The collapse of two American economic powers will be marked this week. Wednesday was the 12th remembrance of September 11, 2001, the date a small band of determined terrorists destroyed the Twin Towers in New York City. This Sunday marks a different king of anniversary that had an equally devastating effect on the nation.
The fifth anniversary of the official bankruptcy filing date of Lehman Brothers Holdings Inc [LBH] going belly up in the early afternoon on September 15, 2008 is a reminder of an event that triggered the second greatest economic collapse in the last 100 years, next to the Great Depression of the 1930s, that the nation continues to struggle forward on as it tries to climb back from the abyss.
From its humble beginnings in Alabama, in 1844, by a 23-year-old son of a cattle merchant who emigrated to the United States from Bavaria, what started as a dry goods story run by Henry Lehman that ended up Lehman Brothers Holdings, Inc. on its last day of business had grown into a global financial services firm and the fourth-largest investment bank in the U.S. behind Goldman Sachs, Morgan Stanley and Merrill Lynch. LBH lines of business included investment banking, equity and fixed-income sales and trading, research, investment management private equity and private banking. Not too shabby. All bases covered. Sky's the limit.
Central to the collapse of LBH was a strategy to engage in heavily leveraged deals and another one—which a court appointed examiner called ''balance sheet manipulation"—that allowed LBH to transfer securities off its balance sheet so it could then present them as collateral to an outside lender. LBH treated the transactions as sales rather than as debt, which meant the firm looked as if it had less debt than it actually did, according to a New York Times report.
Known as Repo 105, the gimmick was used at the end of its fiscal quarters just before reporting results. At the end of Lehman's first quarter 2008, the NY Times reported, LBH's total Repo 105 use was $49.1 billion, "so big that it reduced Lehman's leverage ratio."
Leverage has become a favorite go-to strategy for another former Lehman worker, Ohio Gov. John R. Kasich, who toiled for LBH for six years before he was elected Governor of Ohio in 2010. His work at LBH became a campaign issue in his race against then incumbent Democratic Ted Strickland, who ended up losing the match to "the Congressman from Wall Street" by just 77,127 votes statewide. In that campaign, Kasich always downplayed his job at LBH, and went from touting what an "awesome" guy LBH top dog Richard Fuld was, when he first got hired to be a rainmaker in Ohio, to turning cool on the same guy he said is the "the kind of guy you want to go into battle with" when LBH tanked in 2008 and Fuld got stuck with the blame for its demise.
Kasich employs leverage time and time again with multi-billion bond programs to fund the state's Third Frontier program and JobsOhio, the governor's pet project, that critics have assailed because it's private and secret and off limits to state statutes that allow citizens to see inside other state organizations through normal public record request channels and state audits.
It's argued by some that Lehman collapsed because it invested borrowed capital into deals that destroyed wealth over the long term while creating short term profits. In the case of LBH, its mistakes were concealed through the so-called Repo 105 fund to keep the bonuses rolling in, even as the firm went bankrupt.
For Gov. Kasich, it hasn't yet become a talking point by his declared but as yet not nominated Democratic challenger Ed FitzGerald. On Monday, FitzGerald, who resides in Cuyahoga County, offered suggestions to Gov. Kasich if he wants the heat on JobsOhio to subside. Public audits, transparency and oversight were among the top calls by FitzGerald to turn the black box that is JobsOhio into a sunlit agency everyone can see into.
From reports on Kasich's time at LBH, it should come as no surprise that his critics call him the ultimate crony capitalist. In an interview with Steve Eder of Reuters News Service in August of 2010, Kasich revealed how in-tune with LBH and its leader, Richard Fuld. In Eder's article, Kasich demurred about his work at LBH that he said was broken down into 80 percent for LBH and the balance for other endeavors, including appearances on Fox TV, speaking engagements and writing books, like his non-fiction inspirational work "Stand For Something: The Battle for America's Soul."
When Democrats in 2010 tried to pit Strickland the Methodist Minister and Appalachian commoner against Kasich the Wall Street Banker as a battle between Main Street and Wall Street, it didn't deliver the punch party officials hoped it would. Kasich learned he could wiggle out of the Wall Street Banker corner by claiming he was but one of 700 managing directors at the firm and had nothing to do with running it.
The job of a rainmaker like Kasich, a former 18-year GOP Congressman from central Ohio who matriculated up Chairman of the House Budget Committee after the Contract for American won his party and its leader Newt Gingrich control of the people's chamber, was to open doors for LBH especially in Ohio. Kasich has maintained his introductions did not amount to any business, but as Eder wrote, "Ohio's public funds still lost hundreds of millions of dollars on Lehman products."
Kasich told Reuters that blaming him for running Lehman into the ground is akin to blaming a gas station owner for the BP oil spill. "It is like there are ghosts or goblins in the closet, but when you open it, there's nothing there," he said at the time
Kasich, then 58-years old, told Reuters he ran a two-man investment banking office in Columbus until after Lehman's bankruptcy on September 15, 2008. The second man in the office was Jai Chabria, a longtime political associate of the governor who continues to work as a top-paid staff adviser.
