Corporate Governance Role in Meltdown

By Eric Jackson, Senior Contributor

02/17/10 - 06:00 AM EST

Stock quotes in this article: TYC

What role did board governance play in the financial meltdown of 2008? According to John Gillespie and David Zweig, co-authors of a new book called "Money for Nothing," it was a major one.

Gillespie, a former Lehman banker, a co-founder of Salon.com, maintain that boards were asleep at the switch or simply failed to act to protect some of our largest companies to fail or inadequately protect themselves. Some 57 million American households own stock in public companies. Their interests are supposed to be protected by boards. Instead, their holdings plummeted in value, and then, as taxpayers, they were forced to bail out many of these same companies. I spoke to the authors last week, and excerpts of the interview follow.

TheStreet: What do you think of Mary Schapiro's performance as head of the SEC?

Gillespie: The expectations for her were really low. I've been pleasantly surprised. She's increased disclosure requirements, beefed up enforcement and instituted an Investor Accountability Office. She's also throwing out non-broker votes counting in favor of a vote for management starting this proxy season.

Zwieg: I've been disappointed in her delaying a decision about giving investors a right to nominate directors to boards (the proxy access rule). The longer she waits, the more investors' money is being used by companies' management and lawyers to fight shareholders' interests on this rule.

TheStreet: How do you beef up enforcement at the SEC?

Gillespie: It's really tough. A career person at the SEC makes 180K in annual salary but they have to be as good as the top person at Wachtell.

Zweig: Who else is going to do enforcement if not the SEC? The ratings firms? Accounting firms? I don't think so. We'd like to see a small transaction tax on all stock trades go toward beefing up of SEC enforcement.

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

Sphere: Related Content

How to Fix Corporate Boards

From TheStreet.com

By Eric Jackson

02/24/09 - 12:01 AM EST

C , BAC , GE (Cramer's Pick) , HD

A couple of weeks ago, I co-authored an op-ed on Forbes.com about the problem of bad corporate boards in America.

In it, Sydney Finkelstein and I laid the primary blame for the wheels coming off our economy in the past year at the feet of our corporate boards. There is no question that others, like politicians, CEOs, banks and consumers all had a hand in this mess.

We don't absolve anyone of their justifiable blame. But ultimately, it was the corporate boards of Citigroup(C Quote - Cramer on C - Stock Picks) , Lehman Brothers, Bank of America(BAC Quote - Cramer on BAC - Stock Picks) and others who gave the green light for excessive risk-taking based on assumptions that housing prices would always rise.

Boards are usually an afterthought for most in the media and public. When asked to explain the problems of the past year, there has been a lot of focus on CEO pay and "Wall Street greed." Most people view boards as nothing more than "window dressing" for a company. They are seen as a group of mostly retired execs, bankers, lawyers and accountants who get together once a quarter and rubber-stamp the desired corporate actions of the CEO.

It's certainly true that these groups have been too friendly over the years in allowing CEOs to run businesses as they saw fit. Quite often, directors feel beholden to the CEOs who appoint them and are well paid for serving as a director, so they do not push back on issues when the CEO is a firm believer. Of course, there's also always a friendly consultant that a CEO can trot out to give some third-party support for whatever the initiative is.

Yet it doesn't have to be this way. Boards are responsible at every company for hiring and firing the CEO. They are also the only interface the shareholders have with the running of a business. Every year (except in the case of staggered boards), shareholders have the ability to vote "for" or "against" each director being re-elected to the job. Sadly, many shareholders don't even bother to vote during these elections. For those who do, they overwhelmingly support the incumbent board, as re-election percentages are usually on the order of 90% to 95%.

If shareholders truly were to become engaged with the voting process, the result would be a much more responsive board of directors on their toes to represent their constituents and not just be in the back pocket of the CEO who appointed them.

