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Richard Fuld interview: Can Lehman grow and still succeed?

Antony Currie
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When all around its rivals are spinning off businesses, Lehman Brothers is sticking to a strategy of acquiring rather than relying purely on organic growth. CEO Richard Fuld has exceptional backing inside the firm for this approach. But can the openness and mutual cooperativeness of his managers survive more expansion? Fuld spoke to Euromoney's Antony Currie about Lehman's future.

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WHAT DOES LEHMAN Brothers do next? In the 11 years since it split off from American Express the US investment bank has confounded all of its critics to build a top-tier franchise in equities and M&A. More recently the firm, run by CEO Richard Fuld since 1993, has sought to diversify its revenues by expanding into asset management, buying Neuberger Berman in 2003 and a stake in hedge fund Ospraie this year. Fuld is hoping to add more hedge fund stakes in the coming months.

But Fuld wants his firm to achieve much more. "What we focus on in the executive committee is increasing our revenues from around $12 billion to $15 billion or $20 billion," he says. Pointing out that such gains won't come from incremental increases from the business lines he already has, Fuld states that "we are in a position to make a strong acquisition".

What exactly that is he won't say, although he leaves enough clues. "The big meaty stuff for increasing our revenues comes, for example, in building the asset management business," he says. Or it could involve buying a finance company. "It's no secret that we wanted to buy CIT three years ago," he says. "Finance companies are a possibility for us."

It's not just revenues that he wants to increase, but the variety of businesses, in stark contrast to some of his larger competitors, which have started to spin off or consider spinning off less attractive businesses.

There are many who are still concerned that Lehman lacks diversity in its investment-banking products. "Around 60% of revenues comes from the fixed-income business," says one investor. "That's more than Bear Stearns' 50% and Merrill Lynch's 25%." In the second quarter this year just over 63% of revenues came from fixed income.

Implicit in such concerns is a fear that Lehman is more prone to suffer when the debt markets perform poorly. But, as the bank's second-quarter results show, the fixed-income business is one of the strongest and most diversified on the Street, which, combined with the bank's more conservative approach to risk management, helped it to report solid second-quarter earnings in the face of severe dislocation in the markets. Trading results were still down, but not to the extent they were at peers such as Goldman Sachs, JPMorgan and Morgan Stanley that either reported or warned of a significant drop in earnings.

But observers reckon that Lehman has taken a good deal of care with its correlation modelling, and hedged its exposures effectively whether in debt, mezzanine or equity tranches. The downside is the firm earns less in the good times but when events such as May's GM/Ford-related tumult hit, the firm suffers less.

It is this kind of performance that has given Lehman what every investment bank craves: the respect, and envy, of its peers. In the US, CEOs and heads of business at rival firms talk with a mix of awe and grudging respect about what Lehman has achieved under the leadership of Fuld. Some even admit, quietly, to using Lehman as their benchmark when making business presentations to both their bosses and their staff.

It's the result of 11 years' hard work, capped by the bank's performance in the past five years. Throughout the downturn and slow recovery Lehman has consistently delivered results that match or beat the competition. At the same time the firm has managed to invest, successfully, in its equities and mergers and advisory businesses, while others were cutting back, to the point where bankers in both divisions can now rightly claim, in the US if not in Europe as well, that they are now members of the investment banking industry's top tier.

The firm even seems to be devoid of debilitating political battles at the top. Fuld is, without question, in charge. And, according to him, there is no battle to be his successor; Fuld and the board have already chosen Joe Gregory, Lehman's president and COO. Fuld says: "I'm not going anywhere soon, but everyone knows that Joe is the number two man."

But Fuld also instils in his staff a sense that they have as much responsibility for how the firm runs, especially from a risk perspective, as he does: "I expect everyone at the firm to be a risk manager," says Fuld. As for the roles of those on the executive committee: "All 12 of us are focused on all parts of the business. It's all about risk management. If it's just me, then we're in trouble."

Could Lehman put its success in jeopardy by making a sizeable acquisition? It's possible â€" most of the firm's peers have found digesting acquisitions to be much harder than they expected. And Lehman's culture is one that was born and nurtured in an institution of modest size. Now the bank has 20,000 employees, a small fraction of a Citigroup or JPMorgan but a large increase on the 9,100 when the firm went public in 1994. Some 8,000 of today's total have been added since 2002, many as a result of the acquisition of several mortgage origination platforms and Neuberger Berman.