I meant to write about this a few days ago but the situation had me so irritated I was having difficulty writing cogent thoughts about it, in any event here are some facts, figures, news items and commentary related to Lehman Brother's (LEHMQ.PK) collapse.

First, here is a look at the contrast between their internal struggles and what they said publically:

(From the WSJ's Law Blog):

• On September 9, Lehman’s stock plunged 45% on news that a potential deal with Korea Development Bank fell through.

• As Lehman’s “clearing bank,” J.P. Morgan acted as the financial middleman between Lehman and its clients. Steven Black, co-CEO of J.P. Morgan’s investment bank, told Fuld that in order to protect itself and its clients, JPM needed $5 billion in additional collateral — over and above the $5 billion J.P. Morgan had demanded five days earlier, which had yet to be paid. Fuld persuaded Black to settle for $3 billion right away.

• That evening, top Lehman execs discussed the need to raise between $3 billion and $5 billion to shore up capital by early 2009. That evening, discussions with outside bankers about possible capital raising ended without any formal plan. Lehman execs arranged a conference call for the next day to announce earnings ahead of schedule and to disclose plans for a restructuring. The bankers counseled Lehman against holding the call, warning there were too many open questions about the firm’s finances.

• On next day’s conference call, the firm announced that it expected its largest quarterly loss ever, $3.9 billion, driven largely by declines in real-estate valuations. CEO Fuld said the firm intended to sell a majority stake in its investment-management division and would cut its dividend. Lehman executives didn’t say anything about needing to raise capital.

• On the call, a Deutsche Bank analyst asked whether Lehman would need to raise $4 billion as part of the plan. Lehman’s CFO, Ian Lowitt, replied: “We don’t feel that we need to raise that extra amount.” At another point, Lowitt said: “Our capital position at the moment is strong.”

• By Sunday, Sept. 14, Lehman, its lawyers and officials from the New York Fed determined that Lehman must file for bankruptcy.

Obviously the above could very well create some significant legal issues for various Lehman Execs, the WSJ's Law Blog discusses the subject here,  you can read about an FBI Inquiry here and other investigations here.

Following on the above let's take an additional look at some of the issues Lehman was dealing with in its final days:

(From the WSJ): "In the weeks before it collapsed, Lehman Brothers Holdings Inc. went to great lengths to conceal how fast it was careening toward the financial precipice.

The ailing securities firm quietly tapped the European Central Bank and the Federal Reserve as financial lifelines. On Sept. 10, one day after Lehman executives calculated the firm needed at least $3 billion in fresh capital, the firm assured investors on a conference call it needed no new capital at all. Lehman said its massive real-estate portfolio was valued properly, but Wall Street executives who have seen it say it was overvalued by more than $10 billion. As hedge-fund clients began yanking their money from Lehman, the firm assured them it was on solid financial footing.

On Sept. 11, J.P. Morgan Chase & Co. effectively ended Lehman's campaign to appear strong. In its capacity as a middleman between Lehman and its clients, J.P. Morgan knew more about Lehman's predicament than most outsiders, and it didn't like what it saw. J.P. Morgan demanded from Lehman $5 billion in additional collateral -- easy-to-sell securities to cover lending positions that J.P. Morgan's clients had with Lehman -- repeating an unmet request from a week earlier, people familiar with the situation say.

It was a knockout blow. That $5 billion collateral call, coupled with a huge outflow of money from Lehman's hedge-fund clients, so weakened the 158-year-old Wall Street firm that it sought Chapter 11 bankruptcy protection four days later."

You can read more on the above here.

Now let's take a look at Richard Fuld's testimony before Congress on the issue: 

(From the WSJ): "In his first public statements since Lehman filed for bankruptcy protection Sept. 15, Mr. Fuld testified that he didn't deceive investors and others about the securities firm's financial health. This was despite repeated internal warnings, cited by lawmakers, that Lehman was on shaky ground. 

In sometimes halting language, Mr. Fuld said that while he takes responsibility for decisions the firm made, he believes that Lehman was brought down by outside forces including lax oversight and "short sellers," traders who were betting Lehman's stock price would fall… 

...Meanwhile, lawmakers estimated that Mr. Fuld pocketed roughly $480 million in pay since 2000. He suggested that his pay was closer to $350 million in that time and noted that Lehman's compensation system ties executive pay to performance. He said his 2007 pay, most of which came in Lehman stock, was nearly wiped out because of Lehman's bankruptcy filing…

For much of the almost-three-hour session, lawmakers asked Mr. Fuld about the juxtaposition of upbeat public comments he and other Lehman executives made about the firm and the dire internal view of the Lehman's growing problems.

Lawmakers cited a Wall Street Journal page-one article Monday that examined the lengths Lehman went to conceal its deteriorating financial condition in its last week. The article raised a number of questions, including whether Lehman executives knew, but didn't disclose, that the firm needed to raise capital ahead of a critical Lehman conference call with investors on Sept. 10, five days before it filed for bankruptcy protection.

Mr. Fuld told lawmakers "there was no intent to mislead anyone." He said he believed on Sept. 10 that Lehman was adequately capitalized and that future capital raises would depend on how much money the firm could drum up through the sale of assets and a planned restructuring.