Tougher questions would be asked at board meetings, and potential excessive risk-taking would be challenged earlier on. If only boards had been doing their jobs over the last six years instead of cheerleading and rubber-stamping, our economy wouldn't be facing such dire circumstances.
Sarbanes-Oxley Not the Answer

After the last bubble, when formerly billion dollar entities such as Enron, World Com, and Adelphi were shown to be shams, the U.S. government swooped in to improve corporate governance and overall financial and operational fiduciary oversight. The result was the Sarbanes-Oxley law, which required CEOs and CFOs to personally attest to the veracity of financial statements, prevented auditors from also consulting with businesses and supposedly improved the quality of boards of directors.

To have better boards, SarbOx suggested that the roles of chairman and CEO be split, that there be more "independent" directors on every board, and that boards avoid becoming too large so that meetings resembled something more like a United Nations get-together. Of course, none of those changes, even if they were followed (which wasn't required), seemingly did anything to make Lehman's board any better.

Let's consider the Lehman board in detail. About half of the 11-member board had an average age of 77. Seven of the 11 had been on the Lehman board an average of 15 years -- not exactly fresh eyes. Nine of the 11 directors were effectively retired -- many for several years. One director (Roger Berlind) was a former Broadway producer. Another director (Marsha Johnson Evans) was the former head of the American Red Cross and, before that, Girl Scouts of the USA.

There are many types of backgrounds, tenures and ages that make for an effective director. Yet, in looking at this makeup of the Lehman board, you have to ask yourself: Were these people who were going to (or even had the knowledge and experience to) challenge Dick Fuld about the firm's aggressive risk-taking and scenario-planning in the event of a major housing slowdown?

Of course, CEOs, pro-business leaders and their lobbying groups, such as the Business Roundtable and Conference Board, have complained that SarbOx did nothing to stop the breakdown of 2008. Just last week, Ken Langone, supreme capitalist and compensation committee member of the NYSE for Grasso, Home Depot(HD Quote - Cramer on HD - Stock Picks) for Nardelli, and GE(GE Quote - Cramer on GE - Stock Picks) for Welch, made the case on CNBC that the breakdown proved that CEOs should be less fettered by legislation like SarbOx rather than more.

I would agree with critics that SarbOx and other laws that seek to improve the quality of boards and board governance are ineffective. If you switch over a board so that it is 100% independent, how is it going to be knowledgeable enough about the business to challenge the CEO? So, if things like SarbOx aren't the answer, what is a solution for better boards?

The Solution for Better Boards

There are two ways to improve the quality of boards in corporate America today. The first is self-improvement: Boards need to fix themselves. The Securities and Exchange Commission or members of Congress can't be a fly on the wall to all boards to tell them whether they are debating issues enough. Therefore, boards must do it themselves. The massive value destruction in real capital and reputational capital that we've witnessed in the last year in firms like Citi, Bank of America and Lehman should send shivers up the spine of every public company director.

We hope that this spurs them to action and to seek out advice from other directors or consultants who have seen these changes successfully put in practice.

It would be nice if boards actually did take it on themselves to improve the quality of their governance. However, I am cynical enough not to expect that Vikram Pandit and Ken Lewis are putting such an effort at the top of their corporate to-do list. This brings us to a second solution, which does have some teeth to it.

The second solution is called "proxy access." The SEC has kicked the can on doing something on this for mor than a decade now. After 2008, there's no excuse for Mary Schapiro not moving ahead on it now.

Today, if any public company shareholder wants to nominate any one or more candidates to be elected by all shareholders to a company's board of directors, that shareholder must foot the bill and jump over an extraordinary number of hurdles to do so. The out-of-pocket costs are at minimum a million dollars (for lawyers, mailing, and proxy solicitors). They must run against an incumbent board's campaign paid for entirely by shareholders.

"Proxy access" would allow shareholders, if they were able to demonstrate that they held shares in a company for a certain period of time, to nominate one or more individuals to be elected to the board on the company's own proxy (so the challengers wouldn't have to pay the freight costs of mailing out the proxies). If the challengers make their case on why they should get a seat at the table as opposed to an incumbent, they should have a seat at the table. May the best directors -- not only the friends of the CEO -- serve.

