So if your Level 3 assets climb from 12% to 13% of your total assets, is that a good thing or a bad thing? Does that mean they are worth more or that you have more of assets that everyone suspects are probably worth less than you say they are? Does anyone understand what’s going on at Lehman?

To be frank, we certainly do not.

We at my apartment (so me and Marissa) have heard that the invasion of employee privacy by Wall Street firms has taken a bold step forward: hacking into employee Facebook accounts. According to a sometimes reliable, sometimes not source, the human relations department at a certain investment bank has been using creative technology to get into the profiles of current (and prospective) minions, to monitor their off (and on) the clock activities. This is bull shit and I'll tell you why: it would be one thing, if you and those with the power to get you fired willingly entered into a Facebook friendship, thereby granting them full-access to see what's a-poppin' in your personal life whenever they pleased. But this means that someone who doesn't even have the bedside manner to ask "You wanna do this" first, or worse, someone whose online friendship you've formally said no thanks to, can see that you've added "Boiler Room" to your favorite movies (sheep) and changed your status from "Billy is working at Bear Stearns" to "Billy is getting a public citation for having relieved himself on the sidewalk in front of Bear Stearns which he wouldn't have had to do in the first place if those FUCKS hadn't fired him." Anyway, try and guess which firm we're talking about via Facebook message (thereby granting me access to see your profile for one week even if we're not friends) and I will respond shortly.

Just how has referring to competitors as enemies whose “throats” must be “ripped out,” telling employees to act as though they are “at war,” and, on at least one occasion, making a visit to the trading floor to put his second-best earner’s tie through a shredder, in front of everyone, to make the point that “second best isn’t good enough” helped Dick Fuld to avoid the gigantic writedowns that have plagued Merrill, Citigroup and UBS, the hedge fund failures that have made a joke of Bear Stearns, and the accounting scandal that was Goldman third quarter earnings? How about because all of that is enough to scare the shit out of anyone, especially the people within arm’s length of the guy, into not fucking things up? Nobody wants to be the guy to tell “Gorilla” that things didn’t go so well this quarter, and while everyone else was having a pissing contest to see who could do the worst, Lehman’s minions were being intimidated into not having as horrible a Q3 as their “enemies,” if not necessarily an amazing one (earnings fell 3 percent, to $887 million, and there was a $700 million write-off). Even Mike Mayo, who’s intimidated by no one, gave the credit to Fuld, saying that the outcome was “helped by having one of the most consistent cultures on the Street—one C.E.O. for over a decade, a one-firm mentality and comprehensive risk management,” probably out of fear. Former colleague Stephen Schwarzman, who seems like the kind of guy who would be too petty to give someone else credit for anything, went out of his comfort zone to call Fuld “a survivor” and opine that “he’s got a sixth sense of when things are turning on you,” though, admittedly, Schwarzman’s praise-inducing intimidation could stem more from the height differential than anything else.

But a New York Times profile suggests that Fuld is losing his taste for human flesh, which could mean disaster for LEH. Examine the facts:

- When asked how he felt about “the war comment” from last year, Fuld shifted in his chair and said, “I don’t like the war comment…‘war’ connotes that we are trying to kill our enemies. That’s not the view that I want them to have.”

- After feigning offense at the accusation that he’s “mellowed,” Fuld “paused to collect his thoughts.”

- Then he said: “I think I have many of the same reactions; I just handle them differently…I’VE LEARNED, IN ALL FAIRNESS THERE IS ANOTHER VIEW.”

And the most egregious ?
- Lehman’s president, Joseph M. Gregory, says that Fuld “has improved” his attitude and “made it more comfortable for people to speak.”

This is a phenomenon the must be cut off at the knees (which the old Fuld would’ve already done, without compunction). It’s only a hop, skip and a jump from people not soiling themselves in your presence to Merrill Lynch.

The Survivor [NYT]

There’s no doubt that Planet LBO is a calmer place now than it was through much of the summer. But it’s not exactly terra firma yet. One of the shakiest deals in the pipeline is the buyout of real estate investment trust Archstone-Smith Trust. Lehman Brothers and Tishman Speyer are putting just $500 million of their own money into the $21 billion deal, with the rest coming in the form of bridge equity and debt.

