Lehman bet big and lost

Born to serve cotton farmers in simpler times, Lehman Brothers grew into a financial high roller that succumbed to the recklessness that has immersed the world's financial markets in a morass of toxic mortgages and crumbling home values.

Lehman Brothers Holdings Inc.'s demise, sealed Monday with a Chapter 11 bankruptcy filing – the biggest in U.S. history – served as another chilling reminder of the severity of a mortgage meltdown that began two years ago.

Founded 158 years ago in Alabama by three brothers, Lehman had survived the Civil War, two world wars, the Great Depression, a currency crisis and the 2001 terrorist attacks, which destroyed its former headquarters in New York.

But Lehman couldn't overcome the deepening problems that saddled it with about $60 billion in rotten investments tied to the steadily deteriorating real estate market.

“They did this to themselves with their own greed,” said Anthony Michael Sabino, a St. John's University business professor who specializes in bankruptcy. “People just got crazy, and in their endless obsession to squeeze every penny of profit, they forgot about the perils of taking on too much risk.”

Lehman's disintegration marked a stunning collapse for an investment bank hailed as one of Wall Street's best-managed firms as recently as a year ago.

“If I had my way, I would cry right now,” said Muriel Siebert, who has been working on Wall Street for 50 years and still runs her own brokerage. “Lehman was a firm that always stood for integrity.”

Lehman's jarring downfall apparently marks a bitter end to the career of its hard-charging chief executive, Richard Fuld, who joined the firm as a college intern in 1969 and has held the top job since 1993. Nicknamed “Gorilla,” Fuld ran the bank with a ferocity and determination that became part of Lehman's culture.

Fuld, 62, summed up his philosophy this way in an interview last year with The New York Times: “Every day is a battle: think about the firm, do the right thing, protect your client, protect the firm, be in it, be a good team member.”

After he took control, Fuld masterminded Lehman's transformation from a conservative bond-trading business to a high roller that raked in more than $15 billion in profits from 2003 through 2007.

Things quickly unraveled this year as the mortgage market meltdown got worse than Fuld fathomed, forcing Lehman to record nearly $7 billion of losses in the past six months and scramble for a buyer or a government bailout.

But U.S. Treasury Secretary Henry Paulson adamantly opposed the government's coming to Lehman's rescue – a stance that made it even more difficult for the investment bank to find a buyer to willing to roll the dice on a takeover.

One of Lehman's potential buyers, Bank of America Corp., instead snapped up Merrill Lynch & Co., which last year had brought in a new CEO to purge many of its mortgage problems.

Some analysts believe Fuld waited too long to tackle Lehman's woes, dooming a company that played a pivotal role in the country's growth by helping to finance the construction of railroads.

“Nobody likes to see old institutions like this die. They are part of our society,” said Herbert Rice, who said he is a third-generation nephew of the three Lehman's founders – Henry, Emanuel and Mayer. “It's unfortunate, but this is what happens when you put too many eggs in one basket.”

Lehman shares ended Monday at just 21 cents, a devastating descent from $67.73 just 10 months ago.

The plunge wiped out more than $35 billion in shareholder wealth. Common shareholders all but get wiped out when a company files Chapter 11.

If any good comes of Lehman's downfall, it will be as a cautionary tale that discourages big banks from making big bets on shaky investments like the mortgage-backed securities and complex derivatives that sunk Lehman, said Steven Goldman, chief market strategist for Weeden & Co.

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