More than three years after Lehman Brothers filed for bankruptcy, the estate of the failed Wall Street firm emerged from Chapter 11 protection on Tuesday as a sliver of its former self, devoted to paying off creditors.
What once was one of Wall Street?s biggest investment banks is now essentially a holding company for assets that include vast real estate holdings and an array of securities like derivatives.
All of those will be sold over time to pay an army of creditors, including hedge funds, money managers and corporations, with claims of more than $300 billion. Lehman said in a statement that its first payout, which could exceed $10 billion, would be made on April 17.
Creditors are expected on average to receive well below 50 cents for each dollar of their claims when the payouts are finished.
Enron met a similar fate after its bankruptcy filing. Its estate emerged from Chapter 11 protection in 2004 as a holding company whose assets have been sold to pay claims. Creditors so far have received nearly $22 billion.
When Lehman filed for bankruptcy on September 15, 2008 ? the biggest Chapter 11 case in history ? the firm set off a chain of events that nearly toppled the worldwide financial system. Short-term debt markets nearly closed for even blue-chip stalwarts like General Electric, and stronger investment banks like Goldman Sachs and Morgan Stanley faced perilous investor desertions.
Governments worldwide were eventually forced to step in with enormous rescue packages for the global financial system.
Under the guidance of the consulting firm Alvarez & Marsal and the law firm Weil, Gotshal & Manges, Lehman has sold many of its assets in bankruptcy. Its core investment banking operation went to Barclays Capital, and its Neuberger Berman money management business has since been spun off.
The estate?s exit from bankruptcy comes after the confirmation of its reorganisation plan in late December ? a hard-fought move preceded by months of negotiating between Lehman officials and the firm?s many creditors. Under the terms of that plan, creditors will receive about $65 billion.
?We are proud to announce Lehman?s exit from Chapter 11 and entrance into the final stage of this process ? distributions to creditors,? John K Suckow, an Alvarez executive who also serves as Lehman?s chief operating officer, said in a statement.
Yet many obstacles remain. Lehman must sell its array of holdings amid an uncertain market for deal-making. And it still has a number of legal battles to resolve, including a fight with JPMorgan Chase, over what Lehman says was a cash call that helped push the firm into Chapter 11.
Lehman is seeking to compel testimony from Timothy F Geithner, the Treasury secretary, and his predecessor, Henry M Paulson Jr, over what they knew about JPMorgan?s collateral demands.
The estate is also fighting with its former partners in Archstone, the apartment giant whose $22-billion takeover in 2007 helped load Lehman with its fatal mountain of debt. Lehman is hoping to take Archstone public instead of letting it be sold to Equity Residential, a company run by the real estate investor Samuel Zell.
Another battle centers on a dispute between Lehman and a Switzerland-based affiliate over intercompany loans and derivatives guarantees. Each side contends that the other owes it more than $14 billion.
A mirror can be a dangerous tool for some CEOs
Call it the curse of the chief executive. Powerful, visionary chiefs can create billion-dollar brands. Steven Jobs at Apple and Mark Zuckerberg at Facebook are often-cited examples. But we?ve recently seen some illustrations in the takeover world of the dark side of the chief executive. Being powerful and visionary, or at least thinking you are, can lead corporate chieftains to great heights, but also to extreme narcissism. And the victims are often shareholders.
The trait is on display in the pending $2.7-billion buyout of the insurer Delphi Financial by Tokio Marine Holdings of Japan. The chief executive of Delphi Financial, Robert Rosenkranz, controls a 49.9% voting interest in the company. Despite restrictions in
Delphi Financial?s charter, Rosenkranz demanded in negotiations that he be paid over $110 million more than other shareholders, a number that a special committee of Delphi Financial?s board negotiated down by about $50 million.
Rosenkranz has also reportedly tried twice to negotiate side deals with Tokio Marine that would deliver him an additional payout of up to $57 million. When the board committee discovered this, it forced Rosenkranz and Tokio Marine to repudiate the deals.
All the parties have been sued by shareholders as a result of Rosenkranz?s conduct.