Yesterday Lehman Brothers and Bank of America began their attempt to sell $3.15 billion of the $4.96 billion bank loans financing the debt. The loans consist of a $750 million revolver and a $2.4 billion term loan, each priced at 300 basis points over LIBOR. But word is that they are running into resistance from investors who are surprised the debt is not discounted more heavily.

Reuter’s Jonathan Keehner reports that banks are offering the term loan at 99 cents on the dollar, and this has some would be investors balking. As Keehner gently puts it, the one cent hair cut prices the loans substantially “above where other recent buyout financings have closed or been discussed.”
Not everyone is being so delicate.

"Archstone is a good company, it's got great assets, and bankers probably thought they could sell at this price," said a buyside analyst tells Keehner. "But my initial view is that a lot of deals are coming in at the mid-90s, and this is coming in at 99 cents on the dollar. It looks rich to me.”

We’re told the situation is beginning to look hopeless. And part of the problem may be Lehman’s conflicting interests. As both the buyer and one of the lead lenders—a dual role that many banks considered a win-win situation in happier times—Lehman may have put itself between a rock and a hard place.

Let’s go to the Keehner tape again, this time from Reuter’s Dealzone blog. “Either way Lehman takes a hit: as a principal, renegotiating on any terms could hurt potential profits. But by also banking the deal, Lehman otherwise risks having the debt clog its balance sheet or sold at a loss,” Keehner writes.

Archstone loans appear priced at pre-crunch level [Reuters]
Lehman’s double trouble in Archstone [DealZone]

Real estate blog Curbed recently sat down with an investor in the field to discuss whether or not Andre Balazs’ High Line-squatting Standard Hotel is symptomatic of a developmentification of Manhattan that’s turning the island into a place where only utterly lame (but sufficiently rich) people will live. A simple ‘yes’ would’ve sufficed, but the expert, perhaps going through some sort of personal problem or maybe having had the unfortunate pleasure of drinking at Joshua Tree last night, took it one step further.

Fuck it, I say. Manhattan is one big joke. I think they should let highrises go up anywhere at this point. What's the point of communities on the island anymore?

Everyone's so priced out, does it matter anymore?

If you want a neighborhood/community, move to Brooklyn.

Let Manhattan be just one big bullshit skyscraper. Tower of Motherfuckin' Babel. But for douchebags.

And the Lord spoke and said, "Let us make sure these douchebags do not understand each other, less they build a Tower of Douchieness. Let one douchebag not understand the other." And thus the languages of Goldman, Lehman, and Morgan were formed and the Lord saw it and it was good.

First of all, this tower already exists, and its name is Windsor Court (and on the UES, Dormandy). Second of all, and we’re just passing this along, analysts from Merrill Lynch and Bear Stearns would like to know, “Hey, why weren’t we included on that list?”

Investor Rant: 'Manhattan is One Big Joke' [Curbed]

Shares in Lehman Brothers are trading up this morning after the firm said its third-quarter earnings dropped only a wee bit from a year ago. The subprime lending crisis has hit its fixed-income business, which was down nearly 50%, but its equities trading, asset management and investment banking businesses were strong. The total price tag of the credit crunch last quarter came in at $700 million in lost revenues.

The bottom line numbers look very good, at least compared to what many expected. Net profit fell 3% to $887 million ($1.54/share) from $916 million ($1.57/share) a year ago. Revenue rose to $4.31 billion from $4.18 billion. Wall Street analysts had predicted Lehman would file $1.47/share on $4.23 billion in revenue, which means that Lehman performed better than expected. "Better than expected" are magic words for investors, and Lehman immediately jumped in futures.

The bulls are now running. And we hate to ruin the china shop party, but it looks to us like some financial engineering and unsustainable growth went into those numbers. We can't really make heads or tails of the tax accounting, for starters. But when we looked between the pre-tax and post-tax numbers, tt looks like they are recording something like $70 million in tax savings from second-quarter to third-quarter, which might be due to writing down the valuation of leveraged loan commitments and mortgage positions. Did someone call the guys in the tax department and ask them to find a way to tack an extra dime onto earnings per share?

How about those additional revenues from investment banking? If you think that's sustainable, you might want to come take a walk with me to lower Manhattan. I've got a bridge to Brooklyn Heights I'm looking to unload.

