Lehman’s Bad Karma

September 15th, 2008 by Phil Mattera

The downfall of Lehman Brothers is bad news for its employees and shareholders, but it is difficult to avoid the feeling that, apart from the laws of the market, the law of karma may be at work as well.

After all, Lehman was a firm built on a slave economy. It was founded as a cotton brokerage by a German family that emigrated to Alabama in the 1840s. According to Robert Rosen’s book The Jewish Confederates, partner Mayer Lehman (image) was an active supporter of the Confederacy. In 1864, the governor of Alabama enlisted him in an effort to help Southern prisoners of war being held in the North, describing him in a letter to Jefferson Davis as “a foreigner” but “thoroughly identified with us.” The Lehmans helped rebuild the economy of Alabama after the Civil War.

Some 130 years later, Lehman Brothers got involved in financing what some have called a new form of slavery: private prisons. During the late 1990s Lehman was a key underwriter for securities issued by Corrections Corporation of America, by CCA’s real estate investment trust spinoff, and by some of CCA competitors.

More relevant to the current crisis is the fact that Lehman was a pioneer in the dubious business of packaging subprime loans as collateral for high-yield bonds. It provided major financial backing for First Alliance Corp., a leading practitioner of predatory lending. For this reason, Lehman was targeted by activist groups such as ACORN, and in 2000 the firm was sued by some of First Alliance’s victims. A federal jury in the case later found that Lehman had aided and abetted First Alliance in its scheme to cheat borrowers.

Despite these early signs that securitization of shaky mortgages might have drawbacks, Lehman charged ahead. Not only did it encourage investors to take the plunge, the firm filled its own balance sheet with some $300 billion in mortgage-backed securities. Lehman paved the way for the crisis that is roiling the financial world and became one of its prime victims.

According to a 2004 article in the Wall Street Journal, Lehman CEO Richard Fuld used to tape critiques of his son’s hockey performance while watching games from the bleachers. When the boy played better, he was rewarded with Lehman stock. Assuming he held onto those shares, one can only wonder how the younger Fuld feels now that the fruits of his efforts are virtually worthless. Perhaps a bit like all those people who lost their homes to the predatory lending backed by his father’s firm.

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