Too Big to Fail [62]
He recounted how he had listened intently to Callan’s performance during her by now famous earnings call the day after the Bear Stearns fire sale.
“On the conference call that day, Lehman CFO Erin Callan used the word ‘great’ fourteen times; ‘challenging,’ six times; ‘strong,’ twenty-four times, and ‘tough,’ once. She used the word ‘incredibly’ eight times,” he noted.
“I would use ‘incredible’ in a different way to describe the report.”
After that rhetorical flourish, he recounted how he had decided to call her. With a projection screen displaying the relevant figures behind him, he told how he had questioned Callan about the fact that Lehman had taken only a $200 million write-down on $6.5 billion worth of the especially toxic asset known as collateralized debt obligations in the first quarter—even though the pool of CDOs included $1.6 billion of instruments that were below investment grade.
“Ms. Callan said she understood my point and would have to get back to me,” Einhorn relayed. “In a follow-up e-mail, Ms. Callan declined to provide an explanation for the modest write-down and instead stated that, based on current price action, Lehman ‘would expect to recognize further losses’ in the second quarter. Why wasn’t there a bigger mark[down] in the first quarter?”
Einhorn explained that he had also been troubled by a discrepancy of $1.1 billion in how Lehman accounted for its so-called Level 3 assets—assets for which there are no markets and whose value is traced only by a firm’s internal models—between its earnings conference call and its quarterly filing with the SEC several weeks later.
“I asked Lehman, ‘My point-blank question is: Did you write up the Level 3 assets by over a billion dollars sometime between the press release and the filing of the 10-Q?’ They responded, ‘No, absolutely not!’ However, they could not provide another plausible explanation.”
Clearing his throat audibly, Einhorn ended his speech with a warning.
“My hope is that Mr. Cox and Mr. Bernanke and Mr. Paulson will pay heed to the risks to the financial system that Lehman is creating and that they will guide Lehman toward a recapitalization and recognition of its losses—hopefully before federal taxpayer assistance is required.
“For the last several weeks, Lehman has been complaining about short-sellers. Academic research and our experience indicate that when management teams do that, it is a sign that management is attempting to distract investors from serious problems.”
Within minutes of Einhorn’s leaving the stage, news of his speech had been broadcast throughout financial circles. Lehman was in for some serious pain when the market opened the following day; the shares would fall as much as 5 percent.
As Einhorn headed up Broadway to attend a book party being thrown for him at the restaurant Shun Lee West, he leafed through the program of the conference he had just left and saw something that made him smile ruefully.
Lehman Brothers had been one of the Patron Sponsors of the conference, having paid $25,000 so that the world could hear him publicly undermine the firm’s credibility.
CHAPTER SIX
“Who talked?” Dick Fuld demanded, scarcely able to control his fury, and looking as if he might leap across the table and strangle someone.
Lehman’s executive committee—the firm’s top managers—were arrayed around a conference room table on Wednesday, June 4, awkwardly sitting in absolute silence.
Fuld held a copy of that day’s Wall Street Journal in his hand. There, on page C1, was what he described to them as “the greatest betrayal of my career.” He had practically choked that morning when he read the headline—“Lehman Is Seeking Overseas Capital”—with its subhead adding the damning detail: “As Its Stock Declines, Wall Street Firm Expands Search for Cash, May Tap Korea.”
There it was, the morning’s news, the secret plan he had been working on for the past month to counter the critics and demonstrate strength, exposed for the entire world to read. He had been working frantically to shore up the firm,