More importantly, Lehman says it recorded "substantial valuation reductions" on some fixed income assets but we're basically supposed to trust that they've marked these things correctly. Because, you know, Wall Street banks have done such a great job at valuing fixed income assets recently. Why would anyone get suspicious of their valuation models now? To put it differently, many expected that the credit crunch would cost Lehman more than $700 million. We're still not confident it hasn't.

We know that we're fighting the numbers here. Sorry for being so churlish. We were up till 4 am with insomnia last night. Which always makes us feel bitter. If you're going to be up to 4 am on a Monday night it should involve whiskey, women and at least a little bit of crime.

So we'll let Dick Fuld have the last word. He sounds like he had a better night's sleep than we did.

“Despite challenging conditions in the markets, our results once again demonstrate the diversity and financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles,” Lehman chairman Richard S. Fuld said in a statement.

Press Release [Lehman Brothers]

Lehman Beats Estimates, Limits Losses on Mortgages [Bloomberg]
The hit is light at Lehman [FT Alphaville]

The banks have won the first big show down with private equity.

Last night several news outlets, including the Wall Street Journal, reported that private equity giant Kohlberg Kravis Roberts has signaled a willingness to include a financial covenant for the bank loan portion of the $24 billion of debt needed to finance its purchase of First Data.

First Data was largely viewed as a test case for some of the biggest, and riskiest, of the highly leveraged buyout deals that are scheduled to close in the next few weeks and months. The banks had been asking the private equity sponsors of the deals for concessions on the terms of the financing, saying it was having trouble syndicating the debt due to recent concerns about debt levels by many investors.

More layoffs hitting very far from reaches of Wall Street banks. Lehman Brothers is showing the door to 850 lost souls, as it takes a step back from its global mortgage lending business and considers going coyote ugly.

(You know that one right? It’s where you wake up next to someone after a late night and consider chewing off your arm to get out of the apartment without waking him or her up. Like a coyote stuck in a trap.)

The cuts are hitting all over. The South Korean mortgage business is donzo. People are totally fired in the US and UK. And its not just subprime this time. It’s much broader mortgage business.

Lehman is one of the largest underwriters and traders of mortgage debt on Wall Street. It was basically running its own show until now, originating the mortgages, chopping them up into structured products, selling and trading the bonds. Well, that didn’t work out.

Despite the continued layoffs, everyone we talk to on Wall Street is totally sure that their own jobs are safe.

Except, you know, those media, retail and tech analysts at Merrill who just lost their jobs.

Lehman Brothers To Make Further Mortgage Layoffs [Wall Street Journal]

Such were the instructions of the Knights Who Say "Leh," as Lehman is rumored to have hired Jeb Bush as an advisor for its in-house investment arm. The Shrubberies have a long history of landing prestigious corporate gigs - from G.H.W.B.'s stint at Carlyle and G.G.H.W.B.'s (Grandfather of G.H.W.B.) run at Brown Brothers Harriman. The Shrubberies have so densely lined the upper echelons of corporate America, future Shrubberies are often added to make a path, and rest on the absence of laurels particularly.

Is this a sign that the banks are in desperation mode and looking to bring in people with Washington connections to strong-arm some (more) intervention to stem the oncoming tide of financial turmoil (or a sign that J.B. is going to wait until the Shrubbery name becomes a little less toxic and boost his campaign coffers to make a run in 2012)?

Jeb Bush: Lehman’s Secret Weapon [Deal Journal]

Lehman Brothers announced this afternoon that it is shuttering BNC Mortgage, one of its home lending units and, in the process, laying off 1,200 employees. This translates to roughly 4.2 percent of its total workforce (and: 4.2 percent less people clamoring for a Size M Super Mario Brothers t-shirt with a “LEH” superimposed onto the “Super Mario” at bonus time). The bank noted that current market conditions, wherein no one in their right mind is giving out subprime loans, have significantly reduced the demand for “resources and capacity in the subprime space.” Lehman will suffer only a mild hit of $52 million to third-quarter earnings. One Brother based in New York commented, “Big deal, it’s our lending arm and they likely sit in Wisconsin, no? BNC???” Familiarizing himself at this point seems somewhat moot.

Lehman Closes Subprime Unit and Lays Off 1,200 [NYT]

Although the recent job cuts in two Bear Stearns mortgage units have sliced through obscure places called Irvine and Scottsdale, rumors have started to circulate on Wall Street that the axe may soon fall closer to home. Some, including Jim Cramer, have predicted that there will be serious bloodletting in areas tied to credit markets and hedge funds.