At the Columbus office, Kasich and Chabria managed a roster of dozens of clients, a list that included venture capitalists in California and steel magnates in the Midwest. Kasich's California venture capitalist may have been Silicon Valley venture capitalist Mark Kvamme, a long time friend and political contributor to Kasich. Kasich tried to appoint Kvamme as his jobs czar but when the Ohio Constitution made that not appear to be an illegal action, Kasich moved Kvamme onto his executive staff payroll. From there Kvamme leapfrogged to JobsOhio, Kasich's private, nonprofit corporation that directs the state’s job-creation efforts. Kvamme then departed JobsOhio last November to pursue "private-sector opportunities that support the economic development and job creation mission he began at JobsOhio."
Maybe it was Kvamme, renowned as an early investor in Google, who helped Kasich help LBH get a small piece of the company's 2004 initial public offering, co-workers said, Eder reported, adding that "Kasich also helped Lehman win a leading role in the IPO for DSW, an Ohio-based shoe-retailer."
Kasich said his strength was that CEOs and boards that he got to know and venture capital firms, trusted him.
The contact who opened the door for Kasich at LBH was Wilber James, the managing general partner of RockPort Capital. James subsequently said Kasich "learned so much at Lehman that it is going to make him one effective governor," Eder reported.
One thing Minor and Kvamme have in common is a long-standing business relationship with Kasich, Business First of Columbus reported. Minor, 42-years of age at the time, worked with Kasich on client accounts when the two were at Lehman Brothers from 2002 to 2008, a Business staff reporter Jeff Bell wrote last October.
Kasich told Bell he approached Minor about working for JobsOhio when he became governor. "I found this to be a good opportunity to come to Ohio, make a difference and have an impact,” Minor told Bell.
Minor, who worked in investment banking for 14 years at LBH, then Barclays Capital and Evercore Partners until joining JobsOhio in 2010, is now President and Chief Investment Officer for JobsOhio.
JobsOhio will play a big role in the campaigns that will be waged between the incumbent Kasich of Columbus and his Democratic Challenger Ed FitzGerald of Cleveland.
FitzGerald, a former FBI special prosecutor who was elected Cuyahoga County's first executive, called on Kasich to show leadership by subjecting JobsOhio to sunshine law requirements, public audits, revamped ethical standards and performance standards to best measure JobsOhio’s success.
At a media event this week in Columbus at Ohio Democratic Party headquarters, FitzGerald said of letting the sun shine on JobsOhio, "I also think that it would create an environment where more businesses would actually be comfortable participating in the process because they don’t think it’s a secretive process where you have to know the right person in order to get consideration."
Kasich denies making other calls for Lehman and has refused to say if he played any role in LBH pitching its risky products to Ohio funds in the firm's waning days. Even when LBH chief financial officer Erin Callan came to Columbus to do pitches, Kasich surgically excised himself from LBH radar, defending himself by saying, "When people came to Ohio, they didn't report to me." He has maintained that none of the introductions he made on behalf of colleagues at Lehman resulted in any business for the firm.
Eder queries Kasich on how much LBH paid him during his six years with the firm. Kasich refuses to discuss how much he made while working for Lehman, but released information to Ohio media in April shows that he made $1.4 million in 2008, which included his Lehman pay and compensation for appearing on Fox News and speaking appearances around the country.
By comparison, the awesome Richard Fuld took home an estimated $466 million in compensation between 1993 and 2007, according to Equilar, a compensation research firm, Reuters reported. Given the median household income in Ohio at the time was about $48,000, Kasich was earning more than 290 times that amount.
Kasich has likewise deflected on how much he lost in the collapse of LBH, if anything, by saying, "I try not to think about it." Of course, others are thinking about it, and like Romney's taxes were to him last year, Kasich's taxes, even to whether he's filed them yet this year or not, have and are expected to be as secret as JobsOhio's real accounting books.
So while John Kasich is no longer employed by Lehman Brothers, the webs woven with the help of long-time Lehman workers like Kasich and Minor might lead to the unavoidable conclusion that the spirit of Lehman Brothers lives on in Ohio in the guise of JobsOhio. Kasich the pitchman and Minor the behind-the-scenes deal maker now appear to be running a state like Ohio like Lehman Brothers ran its world before it collapsed.
It's hard to believe that Lehman Brothers, or any other investment banking outfit for that matter, could waltz into Ohio and take over its economic development apparatus. But that's exactly what happened when a friendly Republican legislature gave Kasich carte blanch on ditching 47 years of open government based on the assumption it had "become calcified and was no longer meeting the needs of businesses to help create jobs and revive Ohio’s economy," as the Governor's website declares.
FitzGerald wants to shed light on JobsOhio, but by not calling for its demise, he essentially agrees with Kasich that the old way of doing business was the wrong way. The ultimate get-out-of-jail-free card is to not to go jail in the first place, which is what has happened to corporate Wall Street Titans like Fuld and others who federal officials allowed to remain untouched even after they broker the nation and the world a host of economic troubles that remain tough problems to solve.
Since have fagovernment officials have failed to hold top tier corporate leaders accountable, the message to political performance artists like Gov. Kasich is that he can likewise expect no interference with his leveraged creations. Just as federal officials have never held LBH accountable, Kasich is banking on Ohio voters not holding him accountable for what some say are easily documented failures and scandals. Kasich may be more like his former boss Fuld that meets the eye. Unless someone goes to jail, the means will justify the ends.
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