Thursday, September 18, 2008

From the desk of Dick Fuld, Lehman Brothers CEO

Submitted By Mark McQueen
Dear Mr. Buffett:
First off, I would like to thank you for meeting with me and my Lehman Brothers
team earlier this week. The opportunity to outline our plan to you personally was
the highlight of my professional career. I know that it has been a few years since you had an
office in Manhattan, and we aren’t asking you to take a chair and a desk, but your steady hand at
Salomon Brothers is an example of what all of us on Wall Street are so desperately seeking in
these difficult times.
As I clearly outlined during our meeting, I firmly believe that an investment in Lehman Brothers
by Berkshire Hathaway is a classic opportunity for your great company to, once again, buy a
fabulous global franchise at a very fair price. This isn’t at all like the situation that John
Gutfreund put you in, and I recognize that you are wary given your previous experience. Wall
Street has changed dramatically since 1991, it is far more of a franchise business that relies on
capital than the “people” business that you were once used to. As you mentioned, the $700
million Salomon deal was the single largest commitment of your career at that point; and I take
your point that such sums are now just the bonus pool for the commodity division
But much has changed. Over the past year, our firm’s market capitalization has shrunk by more
than $30 billion (about 75%). All of the shareholder wealth that we’ve created over the past 10
years has been completely erased in a matter of months, and yet our firm has never had brighter
opportunities nor a stronger safety net. This is the investment opportunity that we see for you and
the rest of the Berkshire family. You have the opportunity to invest in the brokerage industry at
prices not seen for a decade.
Our firm is poised to return to greatness, and many of Bear”s clients are coming our way.
Just the other day, a survey of U.S. institutional investors by Greenwich Associates found that
“among the largest players, [Lehman and JP Morgan] scored highest in providing their [fixed
income] clients the best support and understanding during the market turmoil.” This survey,
conducted between February and April, also found that while JPMorgan was found to have
slightly more institutional trading relationships, Lehman Brothers had slightly more market
What this survey will confirm for you is that our trading desk has continued to serve our many
international clients, even when other brokerage firms were pulling back. This bodes well for the
next Bull Market.
I have spoken to both the Treasury Secretary and Chairman Bernanke, and they are prepared to
assure you personally that Lehman will continue to have access to the Fed’s discount window for
many years to come, if so required. As such, our firm cannot fail in the traditional sense. The
federal government’s balance sheet is impregnable. This is an investment circumstance that
rarely presents itself in the lifetime of any investor; even one as successful as your own.
We are very reluctant to raise capital at this juncture. Our recent $6 billion equity raise was
intended to help us weather even the worst storm. I understand that some intermediaries reached
out to you at that time, and that you rightly advised that your modus operandi was not to invest in
a club format. I regret that anyone troubled you with the idea back in May, and recognize that by
passing then, as you said in our meeting, you avoided suffering the 44% drop in our shares since
that deal was announced on June 10th.
Your wisdom is clear. But this time it will be different.
As we discussed, approximately $145 billion of long-term debt is outstanding including current
year maturities of $18.5 billion with $8 billion of commercial paper. We have a plan to deal with
these debt tranches, but recognize that a partnership with you would be a tremendous asset when
we return to the debt markets. My Treasury team advises that we could save in excess of 200
basis points on our medium term paper if Berkshire agreed to be our strategc investor prior to
commencing our current year debt refinancing activities.
The investors who joined our shareholder group in June recognize that much of what has
happened over the past 5 weeks was unforseen. But no one likes losses, paper or otherwise. That
being said, they will be elated if you join their ranks, let me assure you of that. That old saying,
“dilution is your friend”, rings all the more true when the name “Buffett” is involved in the
My partners and I are prepared to consider a $5 billion convertible preferred investment, paying
an 8% annual cash yield, with redemption and retraction rights in, say, 20 years. Our stock
rallied yesterday on the back of the positive news out of Wells Fargo. But, with a sensible
discount to yesterday’s closing price of $16.65, your firm would own approximately 33% of our
Company, at closing. Naturally, we would very much want you to consider joining our Board of
Directors at the earliest opportunity. Other names would be welcome as well.
As we both know, an announcement that Berkshire had agreed to invest capital in our firm would
propel both LEH shares and the broader bank index. If yesterday’s rally is any indication, you
could earn a 25% return in a single day merely on the news of your financial commitment to me
and our franchise.
I appreciate that you have been displeased with the role that you believe Wall Street has directly
played in the credit crisis of the past 12 months. I noted that, during our meeting, you specifically
named Lehman and Bear Stearns as two of the financial institutions that were at the forefront of
the growth in the CDO, CLO, ABS, subprime and credit swap markets.
As you know, the job of an investment bank is to bring to market the products that the market
wants to buy. Although we pride ourselves in our Top 5 ranking in the M&A tables, the fees
generated on advisory assignments pale in comparison to the revenue that flows from the
underwriting side of our industry, whether it be equity, structured products or debt. I took your
point that Wall Street must play a “quality control” role in the process of selling products to our
clients, and I strongly believe that we did our utmost on that front.
We were so convinced that these vehicles were money machines that we bought them for the
accounts of our own captive hedge funds. We put our money where our mouths were.
I understand that you are also dubious about the long term capability of the hedge fund industry
to produce returns that exceed your sense of market norms. I have two points to make on that
Hedge Funds are a key revenue driver on our trading desks, and excellent Prime Brokerage
clients as well. Up to 40% of our daily block trades are done for hedge fund clients. Moreover,
our ability to create our own hedge funds has generated substantial fees from institutional
investors and pension funds around the world. Although the recent SEC push to curtail some of
the more attractive trading strategies of hedge funds such as ours may hamper our ability to beat
the index, the fee streams that our funds generate are extremely valuable. Particularly at times,
such as now, when the underwriting and advisory revenues are weaker than we would like.
However, if you would like a commitment from me to exit the hedge fund business, I will
certainly recommend such action to the Board should you agree to our investment proposal.
Although I am the leader at Lehman, I am always open to well-reasoned perspectives.
In summary, let me again thank you for agreeing to meet with us. I believe that you’ve been
presented with a unique investment opportunity, and one that is sure to be successful. Your
hallmark is to invest in top notch management teams, and I humbly submit that we’ve
demonstrated that we can navigate difficult waters.
With your financial commitment to our firm, the sailing will be smooth, and the entire U.S.
financial services industry will benefit from the rising tide that would surely follow a
commitment from Berkshire. The positive impact that would have on the economy is clear,
which would directly beenfit the rest of the Berkshire Hathaway portfolio of companies. This is
the way that America can exit the recession that you believe we are experiencing right now.
Thank you, in advance, for your time and consideration. As Senator McCain said himself, and I
passed along to you, “the country needs you”, and we are honoured that you are considering this
Yours Sincerely,
Richard Fuld,
Chairman and CEO
Lehman Brothers Inc.

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