?The allegations being made against Delphi Financial, its board of directors and Robert Rosenkranz in this suit are entirely baseless,? Delphi Financial said.
Despite its statement, Delphi Financial doesn?t appear to vigourously defend its chief executive in the litigation. Instead, in a legal filing, Delphi states that one of its directors thought that Rosenkranz had a ?competitive? personality and a ?great sense of entitlement?.
Delphi Financial?s litigation documents also tell of Rosenkranz?s response to the board?s attempt to prevent him from obtaining a premium over other shareholders. They describe Rosenkranz as being ?upset?, ?angry? and ?depressed? and as thinking that he had been ?treated harshly? at the negotiations.
In an opinion released on Tuesday, vice chancellor Sam Glasscock III, the judge hearing the litigation, permitted the deal to go forward but stated that the plaintiffs had a reasonable chance of proving in the litigation that while Rosenkranz felt ?morally? entitled to his premium, he was not so permitted under Delaware law. Rosenkranz may want to get some perspective on life. He will still be worth hundreds of millions of dollars. Unfortunately, his attitude is not uncommon among top executives.
Arijit Chatterjee and Donald C Hambrick said in a 2006 paper that narcissism among chief executives encouraged more volatile company performance. In a study of 111 chief executives in the technology industry, the authors found that indicators of narcissism correlated not only with company performance but also with the pursuit of deals.
The study was criticised for overstating the power a chief executive has over a company. But additional research has shown that a top executive?s personality can have powerful effects on how a corporation is operated.
For example, Henrik Cronqvist, Anil K Makhija and Scott E Yonker found that the level of debt for a company was related to how much a chief executive was willing to borrow to buy a house. Matthew Cain and Stephen B McKeon looked at chief executives who had pilot licenses. Flying small planes is viewed as thrill-seeking behavior. Professors Cain and McKeon found that chief executives with pilot licenses were more prone to engage in acquisitions, with the theory that takeovers are risky, yet exciting ventures.
These effects are exemplified when a company is sold. Narcissistic chief executives are apt to argue that they should be excessively compensated, even if it comes at the expense of shareholders, because the company would not have succeeded without their efforts. That attitude can found in the $21.1-billion buyout of the El Paso Corporation by Kinder Morgan.
The chief executive of El Paso, Douglas L Foshee, appeared to insist on negotiating the sale personally, and was criticised by a Delaware court for folding quickly when Kinder Morgan lowered the price it was willing to pay in
a buyout. The court speculated that this was because Foshee was more interested in buying the exploration and production business of El Paso after Kinder Morgan completed its buyout.
Narcissistic CEOs can?t let go because they believe that the success of their businesses is dependent on them. They also are incapable of believing that they are wrong.
This trait is also on display in a management buyout proposed late last month in which Kenneth Cole offered to take his fashion company private. Cole cited the challenges of working in the ?public markets? as a reason for a buyout, but it appears that Cole also wanted to be free of the criticism of the company?s lacklustre performance in recent years.
To be sure, a narcissistic personality can serve companies well. It can instill an almost cultlike loyalty. The self-belief of the CEOs can lead them to take gambles that would cause others to hesitate. Again, Apple is a terrific example of narcissism?s positive side. Lately, however, the courts have struck a blow against this narcissism, calling out chief executives? misconduct in takeovers. A Delaware court severely criticised Foshee last week for his conduct, calling El Paso?s sale process ?disturbing?. Late last year, Millard S Drexler, the chief executive of J Crew, was chastised by the same court for the ?icky? steps he took in the retailer?s buyout to benefit himself at the expense of other shareholders.
It can?t be just the courts that put pressure on chief executives. Boards also need to act. We now have a back-of-the-envelope test courtesy of Rosenkranz of Delphi Financial. When a chief executive complains he is ?depressed? because he can?t get everything he wants, we?ll know the board is at least trying to negotiate properly.
Narcissism is not just an issue in takeovers. One of the reasons for spiraling salaries is this type of behaviour. Some chief executives can?t believe that they could be paid anything less than their peers.
This behaviour is a hard to control, but perhaps acknowledging the problem openly is the first step. Corporate chieftains of America, it is not all about you.