Karl, meet Dick. It's a little strange, this meeting, but these are extraordinary times. Over the last few months, Lehman Brothers chief Dick Fuld, one can safely say, experienced that profound vertigo best described by Karl -- that is, Karl Marx: "All that is solid melts into air." Marx was describing the powerful dynamic of an ascendant industrial capitalism with that phrase, touching on an aspect of capitalism that Joseph Schumpeter even more admiringly called "creative destruction." Both men were trying to capture the potential of unleashed markets for relentless, disorienting change, for sweeping away the old and creating the new. Lehman is a 158-year-old firm, with a history rich in powerful personages. Fuld worked his entire career there, right through the era of its Babylonian captivity at American Express. He (with Blackstone's J. Tomilson Hill, who is often left out of this tale of exile and return) reclaimed the name. The firm has -- or had -- some 26,000 employees, billions in capital. Fuld and many of his colleagues are, by any measure, wealthy. They were global actors, buying, selling, trading at the highest levels. And then, like those images of the World Trade towers collapsing in upon themselves, the floor dropped and the walls melted.
Marx was aware that for individuals on the wrong side of history the
world could be a vale of tears. Fuld may not have spent a lot of time
pondering the losers in the endless zero-sum financial game. On Wall
Street, you play and move on. But there is an irony in both the falls
of Jimmy Cayne and Fuld that has nothing to do with personalities,
fault-finding or morality: Both were traders who shoud have known how
quickly hard truths and hard assets can melt away; how relativistic
markets can be. As Fuld defended his business, his capital base and
liquidity reserves, he had to know what his critics, particularly the
shorts, saw. It could all evaporate. There were no numbers carved on
stone tablets. The losses, the capital, the liquidity, most tortuously,
the share price were fluid. Accounting was a guess. Marks danced. One
thing led to another. All that is solid melts into air.
Fuld was at the center of the storm, but his world is our world.
Even as late as a few weeks ago, you could legitimately look at the
situation in two radically different ways. First, you could insist that
while institutions like Fannie Mae, Freddie Mac, Lehman, Merrill Lynch,
AIG had serious problems, they were still
decently capitalized, particularly based on past practices. Their woes
stemmed from unhinged markets, spooked by rumor-mongering short
sellers, rivals and cable talkers. Recovery, a return to rationality,
was imminent; and their value would re-emerge. Second, the whole damn
lot of them, Lehman included, were undercapitalized relative to "real"
future losses, and the erosion of their shares reflected that they were
barely solvent based on current conditions. Mistakes had been made,
malefactors must be punished. Value had turned to smoke.
Today, of course, Fannie and Freddie repose in the bosom of Treasury, Merrill at Bank of America, AIG at
the Fed, Lehman in bankruptcy court and at Barclays. It's a little hard
to argue that shorts, who have seen their predictions confirmed
repeatedly, were either wrong or necessarily corrupt. True, spin can be
self-fulfilling, a lesson politics has taught us well; and
reductionists among us will blame it all on shorts no matter the
evidence. But, for all the elusive "facts" and numbers, there is a
reality lurking out there deeper than any spin: trillions of dollars in
rotting mortgages. Share prices, bond rates, swap spreads are all
abstractions that reflect, sometimes dimly, that reality. Whether we
fully realize it or not, we make a pact with "reality" to keep us sane:
We acknowledge that value, whether it's a share price, a poll number or
a reputation, fluctuates, sometimes with great volatility. But our
expectation is that given enough time, enough commentary, reportage,
information, analysis, hard thinking, truth will emerge. Good
information will drive out bad. Skepticism will banish lies, spin,
smears, inanities. Misguided shorts will be driven to the wall. Stock
prices will reach equilibrium. The crowd, after its drunken walk
beneath the street lamp, will speak wisely.
But what's rarely discussed after this fairy tale is how long that
emergence will take and what damage will ensue. Will we survive the
process of the market making up its wayward mind? Survival is nearly
the entire game. That's because markets, history and Karl Marx judge by
the same standard: Survivors write the tale. For years, Fuld -- tough,
ruthless, shrewd, politically adept -- was a survivor par excellence.
Now he knows what Karl knew, and he's hardly alone: All that is solid
melts into air.