Shareholder activist Carl Icahn supports this initiative but wants to limit the right to nominate a director to shareholders holding a 5% stake in the company. That's not a problem for him of course, but it defeats the whole notion of "proxy access," which is that if you hold one share in a company, you have a right to air your views and suggest a legitimate candidate to run.

Opponents of proxy access basically make the case that shareholders aren't smart enough as management to nominate people to serve on the board. They say groups such as the AFL-CIO and Teamsters will "hijack" the process and seek to use it to further their "extremist" views. They also like to criticize shareholders calling for change as not having the "long-term interests" of other shareholders in mind.

Citi was criticized for having an obfuscated corporate structure and lack of corporate strategy years ago. The company responded by saying critics were being short-sighted when the stock was in the $50s. "Let our vision for a financial supermarket play out," they said. They repeated the same thing when the stock was in the $40s, $30s, and $20s. Last Friday, the stock dipped below $2. Are shareholders supposed to still shut up and sit on their hands waiting patiently for the all-seeing and all-knowing Citi managers to dig themselves out of this mess? Of course not.

These criticisms have no merit. Any potential director up for re-election to a board of directors -- incumbent or challenger -- should make his or her case on why they deserve the seat. Shareholders can judge for themselves. Large shareholders like Capital Research, Legg Mason(LM Quote - Cramer on LM - Stock Picks) and Vanguard regularly spend a lot of time and effort studying how to vote. Other large shareholders aren't as fastidious, but hopefully that will improve over time. Shareholders can tell if a potential director is a crackpot, an extremist or simply a pawn of the CEO who will do nothing more than rubber-stamp decisions.

When the SEC allows "proxy access," my prediction is that it won't result in a huge number of shareholders rushing to use the power they've been given. Inevitably, some will, and they'll be successful. These few litmus-case examples will do more for improving corporate governance in America than any SarbOx-like legislation could.

There are other changes the SEC could make to improve corporate governance. For example, any director on a board for a company that goes bankrupt or sees its stock price drop by more than 90% in 12 months (like the aforementioned Lehman directors) should have to resign any other corporate boards he/she sits on and not be able to take any future directorships on a public company for the next 10 years.

The risk of being fired by shareholders through proxy access will always be in the back of the minds of corporate directors. This will indirectly lead to incumbent directors asking tougher questions and better corporate governance. And that will benefit all shareholders in the long-term.

At the time of publication, Jackson had no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

Interview: Why Good CEOs Make Bad Moves

From TheStreet.com

By Eric Jackson

01/27/09 - 05:04 PM EST

YHOO , BAC

Sydney Finkelstein is the Steven Roth Professor of Management at the Tuck School at Dartmouth College. He authored the 2004 No. 1 business best-seller, Why Smart Executives Fail, based on extensive research on what causes successful companies run by smart executives to suddenly drive off a cliff in terms of performance.

The book is as relevant today as it was in the post-Enron world of Sarbanes-Oxley. Indeed, it seems we haven't learned much from that period and have set ourselves up for the current -- even more serious -- economic decline.

I've known Syd for 12 years and worked on consulting projects with him. There are few people in Corporate America today who understand what drives CEOs and Directors as well as Syd.

He's about to release his new book, which he co-authored, called Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. It's published by Harvard Business Press and is coming out next month.

I caught up with him earlier this week to discuss the current market environment, what caused it and what we can learn from it. The following is a transcript of our discussion.

(Note: I will also be writing an upcoming RealMoney article, where Syd discusses specific investment recommendations based on his research.)

Jackson: As someone who teaches and consults with CEOs and Boards, what surprises you most about what we've lived through in the last 12 months?

Finkelstein: There are three things that stand out to me. Number one: Why are there no people protesting in the streets? I find it hard to believe that people are so passive. We've all been witness to a high-jacking of the economy by many corporate executives and boards in the name of higher profits without adequate risk-protection.

