What Were Lehman Officials Really Thinking?

Lehman Bros. CEO Richard Fuld, in a written statement for the House oversight committee, portrays himself as a victim of mortgage-market forces beyond his control. Fuld writes, “What happened to Lehman Bros. [which could have been one of the largest bankruptcies in U.S. history] could have happened to any firm on Wall Street and almost did happen to others.”

Yet, according to yesterday’s Wall Street Journal, Fuld gave investors a confident assessment about Lehman’s financial health during a Sept. 10 conference call — five days before the investment bank sought Chapter 11 bankruptcy protection. That led Rep. Paul Sarbanes (D-Md.) to remark at yesterday’s oversight hearing that Fuld seems to have been either naive or deceptive.

Lehman documents handed over to the committee suggest a little of both.

One undated internal memorandum, written some time in the past six months, amounts to an eight-page, bullet-pointed pep talk describing how Lehman can regain its discipline and focus.

Titled “What Happened & Why,” the memo asks such questions as “Why did we allow ourselves to be exposed?” and is the “business model broken?”

It does provide answers similar to what Fuld said publicly before Lehman filed for bankruptcy protection: that the business model was fine and that crises are a “feature of financial markets.”

Through “intellectual capital” and “drive,” the memo said, Lehman will emerge better than ever through this “Darwinian process.”

The Darwinian process, of course, devoured Lehman. But judging from this memo, it looks as if Fuld was able to convince himself that the investment bank could recover. And, as he testified yesterday, he never sold his company stock.

The consequence of his misplaced confidence may have been the next phase of the now emerging global financial crisis.