The Devil's Casino_ Friendship, Betrayal - Vicky Ward [97]
get people to put money into the firm. So we sort of felt we had a fallback position on
someone saying, ' Ah, but you won't have enough capital if you do SpinCo.' We thought
SpinCo may take $8 billion. So when the plan was put together by Bart, there was a
feeling that ' Boy, it sounds pretty good. ' And the theory would be that at the time of our
earnings in September, we would go through the whole plan, and people would say,
'Wow.' "
On September 10 at 8 A.M. Eastern time, Fuld delivered his announcement in a
conference call to investors. From around the world, Lehman's 25,000 employees listened
in with countless others, and knew this was a historic moment. "I heard his voice and it
was so tired, and it was cracking--and I just knew this is over," said a London-based
managing director who was listening in on his cell phone while waiting for a flight.
"So today, we' re taking a number of necessary actions," Fuld began. "Here's the
summary: We put a concrete plan in place to exit the vast majority of our commercial real
estate; we are reducing our residential and leveraged loan exposures down to appropriate
operating levels; we are in the final stages of raising capital with sale of a majority stake
in IMD [the investment managing division], strengthening our capital base--as we
strengthened our capital base in June, protected our liquidity, and are cutting our
dividend; we reshaped our human capital and product [set expense base] to these
changing markets; lastly, we implemented a series of management changes, some of
which you saw in the last couple of days. Taken together, these actions have quickly
derisked and resized the firm. Let me just go through each in more detail:
"Today we announced a plan to separate a vast majority of our commercial real estate
assets from our core business by spinning off those assets to our shareholders and to an
independent, publicly traded entity which will be adequately capitalized. The spin-off
improves our balance sheet while preserving value for our shareholders. The spin-off
entity will be able to manage its assets for economic value maximization over a longer
time horizon, given the fact that it will not be a mark-to-market entity, but rather use
held-to-maturity accounting. This will preserve economic value for our shareholders."
Then, Ian Lowitt laid out the details of SpinCo, while the banking analysts on the call
waited for someone to ask the obvious question: Since Lehman had not sold
NeubergerBerman (talks were still ongoing with the private equities firms Bain Capital
and Hellman & Friedman), how was SpinCo going to be financed?
Within the firm's senior management there had been debate--throughout the night, right
up to the moment of the call--as to what Lowitt should say when asked this inevitable
question. Lowitt had not got much sleep because of the continual back-and-forth over
exactly what words he should use. McDade had insisted it would be disastrous to convey
to the market the lack of certainty over the execution of their plan, even though the reality
was that Lehman hadn't yet tied up all of SpinCo's numerous loose ends.
After Lowitt had laid out the company's plans and opened the call to questions, Deutsche
Bank analyst Mike Mayo asked the big question: "To the extent you might need $7
billion to capitalize that entity and [assuming] you will get $3 billion with the spin-off
part of IMD, how would you get the other $4 billion?"
Lowitt replied: "We don't feel that we need to raise that extra amount to cover the seven
because you will have less leverageable equity in core Lehman than in, you know, where
you are at the end of this quarter."
In other words, he didn't have a good answer.
The market's response was indeed "Wow!"--just not in the way Lehman had hoped.
A close friend of Dick Fuld, who does not want to be named, shook his head when he
heard the announcement. "Dick's just highlighted the wart at the end of his nose," he said
to himself.
Mayhem ensued. As the Wall Street