Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

Not surprisingly, most entities of this supercore are banks. Financial institutions dominate the top ten, with Barclays occupying first place, closely followed by AXA, State Street, JPMorgan, Vanguard, UBS, and Merrill Lynch.32 This structure epitomizes the interlocking relationships between institutions and, therefore, the people who preside over them. Frequently, individuals are directly linked through board seats at different companies, a fact that creates information flows, aligned interests, and opportunities.33 These network dynamics tend to promote corporatism, where major interest groups have great influence on the state.

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In this chapter, we have seen that the revolving door, lobbying, and campaign contributions weave a tight and powerful web of interpersonal relationships between the financial sector and the political establishment. Personal linkages skew the system in the superhubs’ favor, and while conflicts of interest can pose dangers, solid relationships can preserve the system in times of crisis. But what happens to those precious relationships during personal crises? How resilient are those networks if a superhub violates legal, ethical, and societal rules? Chapter 11 will explore superhubs who lose their links to the system and whether or not they can recover them.

CHAPTER 11

De-Linked

Expulsion and Comeback

BEING A SUPERHUB IS NO GUARANTEE for a privileged and everlasting network status. However, considering the multitude of links to other hubs, complete expulsion from the network is rare. Even after the abysmal crisis—which many financiers had a hand in causing—very few top financial executives disappeared from the map. One who suffered a total fall from grace, to a large extent due to his failure to maintain a resilient network of personal relationships, was Dick Fuld, the former CEO of Lehman Brothers. Most other top executives have found new positions either in the financial industry, related industries, or even entirely different fields. Their strong connections form a safety net that prevents them from irrevocably falling through the cracks. However, for those who violate the law, commit a serious betrayal of trust, or demonstrate a fundamental lack of integrity, a return is certainly much harder.

SENT INTO EXILE: DICK FULD

Having vast power over resources and people can be addictive and lead to distorted perception and irrationality. Overconfidence, intolerance of dissent, and excessive risk taking are often the result. One example is Lehman Brothers’ Dick Fuld, whose hubris catalyzed the demise of a storied institution and his expulsion from the financial network.

Fuld began his career as a bond trader at Lehman Brothers, which was founded in 1850 and in 2008 was the fourth-largest investment bank in the U.S. He steadily rose through the ranks during the rough-and-tumble heydays of banking. At heart he remained a trader, which was perhaps why he never quite fit in with the more genteel bankers. Fuld embodied the testosterone-driven macho culture of Wall Street. Of imposing stature, he wore a perennial grim expression on his face. His intimidating glare left others in a state of constant fear, and people around him walked on eggshells, careful not to trigger any of his infamous outbursts.

Fond of military lingo, Fuld liked exaggeratedly brutal formulations. He once told John Thain of Goldman Sachs, whom he suspected of spreading rumors about Lehman, that when he discovered the culprit, he would reach down his throat and tear out his heart. Accordingly, he employed a martial management style: He expected obedience, did not tolerate opposition, and obliterated disloyal employees. Other executives quickly figured out that life was much easier if they did not challenge him. In line with this personality cult, they fittingly referred to Fuld as “King Richard” and “the Gorilla.” In Lehman’s alpha male universe, female executives were virtually nonexistent. Fuld not only neglected to build a network of goodwill within his organization but also failed to build strong relationships with his Wall Street peers and other strategically important executives. Never really a relationship person, he focused on the one and only area that directly affected his bottom line: clients and transactions.

The inefficient information flow resulting from the lack of a healthy network contributed significantly to Lehman’s implosion. Unlike Robert Rubin or Hank Paulson, who were famous for relentlessly working their phones, Fuld preferred to isolate himself. He outsourced operational duties to a trusted executive, Joe Gregory, and also physically distanced himself from his subordinates in his palatial offices on the thirty-second floor, preferring to rather not mingle much with the rest of the bank. Because he failed to keep a finger on the pulse of Wall Street and Washington, he completely misjudged the mood of the markets. Instead of following up on red flags, Fuld motivated his troops with empty phrases about Lehman’s unbeatable strength until the bitter end. Lehman was leveraged to the hilt with an extremely high exposure to subprime assets, and when trouble came, it needed a loyal network it did not have.

On September 10, 2008, Lehman announced a $3.9 billion loss for the third quarter, the worst result in its history. President Bush later wrote that there was no way the firm could survive the weekend and that the best solution was for the government to help find a buyer in the two days that remained. Fuld’s liaison to the government was treasury secretary Hank Paulson. Fuld had always harbored resentment toward Goldman, which he had revealed at a private dinner with Paulson in the spring of 2008. As a Goldmanite who was highly trained in EQ, Paulson found Fuld to be arrogant with few redeeming qualities. Unfortunately for Fuld, Paulson was now in charge of the rescue. It is highly likely that the brittle relationship helped tip the scales against Lehman.

To his credit, Paulson did try hard to help find buyers for Lehman. Two possibilities circulated: Bank of America and Barclays. However, London regulators rejected Barclays’s purchase of Lehman as a whole, and Bank of America decided to buy Merrill Lynch instead. Lehman was out of options. Fuld begged regulators to convert his investment bank to a bank holding company, in order to obtain access to federal funding. But, as the New York Times reported, Geithner turned him down and President Bush refused to take his call.1 The view in Washington was that Fuld had brought the troubles upon himself and overplayed his hand. Lehman filed for bankruptcy on September 15, 2008.

In contrast, when AIG got into trouble, the government bailed it out with record amounts of money. Treasury secretaries Paulson and Geithner had Goldman CEO Lloyd Blankfein on speed dial, who was more than willing to act as their eyes and ears on Wall Street. Within a year, they spoke dozens of times, mostly during the AIG incident. Both parties had reason to worry: AIG had written billions in credit default swaps for Goldman, and if AIG folded, Goldman would incur a huge loss. Paulson and Geithner feared that billions more were at risk at other firms who were counterparties of AIG, which would likely render them insolvent and wreak havoc on Wall Street. Following their discussions, the New York Fed authorized a loan of up to $85 billion to AIG in return for a 79.9 percent equity interest. In total, the AIG subsidies amounted to $182 billion, of which Goldman Sachs as an AIG counterparty received $12.9 billion.

Following Lehman’s collapse, Fuld stayed out of the public eye. He spent most of his time on his multimillion-dollar estate in Sun Valley, Idaho, which he put on the market with an asking price of $59.5 million. It was sold at auction in 2015 for a “record breaking” price of at least $20 million.2 Not much is known about his firm, Matrix Advisors, and, now a pariah, he is seen only rarely at social occasions. In mid-2015, he reemerged for the first time to speak at a conference. Largely unrepentant, he placed most of the blame for the crisis and Lehman’s failure on the U.S. government.