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Founded 158 years ago by two Alabama cotton traders, Lehman Brothers essentially focused on bond trading for much of its history, and built a reputation as the ultimate white-shoe financial firm: untouchable, a Wall Street flagship, and an engine of the city's economy.
The company had an entire office that just handed out charitable donations each year to dozens of nonprofits here and abroad, including $5 million to the World Trade Center Memorial Foundation and $1 million to the Apollo Theater in Harlem. In 2007, employees donated $4.6 million, with the company matching those gifts, dollar for dollar. The company even had its own art curator.
Lehman won major business awards each year. Lehman was named the "most admired" securities firm in 2007. And this year, somehow, Business Week named Lehman one of the 50 best-performing companies in 2008.
Lehman's boss, Fuld, collected a number of society honors, including a 2006 Rockefeller Award from the Museum of Modern Art.
Named CEO in 1994, Fuld doubled the number of employees in the firm and led it through an impressive increase in revenue and stock value.
And, predictably, he became very rich. In testimony last month, he told the House Oversight Committee that he had made $60 million, plus another $240 million in stock that he sold. He owns a $21 million apartment in New York City, a $14 million home in Florida, a summer home in Idaho, and millions in artwork.
Fuld also waded heavily into the business of selling mortgage-backed securities to investors. You could argue that Lehman's growth precisely paralleled its increasing involvement in those types of investments.
Lehman was able to broaden its portfolio following the repeal of the Glass-Steagall Act in 1999, during the Clinton administration. The act prevented banks from investing on Wall Street, thus shielding consumers from riskier transactions. Once that protection was gone, Lehman could gamble away, and it became among the largest issuers of mortgage-backed securities. The share price had soared from its 1994 price of $5 to $86 in 2007.
Now that Lehman's stock is nearly worthless, several of the pension funds that lost their shirts investing in the mortgage-backed securities have sued Lehman for misrepresenting its financial position as things went sour.
A complaint filed by the pension fund of plasterers' union, Local 262, quotes a memorable bit of obfuscation from a Lehman spokesperson back in July 2007, when things had already started to go bad: "Rumors related to subprime exposure are unfounded."
"They were not telling the truth with regard to their exposure," says Local 262 attorney Curtis Trinko. "They were leading the investment world to believe that they were not exposed, while certain people in charge of those kind of investments had really gone deeply into it."
Representative Henry Waxman called Lehman "a company in which there was no accountability for failure." Four days before the bankruptcy, Waxman said, the Lehman board gave three executives $20 million bonuses.
Federal investigators recently issued subpoenas to a range of Lehman executives and divisions, as part of an investigation into whether the company misled investors during the year leading up to its collapse.
The demise of Lehman Brothers led predictably to a series of gauzy images: employees carting off their stuff; people mourning sentimentally about the company-that-was; nonprofits bemoaning the demise of a major sugar daddy; Fuld insisting that his tenure had been successful, and fulminating about the failure of the government to bail him out.
Even in the late '90s, however, the company was underwriting loans issued by questionable lenders. The company did a lot of the underwriting early on for loans issued by two of the more notorious lenders, Delta Funding Corp. and FAMCO, according to Josh Zinner, a lawyer with the Neighborhood Economic Development Advocacy Project.
The U.S. Justice Department sued Delta Funding in 2000 under the Fair Housing Act for a range of illegal behavior, which included charging unfairly large fees and penalties to homeowners, handing out kickbacks, and charging African-American homeowners more than whites.
In 2003, a federal jury in California held Lehman liable for helping FAMCO cheat borrowers. The jury ruled that Lehman not only knew about the fraud, but actually assisted the company in deceiving homebuyers. The jury fined FAMCO and Lehman $51 million.
Lehman also worked with United Companies Lending, which pushed scores of people toward foreclosure, especially in Philadelphia. United was investigated by federal and state authorities in Pennsylvania and Massachusetts for questionable lending practices.
Lehman was also involved with the mortgage insurance company Conseco, which was fined $27 million in 2002 for violating consumer-protection laws. In 2004, Conseco had to pay $20 million to settle an improper securities-trading case brought by the New York Attorney General and the SEC.
Lehman purchased BNC Mortgage, which gave Lehman a subsidiary that directly lent to homebuyers. And Lehman purchased the troubled Delaware Savings Bank in 1999 and changed its name to Lehman Brothers Bank. Delaware Savings had specialized in lending to homebuyers and purchasing mortgage loans.
Lehman also owned one of the largest loan-servicing companies that collect mortgage payments—the very same Aurora Loan Services that foreclosed on Grant and Christofferson.
Most folks believe that Lehman simply collected mortgages in one pot and then sold them to investors. But according to Ackelsberg, Lehman created the pot first and then went out looking for mortgages to fill it. In other words, the demand was coming from Wall Street.