It's a confidence game

(For the young 'uns, to be "conned" derives from the term "confidence game". Look it up.)

Dick Fuld is not some Elmer Fudd. He's a Lehman Lifer, who got paid either $480 million (Congressional estimate) or only $350 million (his estimate) to steer Lehman Bros. since 2000.

Lehman was a good place to work. Why, just before declaring bankruptcy, they even pumped out $23 million to just 3 employees.

In 2007, they paid their employees, on average, $300,000 each.

Now, let's see. If there are 48,000 employees worldwide, that would be ...

They claimed to be conservative money managers, according to Floyd Norris' account:

"Our liquidity position is stronger than ever," Christopher O'Meara, then the chief financial officer, said just a year ago.

Lehman shares traded for about $64 then. In the next six months, the company spent $1.1 billion repurchasing shares, at an average price of about $60 per share.

By December the share price was down to around $55 and Erin Callan, then the new chief financial officer, was proud. "We have come through the current downturn very well positioned on a competitive basis," she said.

"Conservatively," Callan added, "our view right now is that the asset prices in the fixed-income market will begin to stabilize over the next six months, which will serve as an inflection point for improvement in fixed-income later in the 2008 calendar year."

Lehman was so confident that in January it stepped up its share repurchases, spending half a billion dollars in one month.

In April, it discovered it could use some capital. It raised $4 billion selling preferred stock. In June, it raised another $2 billion in preferred, at much harsher terms, and $4 billion by selling common shares at $28.

Not, you understand, that the company really needed the money. "To be clear," Callan said in June, "we do not expect to use proceeds of this equity offering to further decrease leverage, but rather to take advantage of future market opportunities, which are abundant.

"And over all, we stand extremely well-capitalized to take advantage of these new opportunities. From a risk management perspective, we continued to operate in our disciplined manner we're known for."

Just a few of the many opportunities that they took advantage of was to sow their toxic seeds around the globe (but they were not the only big bank to do so). The Financial Times reported back in December last year

At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange, which marketed Lehman-originated CDOs to dozens of Australian councils as well as to charities and a public hospital provider.

The losses suffered by the councils and charities are further evidence of the damaging impact of the recent global credit turmoil as it spreads from sophisticated large investors to small communities round the world - and is increasingly starting to hurt mainstream, risk-averse investors such as local governments and pension funds.

Four towns in Norway saw most of the value of their investments in complex funds designed by Citigroup wiped out by the credit crisis.

Lehman has admitted that, "in very few cases", the CDOs sold by Grange breached the councils' investment guidelines because of the length of their maturity dates. It has bought back some CDOs.

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

Lehman said the councils were suitable investors in CDOs because they were recognised as "sophisticated wholesale investors who have responsibility for their own investment decisions and due diligence". It added: "We believe that everything Grange sold to customers conformed to NSW ministerial [investment] guidelines. There will be cases where Grange does not believe, on objective grounds, they have to cancel [the CDOs]."

Some bloggers have patiently and diligently been chronicling the slow demise of Lehman.

It is a common theme of many of the commentators that Lehman blew up over its over-extended leverage and under-extended risk management, e.g.:

The company leveraged its assets far too much over the last few years, using ‘dozy’ risk metrics

But Mr. Fuld won't have a bar of any such criticism. He says the two thing that brought Lehman down were not any doing of Lehman but, rathe,r those evil naked short sellers and confidence.

How ironic that the main man in one of the key players in the toxic-debt confidence game says:

ultimately what happened to Lehman Brothers was caused by a lack of confidence.

there is a systemic lack of confidence in the system

Now, who do you suppose brought that on?

Additional sources:

Lawmakers Lay Into Lehman CEO

STATEMENT OF RICHARD S. FULD, JR. BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM OCTOBER 6, 2008