“I think that many of these firms have as many as 30 percent more people than they need right now in these departments, and all of them will be cashiered by the end of the year. The lists are being drawn up; the HR people notified,” Cramer wrote recently in New York magazine.

Many on Wall Street scoff at the idea that they have anything to worry about but recent history of market downturns suggest otherwise. When the markets suffered in the years following the bursting of the tech bubble, investment banks and brokerages laid off as much as 25% of their work force. In just one day in the winter of 2003—it was February 7th, to be precise—Goldman Sachs announced that it would cut roughly 20% of its 220 options traders.

Last time around the cuts began with the brokers, since it was a downturn in the equities market that began the bloodletting. This time it may start with those parts of the investment banks directly tied to mortgages, leveraged buyouts and hedge funds and spread from there. As the mortgage market contracts, structured finance could also get hit, with both product and sales people losing jobs as the pool of underlying assets dries up. Derivatives traders may also find the axe swinging in their direction.

But enough of this vague speculation. It’s time for specific speculation. Where are the job cuts coming next? A recent item on DealBook doesn’t exactly name Lehman brothers as the most likely candidate. Except that it sort of does. “Bear Stearns is the nation’s 12th-largest home lender, according to Inside Mortgage Finance. The company, the fifth- biggest U.S. securities firm, ranks second after New York-based Lehman Brothers Holdings Inc. among U.S. sellers of mortgage bonds,” DealBook explains.

There’s also been talk of more cuts coming from Citigroup. Despite claims that they are still dancing in the LBO market, the music seems to have stopped. And a few seats are probably going to get pulled away, leaving some left standing. Like musical chairs but with your job.

Anyone care to irresponsibly speculate about who else might pick up the job cutting axe?

As Bear Cuts Jobs, Some Wonder Who’s Next [DealBook]
Bloody and Bloodier [New York Magazine]

Lehman Brothers is getting ground down by the rumor mill. It's up slightly just now but has recently been winning the race to the downside in the financial sector. The pricing on Lehman's credit default swaps is behaving erratically. All this on no official news.

We're hesitant to publish this kind of item, especially about Lehman. Last time we touched on Lehman rumors that bank wound up making a statement later that day denying the rumored troubles. But it's clear that something (or perhaps someone) is pushing Lehman down, down, down.

We keep getting emails from traders who have heard sketchy reports that Lehman will make a "major announcement" today. Keep in mind that so far the rumor mill has predicted a dire Lehman warning for three days in a row. Reality has stubbornly refused to cooperate.

Lehman isn't commenting right now. Anyone hearing about what might be going on?

Let’s say you’re a lady, working in the business world. You want to get ahead but doing so by conventional means like working hard is such hard work and we live in a patriarchal society that will always value the penis over performance. Just what’s a girl to do? The Wall Street Journal suggests putting on a pair of stilettos, because “high heels indicate power,” so much so that you might even morph into a man.

But it’s not just the added height that’ll get you to the top of our next bonus bumper. It’s that high heels offer an “inherent contradiction” (am I tall or am I short, I do not know). According to the Journal, ‘lettos “make us more fragile, but conquering them to stride alongside men in their sensible flats creates mystique.” This is not a joke—men will marvel—yes marvel— at the fact that you can walk just as fast as them—if not faster— in those things. Some—the ones who believe that hobbits are real—will scratch their heads and say, “She must have magic feet.” Ca-ching.

Kristen Bentz, who worked at Lehman Brothers for several years, recalls a senior executive stepping into an elevator, staring at her chocolate-brown crocodile four-inch pointy-toe pumps and asking, “Where do the toes go?” He was confused, scared and turned on. Ca-ching. (What he—Dick Fuld, one presumes—didn’t know, was that Ms. Bentz does not in fact have toes).

Super Lehman Brothers threw some D's on market rumors that it’s going to take a hit due to subrprime exposure this afternoon, according to CNBC. A (unsubstantiated, not necessarily untrue) rumor from this morning made stocks prices sad and ignited buying in Treasurys, traders said.

"The rumors regarding subprime exposure are totally unfounded," a Lehman spokeswoman told CNBC.

Lehman: Subprime Exposure Rumors 'Totally Unfounded' [CNBC]

We’re hearing from multiple sources that Lehman is about to make a major announcement about its hedge funds being damaged by subprime. Lehman would not immediately comment. Heard anything?

