In case you think Lehman management aren't aligned with shareholders. Friday, September 12, 2008
In case you think Lehman staff aren't personally affected by the crisis facing their company, outside of fearing for their jobs, think again - the executives and rank-and-file at Lehman collectively own about 25% of the company.
According the Wall Street Journal, Lehman CEO Dick Fuld owns 10.9 million shares, or approx 1.4% of the company. The current value of those shares is approx $46 million, which equates to a paper loss of $649.2 million [93% fall] since 31st Jan 2008.
Other senior executives hit include their Chief Legal Officer [1.5 million shares]; Chief Risk Officer [259,791 shares]; and CFO [248,056 shares].
So, despite having followed the best practice notion of aligning managers and shareholder interests which theoretically would curb excessive risk taking, it appears that Lehman will fail to avoid a dramatic end to the business. Whilst it could remain intact were it to be rescued at the last minute by an overseas white knight, this seems unlikely given
a) the lack of time to conduct any due diligence given the urgent need to find a buyer and inject new capital into the business; and
b) the probable absence of any US Govt financial support for an overseas buyer, unlike that provided to JP Morgan in buying JP Morgan.
A possible solution to raise capital might come in the form a hastily arranged sale of Lehman's asset management business, but this may not be enough to provide permanent respite from the troubles it faces.
Instead, the most likely outcome seems to be a carve up amongst other banks, in which case employees will be hit with the trebble whammy of a massive drop in their personal wealth; unemployment at a time when job opportunities are almost non-existent; and missing out on a bonus which would ordinarily form a sizeable proportion of the compensation.
Whilst you may have little sympathy for Lehman staff given the past years of plenty enjoyed by folks in this sector and believe they brought it on themselves given past excesses, remember that the World economy benefited from good years recently in part due to cheap and abundant credit. Moreover, if you live in the UK, financial services accounts for 20% of UK GDP, which means a severe decline in the sector will also have a considerable impact on tax revenues that are desperately needed by the Government to spend on universal services like health care and social security.