Awards for excellence - Best investment bank |
Awards for excellence - Best credit derivatives house
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
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
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
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.