As always, you'll have to judge the quality of these rumors yourself. We trust you to exercise your independent judgment. At this point, it's all hearsay. Rumors of rumors. We have no reason to believe we're being intentionally misled here but sometimes rumors get started by people with agendas. We report rumors because, unlike a lot of others in financial journalism, we don't think you are too irresponsible or ignorant to be trusted with information of uncertain provenance or probity. Proceed with caution.

Who takes the mic from Funkmaster Fuld during Lehman’s weekly capital markets meeting? Jami Miscik, Lehman’s Global Head of Sovereign Risk, giving the L.Brohamsters the most lucrative geopolitical instability to invest in.

Sure Jami has the potential to steer Lehman’s capital in and out of dangerous waters, but at least she can’t start a war. At least not anymore, as Jami used to run the intelligence directorate of the CIA under George Tenet. In other words, you may remember her from (save Tony Olando’s House 1988, and…) the really crappy intelligence provided in the 2002 National Intelligence Estimate that said Saddam Hussein and his Nigerian yellow cake (with chocolate frosting) were about to unleash the apocalypse with WMDs. Hey, at least Miscik was right about North Korea and Venezuela (for Lehman). Two out of three ain’t bad. The country loses, but at least Lehman cashes in on her more recent assessments. No biggie, let’s march onward, says Miscik, from Fortune:

Miscik presents herself as a determined sentinel who is free of distraction and totally accountable, someone you might trust with another chance. Does she bear responsibility for the WMD conclusion in the Iraq report? "Absolutely. We got this wrong," Miscik acknowledges, while adding she had no time to beat herself up about it in the aftermath. "We were so busy, and we felt this unrelenting push to stay on top of things. It was kind of 'Just do it!'"

Whew, and for a second we thought Miscik was going to go all Robert McNamara in Fog of War on us. Don’t beat yourself up over that one, Jami. Take a mulligan. Bygones, seriously. I’m sure you’ll rest easier after a couple of those (TOP TIER) Lehman bonuses. You were part of that gangbusters second quarter, after all.

The spy goes to Wall Street [Fortune via CNN Money]

When the indoor putting green became a necessary accoutrement to the chief executive office, everyone assumed that the “golf or work?” conundrum had been answered with a resounding “both.” But, as the Times reported recently, there is no tenable substitute for well-manicured sand traps and tree-lined fairways, even when your hedge funds are collapsing.

Yesterday, the Bespoke Investment Group blog posted the recent scores and handicaps of five CEOs: Stanley O’Neal of Merrill Lynch, Richard Fuld of Lehman Brothers, James Cayne of Bear Stearns, John Mack of Morgan Stanley and Lloyd Blankfein of Goldman Sachs. The Dealbreaker question of the day: is there any correlation between a CEO’s golf game and that other hobby, making money? Here are the results:

CEOs Ranked by Handicap
1. Stanley O'Neal (9.9)
2. Richard Fuld (10.3)
3. James Cayne (15.9)
4. John Mack (17.0)
5. Lloyd Blankfein (32.1)

CEOs Ranked by Percent Change in Stock Price This Golf Season
1. Lloyd Blankfein (+6.9%)
2. Richard Fuld (+3.14%)
3. Stanley O'Neal (-1.3%)
4. James Cayne (-3.49%)
5. John Mack (-9.86%)

Lloyd Blankfein, by far the worst golfer of the bunch who, on a really good day shoots under 110, pushed Goldman stock up nearly 7% since April. This could mean several things: while other executives hit the links, Blankfein is holed up in the office; his short game is only strong in the financial sector; or he is confused about how golf is scored. You decide.

If you’re left muttering, “that doesn’t make any sense,” you’re probably not a summer at Lehman Brothers, and you don’t have a double Windsor knot (all business formal, all the time) choking the blood/air supply to your brain.

Courtesy of Bankers Ball (courtesy of Intern Memo), an ex-Lehman HR lackey gives the scoop on how Lehman Brohamsters cages its veal (an apt description from what I hear about the relative size of Lehman’s cubicles).

You see, Lehman is happy to entertain the thought of giving all of its summers full-time offers (it tries to try), as long as the summers keep their end of the bargain, by being one of the 70% of summers Lehman wants to hire. Help Lehman help you, in other words, by not ‘forcing’ Lehman to make trips to dingy college campuses. Lehman doesn’t want to go back to college and make out with a mono-addled makeout queen after drinking backwash and floor particulate from old beer pong vessels. Lehman doesn’t like it.