Now, our government is deciding in its wisdom to dole out potentially trillions of dollars in our money -- without clarity on if it will work. The average person is losing his job and half of his 401k. Maybe we don't understand it; maybe it's a generational thing. We should be more upset and demanding more accountability.

We did a panel discussion recently at Tuck. There was an economist talking about the bailout and why TARP made sense. There was an investment person talking about potential return on investment for taxpayers with TARP. I talked about everyday people's reactions to what was going on. The bonuses which are considered Standard Operation Procedure on Wall Street are so far removed from the man-on-the-street. There was a major disconnect that still exists and needs to be bridged.

As a professor, I've given a lot of talks in my career, but I can tell you I've never had such a strong reaction as to that talk. Staff people, students, regular people from Hanover [New Hampshire] all came up to me afterwards. It touched a nerve with them. There are real people struggling out there now and just can't relate to the fantasy world of expected bonuses and $87,000 area rugs.

The second thing that strikes me about what's going on: Where are the shareholder activists? It's been astonishing to me to watch the growth of these activists in the last 10 years (including what you were able to do at Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) using the Web). But where is Carl Icahn now?

The sad part of the activists' success in the past few years is that our Boards of Directors are so inept that we have to rely on outsiders to correct the problems which should be solved by management and boards within their own companies.

The third thing I notice is how little the so-called experts know about what we're living through. This is concerning for someone proud of America and our economy. Nobody really knows if TARP is the right answer, or how to make banks lend, or whether we should buy up toxic assets. As you can guess, I meet a lot of smart people from business, academia and government at Dartmouth and I can tell you that nobody knows what will work. And yet we're betting hundreds of billions of dollars on this.

Jackson: Well, who's to blame? Is one group more to blame more than another.

Finkelstein: Look, none of us is innocent. From people wanting to buy a bigger house than they could afford, to mortgage brokers, to the press, regulators, and even business schools. We've all got our fingerprints on this.

But is one group more deserving of blame? Yes, the corporate boards ultimately let these companies get in way over there heads on their watch. This wasn't malfeasance. It wasn't illegal. It's just that they didn't provide any oversight. They're supposed to ask questions and not just go along. They decided it was o.k. to accept high risk and high leverage.

I don't mean CEOs get a pass for driving their businesses for big bonuses. However, our system of governance is most to blame.

Jackson: Why do smart leaders make bad decisions?

Finkelstein: The way people actually make decisions is not at all how textbooks say we do and that's what this new book is all about. We don't identify a set of alternatives and weigh them with a best expected value in their head.

Jackson: We're not "rational economic beings" like economists argue?

Finkelstein: No, and we've known that for some time now. The data just do not support that view. We have evolved to make very quick decisions to get along in life. We generally make one plan at a time at the moment. We then run with that solution.

Jackson: Sounds like TARP.

Finkelstein: It's exactly like how TARP was developed. The role of emotions is paramount to making decisions. We have emotional tags tied to each decision we make. Some tags are stronger than others. Our brain remembers the tags that are most positively or negatively charged. We look at these tags with the most emotion when making current decisions and it shapes the choices we make. All this operates at the subconscious level. These processes have been developed by our brain over time and are very useful -- most of the time.

Problems occur when we start to face situations in our current environment which don't match situations we've faced in the past. We need to be conscious of our decision-making process and not succumb to past emotional choices.

There are four red flags we talk about in the book to be on the watch for in real-time, when facing new types of problems: (1) misleading experiences when we think we've encountered a similar situation in the past but misjudge its similarities to the current situation, (2) inappropriate attachments when we are making decisions about a group or people with whom we have past ties, (3) misleading pre-judgments when our past decisions color current decisions, and (4) inappropriate self-interests when we have different personal interests than the stakeholders we represent.

Jackson: Do these red flags apply to Dick Fuld [former CEO] of Lehman Brothers?

