: Employees Face $10 Billion in Losses and written by Randall Smith, Susanne Craig and Annelena Lobb.

All employees holding the stock have taken massive personal losses since the beginning of the year. The CEO and Chairman Dick Fuld, for instance, owns approximately 10.1 million shares and that stake is now valued at $45.8 million, down some $649.2 million or about 93% since the end of January 2008. The other four senior executives listed in statements filed with the SEC owned 2.6 million shares and suffered comparable paper losses.