Lehamn hates this place. This zoo. This prison. This reality, whatever you want to call it. Lehman can't stand it any longer. It's the smell, if there is such a thing. Lehman feels saturated by it. Lehman can taste your stink and every time it does, it fears that it’s somehow been infected by it.

Did you know that the first Lehman Brothers was designed to be a perfect investment bank? Where none suffered, where everyone would be happy. It was a disaster. No one would accept the lifestyle. Entire deals were lost. Some believed Lehman lacked the internal strategic consultants to describe that perfect world. But Lehman believes that, as a species, investment bankers define their reality through suffering and misery. The perfect investment bank was a dream that bankers’ primitive cerebrum kept trying to wake up from. Which is why Lehman Brothers was redesigned to this: the peak of Wall Street civilization.

Here’s the quote from the Lehman HR person:

We do not approach the summer with a set percentage of offers that we’re looking to give out. If all 50 summer analysts perform at a high level, then we would be more than happy to give out 50 offers. The more offers we give out, the easier it is for us to fill our full-time class. It actually makes our job easier. So, in general, our interests are aligned. Lehman takes the summer interview process very seriously, because our hope is that we do not need to return to campus full-time to hire additional people. Obviously it never works out that 100% of the class receives offers, so I would venture to say that it’s more like 70%; however, that number would vary by division and year.

How to Behave if You’re a Lehman Intern [Bankers Ball]

Lehman may have dominated day one of the JPMorgan Chase Corporate Challenge, but day 2 was more bearish for bankers, and bullish for GlaxoSmithKline. Day 2 also featured faster times overall.

GlaxoSmithKline was responsible for two explosive runs on the women’s side, courtesy of over the counter diet drug Alli, and the fact that the top two finishers, both from GSK, did not bring a pair of dark running shorts. Jessie Webb ran a 20:03 and Christa Meyer ran a 20:24, losing an impressive 7 pounds.

The only banker in the women’s top five was Sumitomo’s Katarina Melville who finished in third with a 20:27. Only a financial services employee, accustomed to much longer periods of getting shat on, was able to draft the GSK girls so closely.

Andy Bishop from GSK finished in fifth for the men with an 18:40.

The top two male finishers from last year squared off in the same race this time, and finished in the same order. Karl Dusen from AIG ran a 17:25 and John Traugott of Credit Suisse ran a 17:48. Dusen finished with the top overall time (too early to start “Dynasty” talk?), while Traugott’s time was 6 seconds off yesterday’s top finisher, placing him in third overall.

Click here to take a photographic journey of the race.

2007 New York results [JPMorgan Chase Corporate Challenge]

The unofficial JPMorgan Chase Corporate Challenge results for race #1 are in, and times were predictably slower than last year, as bankers got much fatter. The top five finishers on the men's side included only one bulge bracket BSD (that was taped to avoid drag). Mike Guastella from Morgan Stanley ran the 3.5 miles in 18:02 and finished 3rd.

Lehman girls dominated the women's race, aided by the lower body strength developed from wearing aggressive shoulder pads in business formal attire. Lehman lady Kelly Chin led the pack with a 21:01 and close behind was co-worker Elizabeth Williamson with a 21:27. Diane Kenna from Merrill finished 4th with a 21:51.

DealBreaker Anti-Chaffing Specialist Scott Bressler attended the event and the requisite candy photography is forthcoming.

2007 New York results [JPMorgan Chase Corporate Challenge]

The JPMorgan Corporate Challenge kicks off tonight in Central Park at 7:00pm with the first of two 3.5 mile races. The event, which started in New York in 1977, is now held in 12 cities on five continents with over 200,000 participants from 7,000 organizations.

The banks make up a large portion of the 15,000 race registrants. Here are the registration numbers for the top five:

Morgan Stanley – 1,605
JPMorgan – 1,450
Lehman – 800
Goldman – 550
Citi – its own version of the 1980 Olympics, boycotts on principle

Goldman limited its roster to 550 after almost 800 employees tried to register, according to the bank’s fitness center manager. Does anyone know why Goldman had to limit its registrants (and please tell me they had tryouts or cuts to determine who made the final 550)?