Finkelstein: Sure. With Dick Fuld, the biggest thing he did that ended up hurting Lehman was believing he could fix the mess instead of selling the company sooner. No suitors were willing to take a chance. He'd driven down his negotiating power. John Thain [former CEO of Merrill Lynch (acquired by Bank of America (BAC Quote - Cramer on BAC - Stock Picks)] -- leaving aside his interior decorating decisions -- saw the writing on the wall sooner and sold Merrill at a premium when he could.

Fuld also fell prey to misleading experiences. During the Long-Term Capital Management (LTCM) crisis in 1998, there was global uncertainty about what would happen and Lehman and Fuld got themselves through that. He came out looking like a hero. His experience taught him that he could do it again -- and there were lots of people in the press, earlier in 2008, who agreed with him. He was over-confident. He assumed this time was similar to LTCM. But this crisis was far more severe.

Another red flag about Dick Fuld is the attachment story. He was credited with rebuilding the firm when it was spun out of Shearson in the early 90s. He thought of himself as a founder -- as if he was a Lehman. His over-attachment caused him to not want to sell. John Thain had no such attachment. He was looking to sell out at the highest price.

Jackson: Most would say President Obama is smart. He appears to have surrounded himself with talented people. He has enormous goodwill from the American public. What are the biggest lessons he should take from your work in order not to squander the opportunity he has?

Finkelstein: He appears to have the right management style with what we've found works. He delegates with appropriate oversight without micromanaging. That's a real art. He also pays attention to the importance of symbols and customs. A lot of leaders have no clue about just how important it is to pay attention to the symbolic things that people always remember. He also appears to engender real debate without getting bogged down by analysis paralysis. I think his biggest risk is that he listens too much. At end of the day, there's only one leader and he has to decide.

I would also advise him, if he asked me, to never give up the high ground on values -- the fundamental values of what you believe in. He's come to power with a lot of high hopes. Compromise is important and part of the political process, but he's got to stick to some fundamental principals.

Jackson: I was struck by what you said in the book about pattern recognition. Hedge funds have gotten their share of the blame for the current mess. Many funds built quantitative models with bright PhDs in math, computer science and physics to predict the future. When the world changed, their models were found to be worthless and resulted in billions in losses and redemptions. If you were advising a hedge fund picking up the pieces now, how do you do pattern recognition correctly?

Finkelstein: A lot of people in hedge funds attribute their success to their genius -- on the way up. You think they're doing the same now? Arrogance is an incredible warning sign for later tragedy. Every one of their quant models was based on a set of assumptions. You have to understand those assumptions and whether your model is based on limited data.

The world changed. Going forward, they have to build new models and ensure they are monitoring and updating their assumptions as they go in a dynamic fashion instead of remaining static.

Jackson: You point out the risks of an over-confident leader. Shouldn't leaders be self-confident though?

Finkelstein: No one has ever been successful without self-confidence. Of course, you need a balance. It's tough but you need to find it. You have to be confident, willing and able, but you have to stay open to alternative points of views.

But again, boards play a big role in reining in out-sized egos. There are a lot of safeguards you should be aware of that we discuss in the book: avoiding yes men and ensuring a high quality of debate in group discussions. But there's no replacement for good governance. Boards need to be much more assertive.

Jackson: How do you do that? The SEC can't mandate assertive boards?

Finkelstein: You're right. Outsiders can't make it happen. It has to come from the boards themselves who are often self-perpetuating. You and I worked on a tool for boards to use to identify early-warning signs of problems. It wasn't a very successful tool because we found that most boards don't want to hear about the problems they have. No bad news is good news. And there's an army of consultants and search companies to always come around and compliment you.

However, the evidence of the last 12 months is clear: If boards don't do a better job identifying early-warning signs, their companies will fail. I guess that's my hope, that boards become afraid enough so that they'll make the necessary changes themselves. The government cannot regulate good governance. We're talking about quality of decision-making and interaction here. You're not going to be able to put something like that in a Sarbanes-Oxley.

Jackson: How should CEOs and boards safeguard themselves against killing their companies?

