Good column in NY Times....

August 26, 2008
Summer Story Lines Have Legs
By ANDREW ROSS SORKIN
It’s that time of year again, the last week of summer on Wall Street. Getting a table at San Pietro is easy; a tee time at Maidstone Club in East Hampton, less so. With the Street virtually empty, except for all those Lehman Brothers executives working the phones in search of a buyer, it’s worth reflecting on the crisis gripping the financial world and trying to peer around the corner to see what will happen when everyone gets back to business after Labor Day.
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When will Lehman Brothers die?
Judging by the headlines, you’d think the troubled investment bank would go belly up any day now. In fact, it probably never will.
Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.
It’s hard to believe that the Fed would let one of its own fail the way Bear Stearns did. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.
Given Mr. Fuld’s access to Fed chief Ben S. Bernanke and Mr. Bernanke’s man on Wall Street, Timothy F. Geithner, Mr. Fuld is in a much better position than his rivals to keep his firm alive. A prediction: Watch the Fed’s discount window for loans to brokerage firms. It won’t close until Mr. Fuld is out of the woods.
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While we’re on the subject of Lehman, there’s a good reason bidders are balking at buying the firm’s Neuberger Berman money management unit.
Any bidder has to pay for Neuberger twice. “You’ve got to pay Lehman, and then you’ve got to pay again to keep the brokers from leaving,” said one banker who has been poking around Lehman on behalf of a bidder.
Unlike some rival asset managers, like BlackRock, for example, which has institutionalized its business, Neuberger Berman is still run as dozens of fiefs. If the buyer doesn’t pay up to keep Neuberger’s talent, the employees — and their clients’ money — will walk out the door.
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One last Lehman-related thought: Last Friday, a spokesman for Korea Development Bank was quoted by Reuters as saying: “We are studying a number of options and are open to all possibilities, which could include [buying] Lehman.” The brackets and the word “buying” were included in the Reuters report.
Lehman’s stock jumped almost 15 percent that day as investors rushed into the stock on the basis of the word in brackets before it settled down to about a 5 percent gain.
The same spokesman told The New York Times and a half dozen other media outlets that he had been misquoted in the Reuters article. “Such reports are erroneous,” he said. Lehman’s stock has since fallen back to where it was before the article was published.
Nuance can often get lost in translation, and who knows what was really supposed to be in those brackets. But the episode illustrates just how fast both good and bad information can move the markets.
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When Wall Street seeks to save money — “every dollar saved is a dollar made,” is the current catchphrase — it often turns to management consultants to help figure out which divisions should stay and which should go.
So McKinsey & Company published a helpful report last week on how investment banks can cut up to $2 billion in noncompensation costs. (We wouldn’t want to cut compensation, would we?)
“Initiatives to curb expenditures need not be extremely demoralizing to frontline employees,” McKinsey says, trying to find ways to save money without affecting the worker bees. So what does it recommend? Getting rid of the consultants. Yep, you read that correctly.
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An addendum to my column last week about Ronald G. Insana, the CNBC anchor turned investor who shut down his fund: A number of readers seemed to miss the point of the column. Mr. Insana was not a bad investment manager, nor is he a dumb guy. He’s actually a very thoughtful investor whose fund was down only 5 percent when the market was down some 15 percent. That’s a pretty good performance — much better, in fact, than some more experienced managers. He took a chance and it didn’t work. Give him a bit of credit.
The point of the column was to illustrate why the economics of starting a small hedge fund are so difficult and so different from the big guys, who get paid no matter what their performance.
The point was made even clearer later in the week when Daniel C. Benton of Andor Capital Management said he was closing his fund. Mr. Benton, a disciple of Arthur J. Samberg at Pequot Capital, had a $6 billion fund in 2002. Now, with a series of redemptions and lousy performance, his fund is worth some $2 billion.
Even so, Mr. Benton, a one-time star technology investor, made tens of millions of dollars because of his 2 percent management fee. There’s a bit more to the story, but Mr. Benton offers the starkest cautionary tale yet.
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A brief forecast on Freddie Mae and Fannie Mac: Treasury Secretary Henry M. Paulson Jr. will nationalize them within the next two weeks, but he won’t wipe out all the stakeholders, even if they deserve to be. The debt holders and the preferred shareholders will make out like bandits. A “moral hazard” will always exist, but the government may end up saving some of the rich to save the poor.
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And finally: If timing is everything, then Amit Chatwani should be happy he isn’t a stock picker.
Mr. Chatwani is the author of a new book called “Damn It Feels Good to Be a Banker.” The subtitle is: “And Other Baller Things You Only Get to Say If You Work on Wall Street.”
Mr. Chatwani’s book is supposed to be a joke — sort of. He writes it as if he is a egomaniacal banker on Wall Street, though in truth, he’s a consultant who wrote a popular blog called Leveraged Sell-Out.
The book is a sometimes hilarious effort to mock Wall Street, back when bonuses were still something to look forward to. Now, the laughs come because of the irony. A sample from the preface: “I’m not writing this book for money; I bonused ten times the advance I got for this my first year out of school.” He then goes on to say, “Dad, thanks for not letting me study liberal arts.”
If you can get over the juvenile humor and some cringe-worthy moments, you can transport yourself back to pre-2007. It might make you smile at the beach this week.