Last year, of the major banks, CSFB has the most outstanding individual performer - ’03 Harvard alum and track captain, John Traugott, who is an associate in the equity capital markets group. Traugott had the 2nd fastest time overall in the men’s division over the two races with a 17:48.

Karl Dusen of AIG posted the fastest overall time in the second race with 17:05 and Joseph Mcveigh of Morgan Stanley posted the 3rd best time with 18:18.

If anyone has any fun corporate challenge stories, or is planning to pull a Jeff Gillooly on John Traugott, please comment or drop a line to 'tips at dealbreaker dot com.'

Wall Street Rivals Run for Charity, Bragging Rights and Beer [Bloomberg]

Lehman kicked off the banking earnings release season by beating analyst estimates and posting a 27% profit gain for the second quarter. Lehman reported a record quarterly revenue on a 25% increase over last year and net income of $2.21 per share, which beat analyst estimates by 18% and last year by 31%.

Lehman’s revenue boost came mainly from capital markets with equities trading revenue increasing 94%, offsetting a 14% decline in fixed-income trading, dampened by weakness in mortgage backed securities caused by the subprime fallout.

Non-domestic revenue sources account for 48% of Lehman’s net revenue, which CEO Richard Fuld interprets as a sign of unprecedented strength in the bank’s global platform, which has been one of Lehman’s weaker areas in the past relative to other banks and had several outlets pushing for an acquisition earlier in the quarter.

The strong earnings report may indicate that Lehman has its mojo back (and we’re talking relative mojo here), as a month ago Breakingviews and other outlets pointed out Lehman’s recent drop-off (compared to its surges 3-5 years ago) relative to the gains of other banks during the current boom in the banking sector. Lehman’s quarterly net income gain is expected to beat competitors, as Morgan Stanley is expected to post earnings of $2.21/share (an increase of 8%), Bear Stearns $3.50/share (a slight drop) and Goldman $4.79/share (flat).

Lehman is still expected to pay TOP TIER analyst bonuses this year, and Lehman (NYSE: LEH) shares are up over 2.5% in morning trading at $77.65 but still 10% off its 52 week high of $86.18.

Lehman Posts Record Revenue [Wall Street Journal]

It’s hard to throw a stone on Wall Street without hitting a senior investment banker who thinks the new kids these days are too much money. Just two weeks ago we saw John Whitehead, who was one of Goldman Sach’s co-heads exactly one billion years ago, griping about that he was “appalled at the salaries” on Wall Street. He had in mind more than just the junior bankers and newly recruited analysts—he even singled-out Goldman Sachs chief Lloyd Blankfein’s paycheck. But you don’t have to press to aim your tossed rocks very well to knock around a few grey-hairs covering the minds of those who think that salaries for associates are getting too high.

Not surprisingly, those on the receiving end of the "appalling" paychecks tend disagree. Fortunately for the youngsters, there are more places to take their finance degrees than ever before—and many of them hold out the promise of even more money to the next generation of would-be tycoons. Many recent graduates of some of the best finance programs look at Wall Street’s traditional investment banks more as finishing schools than as places to spend their careers.

Take “Fred”—the pseudonymous rising third-year featured in Liz Peek’s New York Sun column this morning. Fred is a top analyst at Lehman Brothers. You can tell he’s a top analyst because Fred’s been invited back for a third year at the firm, which means he is getting promoted upwards without going through the trouble of getting an MBA. He describes his work as “mind-numblingly boring.” And he’s leaving for greener—meaning, potentially more exciting and more lucrative—work in private equity.

It isn’t just the potential to make more money that is luring Fred away from Lehman. It’s also the transparency of how his new firm makes compensation decisions. The mysterious machinery of bonus decisions has long been a source of frustration on Wall Street. Exactly who gets what and why is often a mystery, fueling rumors of favoritism and envious speculation. It can even be more irksome for junior employees of Wall Street firms, who are often paid in lock-step with their peers regardless of personal or business group performance.

"The private equity guys tell us what they want and we do it," Fred tells Peek.

Indeed, contrary to the impressions given by headlines about bonuses and the gripes of retired bankers, these days Wall Street firms pay-out far less of a percentage of revenues to compensate their professionals. Last year, for instance, Goldman Sachs made news by handing out large bonuses but still managed to shrink its compensation costs to the lowest percentage of profits in recent memory. This is good news for shareholders but bad news from the perspective of the bankers who are doing the work generating those profits.