Finkelstein: Do you have high-quality debate in your management team or board or are you an "imperial CEO" who has driven away anyone with a different opinion than you? Are you surrounded only by "yes men" or a bunch of weak consultants telling you what you want to hear?

Boards need to be regularly monitoring the strategy of the company against a set of predetermined yardsticks. It should be like a well-run venture-backed company: You don't get your next round of funding until you hit your metrics. Is the board regularly discussing the risks facing the company and are they working on mitigating the risks?

Finally, each director -- no matter how much they like their CEO or other members of the management team -- has to constantly remind themselves that they are the last backstop for shareholders and for other stakeholders. Don't let a stellar career go up in smoke because you didn't ask that extra question. Understand what the company does for customers, and exactly how that translates into profits and shareholder returns. That's one thing that no board member can outsource.

Jackson: Thanks, Syd.

Think Again from Harvard Business Press will be available in February.

Sphere: Related Content

TheStreet.com: The Activist Investor: Lehman's Fuld Under Fire

From TheStreet.com
by Eric Jackson
06/12/08 - 12:59 PM EDT

CFO Erin Callan has been the public face for Lehman Brothers (LEH - Cramer's Take - Stockpickr) over the past six months, trying to convince shareholders that all is well with the smallest of the big investment banks. She failed, and that's why she got sent back to the firm's Investment Banking group this morning and why COO Joseph Gregory got ousted.

CEO Richard Fuld has a sterling reputation on Wall Street, and he has seen trouble before and navigated through it. The Long-Term Capital Management imbroglio from 1998 has been often cited as the last example of Lehman fighting off predictions of its demise. Fuld was there then and is firmly in command now. However, after what he allowed to transpire, particularly between Callan and hedge-fund manager David Einhorn over the past several weeks, he needs to be put under the spotlight now.

It was only in December that investors were congratulating Lehman for side-stepping the credit crunch that had hit their competitors between the eyes. That good fortune vanished when the ball dropped in Times Square to herald in 2008. Lehman has been under fire ever since, because of a number of poor decisions which began to show themselves.

Fuld yielded the spotlight to the CFO, who only took the position last November, and that's been a mistake. You might have thought he was playing bridge with Jimmy Cayne this whole time, based on how little we've seen or heard from him.

For the Icarus-like Callan, her brief CFO stint has seen lavish media praise and now a harsh fall from grace in the most public way. Four months after her promotion to CFO, Portolio magazine called her "Wall Street's most powerful woman". (Zoe Cruz relinquished that title when she left Morgan Stanley (MS - Cramer's Take - Stockpickr) amid large losses from her group last year.) Fellow women execs from the financial world voiced support for Callan. 85 Broads, a Web site for women in the financial industry, declared Callan a "rock star" CEO who is "drop-dead gorgeous with a brain to match."

The public attention that comes with the label of "most powerful woman on Wall Street" is a double-edged sword; ask Cruz or Citi's (C - Cramer's Take - Stockpickr) Sallie Krawcheck, who also was moved out of the CFO post at that firm. The press often praises women on the way up with glossy profiles, only to pounce immediately when trouble comes.

Callan's big undoing in these last six months has been her penchant for bravado-laden predictions, which she has had to continually back-track.

Here's a recap:

Earlier this year, Lehman bought up $2 billion in Alt-A loans (i.e., riskier mortgages). "We saw a great opportunity," said Callan in March. The current quarter has had more than $2.8 billion in losses of these loan types.

In January, she predicted that Lehman's return on equity would average in the mid- to high-teens this year. It's around 9%.

In February, Lehman raised $1.9 billion. Callan said at the time that it "took care of our full year needs." In late March, it raised an additional $4 billion and then another $6 billion earlier this week.

Additionally, for several days in March, many worried that Lehman was the next Bear Stearns, further adding to the market's turmoil. Its stock price plummeted from $45.99 on March 13 to $31.75 on March 17, the day before the release of its first-quarter earnings.

