Vicky Ward, author of the upcoming Devils Casino: Friendship, Betrayal, and the High Stakes Games Inside Lehman Brothers, has a devastating follow-up to the accounting shenanigans at Lehman Brothers. In her telling, this was just part of the basic culture of Dick Fuld and his crew.
From the Daily Beast:
Back in the 1970s when Lehman was run by white-shoe bankers, the traders in the commercial paper unit, Lehman Commercial Paper Inc (LCPI) used to hide their volatility from the partners. The traders used to put up their positions on five-by-seven inch cards on a wall so that everyone could see what had been bought and sold. The colour of the ink indicated which type of security it was…but according to a senior person at LCPI, if the traders heard that Arthur Schulte, Lehman’s partner responsible for trading, was on his way over from 1 William Street (Lehman’s headquarters) to 9 Mill Lane (then the headquarters of LCPI), the cards were quickly pulled off the board. There were limits to the total value of their positions and at midday those positions might be higher. Essentially, they were hiding their volatility, how much risk they were taking on a daily basis.
As soon as Schulte left, the cards went back up. “It was a game,” says Paul Newmark, Lehman’s former senior vice president and treasurer of LCPI. “It was a game that was ingrained in people…Dick Fuld was very good at it.”
So good at it, that once LCPI was absorbed by American Express Shearson Lehman he allegedly carried on. “Dick’s reserve” was the name for what could also have been called “the Daily Fiction,” which the Lehman traders hid from their bosses, Jim Robinson and Peter A. Cohen. A former managing director says it worked like this:
Every day we would report up to Shearson and American Express our P&L [profits and losses] for the day. We knew that the management upstairs, if they saw the P&L going up and down dramatically — one day we made a lot of money, and the next day we lost a lot of money-they’d know that we were betting a lot of money, and taking a lot of risk. But if our P&L looked like a nice steady EKG kind of thing, then everything was OK. So on the days we made a lot of money, Dick didn’t report all of it, and when we lost a lot of money, he took a little out of that kitty to make that day’s P&L not as bad. We called that kitty (kept on a piece of paper) “Dick’s reserve.”