Another One Bites The Dust

American International Group (AIG) looked as though it too might be teetering on the brink of financial disaster, as shares in AIG fell 43.28 % on September 16 (http://business.timesonline.co.uk). Like Lehman Brothers, AIG’s attempts to secure external capital injections to save the day whimpered into obscurity but, unlike Lehman Brothers, AIG was able to attract a significant Federal Reserve loan, of $85 billion, albeit on the proviso it cedes control, by way of giving the government a majority equity stake of 79.9% (www.bloomberg.com).

According to the United States Federal Reserve Board of Governors Press Release of September 16, the loan also gives the Federal Reserve Bank the right to suspend dividends to previously issued common and preferred stock. A number of key players in AIG, including its Chief Executive Officer (CEO), Robert Willumstad, were booted into base as fallout from the loan conditions. The Federal Reserve Bank’s turn around on its opposition to bailing out beleaguered financial giants has ensured that AIG avoids joining Lehman Brothers in the swirling financial dust of the times. The reason for the turn around is simple: AIG is a bigger player than Lehman Brothers, too big a player to fall if there’s to be any hope of ‘Financial Team America’ kicking ass anytime in the near future. Had AIG collapsed, the fallout for the Western financial system could have been catastrophic. AIG employs 116 000 people, four times that of Lehman Brothers (http://business.timesonline.co.uk), it is the biggest US insurer, in terms of assets, (www.bloomberg.com) and, according to Forbes Global 2000 list of 2008, it ranks as the 18th largest world company (www.wikipedia.org).

So, AIG lives to fight another day, cowed and under a government leash, but standing. Not so for Lehman Brothers. Some commentators have pointed the finger at Richard Fuld, more or less asserting that if he did not have the personality he has things may have been different. Fuld was the Chairman and CEO of Lehman Brothers since 1994 when the merger between Lehman Brothers and American Express came to its conclusion. Lehman Brothers is the only firm Fuld has ever worked for. Fuld joined the business world after a previous career as an air force pilot came to a shuddering halt when Fuld defended a younger cadet from a commanding officer by engaging in fisticuffs with aforesaid officer. Some would argue that this form of problem resolution is counter-productive, creating as it does another problem to supercede the first and suggesting a certain lack of regard for authority. Anyhow, whether or not Fuld likes to be a defender of the ‘underdog’ or simply cannot resist succumbing to an ‘aggressive streak’ within (Tom Bawden, http://business.timesonline.co.uk), his attitude certainly worked well for him when it came to securing himself a place on Wall Street and turning Lehman Brothers’ losses into a $4.2billion profit in 2007 (www.timesonline.co.uk). Fuld was named America’s top Chief Executive in Institutional Investor 2006; not bad for someone who basically fought his way single-handedly through the Wall Street scrum when it came time to change career direction.

Lack of regard for authority figures or the ‘bigger man’, a term used by Fuld to explain why he involved himself physically in an altercation between a Lehman executive and a ‘bigger man’ at a hockey match (www.business.timesonline), may not have served him so well when it came to negotiating with outside financial institutions in a somewhat more powerful position than Lehman Brothers. Fuld, whatever the case, was not alone in handling these negotiations; Lehman Brothers’ Board of Directors – Michael Ainslie, John Akers, Roger Berlind, Thomas Cruikshank, Marsha Johnson Evans, Sir Christopher Gent, Roland Hernandez, Dr. Henry Kaufman and John Acomber - was clearly not much help in soothing troubled waters. Fuld and his Board of Directors were perhaps not very realistic about price in these failed negotiations.

There really is no good purpose served by pointing fingers at individuals in a situation of this sort. Lehman Brothers, like Bear Stearns that was bought by J.P. Morgan Chase when it too faced bankruptcy as a result of the financial conditions of late 2007, early 2008 (http://topics.nytimes.com), was simply not a big enough player to warrant the sort of help AIG has received.

Lehman Brothers’ plight and the near plight narrowly avoided by AIG and the potential plight currently staring HSBOS in the face in Britain, are all part and parcel of the same thing that has claimed numerous victims in the shuddering and shaking the Western financial system is enduring. The root problem is silly lending. Lending people money to buy things they should not really be buying because they cannot really afford to is just silly. Silly on the part of the people who see something they want and take out exorbitant loans they cannot service, instead of doing what the old-timers did, scrimping and saving and working more till you can get it and keep it. Silly on the part of financial institutions who should have known better but allowed sound economic thinking to be clouded over by greed and made wrong decisions. It’s a lesson learnt, hopefully, and now that ‘the chickens have come home to roost’ it’s likely the clucking won’t die down for some time yet. Furthermore, the clucking may be unnervingly multilingual.

It was Shakespeare who wrote the lines “Misery acquaints a man with strange bedfellows” in The Tempest, and there’s certainly been evidence of that recently. If there is one potentially positive thing to come out of the doom and gloom of the financial meltdown it is that international banking groups are embracing more meaningfully the concept of internationalism and seeking bedfellows from pastures anew. When Lehman Brothers entered into negotiations with Korea Development Bank it was the latest in a long line of western financial groups looking to Korean, Chinese or Gulf institutions for a financial boost. Mark Kleinman (www.telegraph.co.uk) points out that Lehman Brothers was also considering investment from Chinese brokerage firm, Citic Securities, and a number of sovereign funds from the Middle East, including Abu Dhabi and Qatar. If the negotiations with any of these had succeeded then Lehman Brothers would have joined other American financial institutions, such as Citigroup, Merrill Lynch and Morgan Stanley, in receiving capital injections from Korean, Chinese or Gulf institutions. Barclays, Fortis and UBS in Europe have all received such backing. Is this a good thing? It certainly could be. Only time will tell. Once the dust settles a very different financial environment may come a-calling.