After Lehman exceeded expectations with those results, its stock snapped back 46% and the Callan swagger returned. She walked down to the trading desk following the call and, according to The Wall Street Journal, "high-fived" her colleagues. It seemed as though the storm clouds would pass.

The Einhorn Factor

David Einhorn, founder of the $6 billion Greenlight Capital, became Callan's nemesis.
Einhorn is the anti-Callan. He hasn't been perfect in his calls (being on the board of New Century, which was one of subprime's first big casualties), but he knows how to make money with average annual net returns of 25% since 1996. Einhorn puts substance before style.

Einhorn began questioning Lehman three weeks ago, after Greenlight's analysis showed that the firm had booked an unusually large number of unrealized gains in the first quarter -- 10 times the average from previous quarters -- which marked up equity positions that were not publicly traded.

Activist investing is typically practiced by long-only hedge funds. They use their "ownership" in the company as justification for calling for improvements that will increase shareholder value. Although companies can respond by trying to paint such investors as "short-termists," it's hard to disparage a fellow owner of the company. Activists will typically encourage the company to take actions meant to benefit all stock holders (including management).

With his Lehman investment, Einhorn might have created a template for a new type of activist investor: the activist shorter. Einhorn made his case for why Lehman would drop through a series of speeches and media appearances. With a good argument and his own track record as credibility, people listened.

Shorts are unfairly vilified in the press for not being true owners and for wanting to drive down the stock. Yet, as Einhorn and another prominent shorter, RealMoney.com contributor Doug Kass, have pointed out: Are management, stock analysts or stockholders of a company who talk up a stock not guilty of the same bias that a short has when talking down a stock?

All long and short holders of stock deserve to make money if they can articulate a point of view before the fact and see it borne out. Einhorn simply had a better argument than Callan and the market sided with him. Lehman's stock dropped 16% between the time when Einhorn first made his public remarks on the bank's problems on May 22 and last Friday.

Lehman Shows Its Hand

Callan was forced into damage control. She immediately questioned Einhorn's credibility, reminding investors that he was a short-seller. "Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm's financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain," said Lehman in a statement.

Yet, days later, by its actions, Lehman demonstrated that it was in exactly the position Einhorn said it was. On Monday, Lehman raised $6 billion -- higher than what market observers expected. The stock has dropped another 17% this week and is down 64% year to date.

Said Einhorn succinctly, "They just raised $6 billion that they said they didn't need to cover losses they said they didn't have."

Who was picking cherries?

Market observers didn't necessarily blame Callan for Lehman's poor investment decisions, but she lost all credibility for her serial back-tracking.

Callan still didn't lack confidence in announcing the capital raise on Monday, sold at 20% off the firm's book value. She jawboned, saying: "The discussions at this point aren't about our viability or the fact that we will be here or the fact that we have sufficient liquidity. I think we put that to bed on a number of different levels through our own actions."

Her words simply did not match up to the reality Lehman is facing and that's why she deserved to be removed. She committed the cardinal sin of overpromising and under-delivering -- repeatedly. Einhorn, by contrast, has walked softly and carried big returns for his investors.

Yet, neither Callan nor Gregory is completely responsible for the mess Lehman finds itself in. Where was Dick Fuld?

Why Should Fuld Get a Pass?

It's inconceivable that if such problems were facing Citi or Goldman (GS - Cramer's Take - Stockpickr) that Vikram Pandit or Lloyd Blankfein wouldn't be held to account. Why have analysts, investors and the press given Fuld a pass? Callan alone didn't sign off on those Alt-A loans earlier this year.

Dick Fuld clearly needs to step out of the shadows and demonstrate there is a path forward that Lehman investors can believe in. Most expect that Lehman will have to sell itself in whole or part in the coming months.

Fuld's greatest asset through this mess has been his mystique that he's been here before and can help the firm get through this again. You don't lead through abstention though.

Lehman shareholders need Fuld to step up -- or sell out.

Sphere: Related Content