Lehman’s Head Joker Reshuffles the Deck

Dick Fuld's efforts at self preservation continue to impress me....he still has a job, after all.

But his empire is being hollowed out, and his efforts to win might prove to be a loser, in the end. With everyone hip to his game, and deciding to wait and see, he is trying to force the issue:

Lehman Brothers Holdings Inc. may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.

Investors in the new venture would also manage the holdings, which are linked to commercial real estate, the people said, declining to be identified because the proposal hasn't been made public and no decision has been made about how to proceed. The New York-based firm had about $40 billion in commercial-mortgage assets as of May. Bloomberg

This might be an arm's length transaction in appearances only; somebody needs to keep an eye on Fuld and his machinations. Even his high-powered friends have been silent of late, but chances are he can crash on Mayor Bloomberg's couch in a pinch.

Selling Neuberger & Berman would certainly give him a little breathing room, but the coup plotters at Lehman might want to take him out before he does any more damage. Do they have the balls to do it?

There are many precedents in Palace Coup history, and even academics have weighed in on the economic ramifications of a coup. Of course, Fuld has the keys to the cookie jar, and knows where the bodies are buried....

I claim that threat of palace coup by an inside rival can be used as an effective disciplinary method on the Chief Executive Officer. I set up the moral hazard model with hidden information with respect to the idiosyncratic intrinsic risk associated with the CEO?s investment choice. Then, I analyze the relationship among the investment choice, the role of palace coup, the rent-seeking by the CEO, the optimal CEO compensation scheme, and the changing direction of reservation wage for the CEO position and the second position.

I find that, under information asymmetry about the intrinsic risk of the investment between the board of directors and the CEO, the optimal compensation scheme is to retain a fixed risk-free compensation and a fixed risk-sharing compensation, rather than adjusting them according to the investment variation. With that consistent fixed wage policy, in equilibrium, a reckless investment can be deterred. By widening the gap in the reservation wage between CEO position and second position, board of directors gives a greater incentive to the inside rivals to launch a palace coup. Then, the board of directors can effectively prevent the CEO from rent-seeking with a reckless investment and from bribing rents to the inside rival within the management team. Palace Coup Research Study

Fuld has already fired a number of fall guys in his ongoing efforts at self preservation.

And long story short, he can try to buy off potential coup plotters by dangling a few baubles in front of key employees. But this might not work out so well for shareholders, and are yet another example for a return to the partnership model on the Street.

Given the deleveraging that has taken place, the future of th SellSide might closer resemble Lazard Ltd than Lehman, and with diminished capital requirements, perhaps a return to the partnership model is not so far fetched after all, at least for a few of the fallen titans.

There is a mess to be cleaned up in the months ahead, but I would not put anything past Fuld in the end. He might be able to digest a shrunken Lehman Brothers circa early 2009, and no doubt smells opportunity somewhere.
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Dick Bove discussing on LEH/Fule yesterday on FBN Happy Hour:

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Lehman Said to Weigh Forming New Company to Buy Mortgage Assets
Bloomberg

Palace Coup, Inside Rival, Investment, and the Optimal CEO Compensation Scheme
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