For financial markets, it has again been an extraordinary weekend, one of a series since the vicious credit squeeze began just over a year ago. For when a firm is on the verge of collapse, and this time it is one of the giants of Wall Street, Lehman Brothers, the heavy work of trying to devise a rescue scheme is often compressed into the 48 hours that elapse from a Friday evening until a Sunday night. The absolute deadline of having to make an announcement by start of business on Monday produces the necessary pressure.
Lehman Brothers is one of the Big Four investment banking firms in New York. Lehman was founded in 1850. I give this date to show how venerable are the market leaders. Goldman Sachs goes back to 1869, Merrill Lynch began life in 1914 and Morgan Stanley was spun out of the J P Morgan banking business in 1935. In London, only Rothschild's has such a long history as an independent business.
If Lehman Brothers disappears, it will leave Goldman Sachs as the sole inheritor on Wall Street of the great German Jewish banking tradition. The founders of these firms immigrated to the United States in the middle of the 19th century – among them the Loebs, the Guggenheims, the Kahns, the Kuhns, the Schiffs, the Seligmans, the Strauses, the Warburgs and the Lehmans. They brought with them one of the few skills that anti-Jewish regulations in Germany had allowed them to acquire, peddling goods on foot or with a wagon. Henry Lehman started selling groceries, dry goods and utensils to the local cotton farmers in Alabama. The subsequent history of the firm can be quickly told – from dry goods to cotton broking in the South, to cotton broking in New York, to investment banking in New York. Now, 158 years later, Lehman Brothers employs 26,000 people around the world.
In Our Crowd, the story of the "Great Jewish families of New York", Stephen Birmingham tells how one of the original Lehman brothers, Mayer, at the height of a panic on the Cotton Exchange, was seen striding out of his office in silk hat, frock coat and striped trousers, wielding his gold-handled stick, wearing a smile on his face and generating an air of confidence. A young colleague ran up to him and said: "Mr Mayer, aren't you worried?" Mayer replied: "My dear young man, I can see you have no experience of a falling market" and strode on.
That is the very same attitude that Mayer Lehman's present day successor, Richard Fuld, the chairman and chief executive, has been taking. For he has assumed that while the credit crunch was undoubtedly damaging, it wouldn't be fatal. He failed to take avoiding action when he could. Mr Fuld has taken his predecessor's sang froid too far. For at some point, hard to locate, admirable self-confidence becomes foolhardiness and he crossed the line. Thus this 62-year-old former bond trader, who has run the company for 14 years like a close-knit family, albeit with a firm hand, has been slow to acknowledge the firm's losses and has frightened potential investors away by trying to drive his usual hard bargains. As a result, he has had to spend the weekend wondering whether anyone will now rescue his firm at even a derisory price. Barclays Bank pulled out last night. The significance of the discussions goes well beyond the fate of Lehman Brothers itself. For the Federal Reserve Bank and the US Treasury have been trying to bring about a solution to Lehman's difficulties which doesn't involve the government providing financial help as it did on previous occasions. Thus the Fed and the Treasury have been urging Lehman's rivals to provide it with the temporary financial support it needs without government backing, and to do this for the good of the financial system itself.
And this message, that the government has done enough and that henceforth banks must themselves clean up the mess they have created, is akin to the statement that the Governor of the Bank of England, Mervyn King, made on Thursday. Mr King said Britain's stricken mortgage lenders shouldn't rely on the Bank of England to support them through the credit crisis. He also warned the Government against guaranteeing mortgages.
This morning, bankers in New York and London have woken up wondering whether they are on their own now. The pernicious idea that their firms are too important to be allowed to fail is fast becoming another myth. The worst financial crisis since the 1930s is like Hurricane Ike. There is nothing you can safely cling to while the storm rages.Reuse content