Lawmakers also pointed to an internal Lehman document from June that questioned how the firm had allowed itself to become so exposed to the real-estate market and didn't show enough discipline in allocating its capital. "That is not what you told the public," said Rep. Brian Higgins, a New York Democrat.

Mr. Fuld said he didn't recall seeing the June talking points."

You can read more of the above here.

Let's quickly dissect some of the nonsense contained within Richard Fuld's (who henceforth shall be referred to as Elmer Fudd on this blog) testimony before Congress:

Oversight: how can one claim responsibility whilst at the same time blaming regulators (lax oversight) for allowing him to screw up, effectively making the claim that he's only a mere child and while he "takes responsibility" he can't truly be responsible since it's really the job of those providing oversight to keep him out of trouble? The statement doesn't even make sense and is extremely hypocritical, when I'm sure Elmer would've been one of the first ones crying to his lobbyist if the government had tightened regulations on the financial industry during the housing boom.

Misleading Statements: this is one of those cases when it would've been better for Elmer not to say anything at all, as all he's done here is to reveal himself to be a criminal at worst and a liar at best. Internal documents, discussions and even his own actions as CEO reveal that there was a marked difference between what was being said/done internally and was being said in public. For instance: how in he world can he defend the fact that he claimed that the company didn't need outside capital when an internal analysis had revealed the opposite AND the company was facing a collateral call from J.P. Morgan (JPM)?

Perhaps Elmer should've been asked: "Why are you continuing to make misleading statements NOW?!"

Short-Sellers: blaming short-sellers and negative rumors for "taking the company down" is especially ironic in light of the fact that Elmer was effectively trying to inflate the company's stock and keep customers from defecting by lying about Lehman's financial health. I suppose in Elmer's cartoon world one can lie all they want as long as it's to push a company's stock up, but if customers flee to protect themselves, if investors make a valid decision to sell a bad stock and if short-sellers short a stock of a company in trouble it's a pernicious act. Perhaps Elmer is merely self-centered and thinks customers and the market are just supposed to serve him.

Of course it's worth noting that there are some in the business media who believe that short-sellers are to blame for Lehman's demise as well, so it's not just Elmer who is trying to pretend that an insolvent company can operate indefinitely as long as it has a healthy stock price.

The real issue here is that short-sellers didn't take Lehman down, Elmer and the other executives in charge of the company are the ones responsible. To blame short-sellers would mean we'd have to ignore the $5 billion collateral call from J.P. Morgan Chase, the $3.9 billion quarterly loss and the need to raise another $3-5 billion in collateral. Not to mention the overvalued real estate portfolio and a host of other financial issues, which were making other I-Banks very wary of the company especially after they had looked through the company's books.

In other words, in order to blame short-sellers with a straight face one would have to ignore Lehman's malaise ridden balance sheet, and pretend that it was a perfectly healthy company that would still be doing just fine if a bunch of short-sellers hadn't targeted the company with false rumors. 

i.e. there were very legitimate reasons to short Lehman's stock that had nothing to do spreading false rumors or breaking the law in anyway, shape or form.

The ultimate hypocrisy is that the Hedge Fund clients (that Lehman was begging not to leave) engage in the shorting of  stocks on a regular basis, and I'm sure that Lehman's proprietary trading units and the Hedge Funds they own have done the same. In other words: Lehman is only against short-selling when they think they can blame it for their problems/use it to deflect attention from their own issues/defect blame away from their executives. 

While troubled times often precipitate the designation of Hobgoblins we can blame for our woes it's time we start holding the feet of these executives to the fire and force them to take FULL responsibility,  Elmer Fudd stood before Congress and effectively lied through his teeth and blamed everyone in the world but himself by telling lie after lie after lie. Anyone looking for a classic example of audacity or "chutzpah" needs to look no further than Elmer's "performance" before Congress. 

Or maybe it wasn't audacity at all, maybe it was just a series of bold faced lies, or the actions of an individual with a persecution complex who doesn't believe he should have to face any consequences for his actions and nothing is his fault.

How else can you explain an individual who purports to claim responsibility for the demise of his company, yet blames "outside forces" as the ultimate cause despite the very real problems within the company?

Either way it's no wonder that companies like Lehman are failing when their executives seem incapable of admitting that they're even fallible, let alone that they could possibly be responsible for their companies going down the tubes.

Finally while Elmer's performance was farcical in nature so were the Congressional hearings themselves, after all when is the last time that Congressional hearings involving corporate executives (outside of Enron) has led to any sort of changes, persons being held responsible, etc, etc? They're nothing more than dog and pony shows that insult the intelligence of the American people via claiming to be a method by which Congress will "get to the bottom of this, or do something to address the problem."

In all likelihood Elmer will ride off into the sunset with his $350 million and aside from facing a few protesters and angry ex-employees here and there he will suffer very few consequences, thus setting the stage for the next round of corporate executives to behave in a similar manner. 

Sources:

The WSJ Law Blog: "Liability for Lehman? -- Our Capital Position at the Moment is Strong" -- Dan Slater, October 6, 2008 .

The WSJ: "The Two Faces of Lehman's Fall" -- Carrick Mollenkamp, Susanne Craig, Jeffrey McCracken and John Hilsenrath, October 6, 2008.

The WSJ: "Lawmakers Lay Into Lehman CEO" -- Susanne Craig, October 7,2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.