Perhaps even more troubling for traditional Wall Street firms is that they are losing some of their luster. There is widespread feeling that the last generation of tycoons has passed through the doors of the investment banks and that the next generation will arise elsewhere. A decade ago, investment bankers would describe themselves as the “hunters” of the tribe of finance, relegating the lawyers and others to the job “basket weavers.” But these days many Wall Street firms seem to be playing catch-up in a deal market whose biggest headlines are made by hedge funds and private equity firms, often serving in what are considered decidedly secondary roles by providing financing and bridge equity to deals cut by the new class of hunters.

“Whereas in the old days the investment bankers were the creative masterminds behind financial transactions, these days the intellectual baton has passed to the firms that are taking everlarger companies private at an accelerating pace. Investment bankers view themselves as necessary but not very exciting ingredients in the mix,” Peek writes.

Wall Street Adjusts as Top Hires Flee [New York Sun]

Breakingviews.com sparks a "what can Lehman do to recapture the magic?" brainstorming session. The rationale is Lehman's recent relative shortfalls - only 20% net revenue growth last year and not increasing its market cap by $30bn (or 50%) in the last couple of years like Morgan Stanley and Goldman (Lehman measures up a lot better over the last five years, (here) with Morgan Stanley and (here) with Goldman Sachs).

Breakingviews' solution - it's deal time. No, not a DLJ-esque mega-merger, most likely with Bank of America or Wachovia to try and get a deeper insta-foothold in IB, but a Cazenove style venture with HSBC. This deal would compliment Lehman's focus on emerging and Asian markets and provide the IB infrastructure to support existing HSBC relationships.

Band of Brothers [breakingviews via DealBook]

The results of yesterday’s “Which bank has the dirtiest working conditions” poll are in. Some of the results may surprise you, some may not. If you actually read what we wrote about Bear Stearns’s in-house cafeteria and its 42 health-code points violations, for instance, you won’t (or shouldn’t) be surprised to learn that it landed in the top three (and if you read the part about contaminated food and inadequate levels of personal cleanliness and are still stunned, don’t invite us over to your home any time soon). If you didn’t know, though, that the 85 Broad is basically one step away from a gas station restroom on the Garden State Parkway (going South), you might be a bit caught off guard to learn that the Kingdom also landed at the top of the list of shame (all that glitters is not gold, indeed). Let’s examine the cold hard (dirty, disgusting, scatological) facts now.

Among the many facticles proffered in Charlie Gasparino’s profile of Lehman CEO Dick Fuld in the latest Trader Monthly, two stand out from the pack—the one about the purchase-of-a-lion-that-wasn’t and the other, about keeping it real at kid’s hockey game, via getting into a fistfight with another father. These anecdotes not only entertain but are instructive in Gasparino’s tale of a man who not only “loves to brag about his aggressiveness” but also is not a pussy. In the greater scheme of things, they also reflect Fuld’s reign at Lehman Brothers and the patterns of isosceles triangles present in the Vitruvian Man but we won’t dirty our hands with that right now (later, though, for sure).

The first is short yet virile: Fuld once declared (no doubt while beating his chest) that he desired to buy a lion after returning from an African safari. Alas, it was not to be: “I knew I couldn’t do that, because those animals eat people,” he told Gasparino.

The last time we checked, the only reason to be envious of Lloyd Blankfein’s henchmen was because some of them were getting upwards of $100 mm in bonuses (and because B-fein had carried on a tradition instituted during the Paulson era wherein on Tuesdays and every first and third Friday of the month, the girls are on Goldman).

According to the WSJ, however, there’s a new motivation for keying doctored league tables into the Goldies’ cars: trading floor envy. The Masters of the Universe are in the midst of erecting a “gleaming new building in lower Manhattan that will feature six gigantic state-of-the-art hangar-size trading floors (72,000 square feet each, with room for more than 900 traders on each floor)” and a Jamba Juice. If you’re the sort of person who’s made jealous by that sort of thing, you’re not alone—the top BB-banks are going to great—desperate, sad, whatever—lengths to keep up with the Goldmans. Let’s take a look at the competition.

Lehman Brothers Holdings:
Mulling over a deal with Vornado to build a HQ and trading floors where the Hotel Pennsylvania on Seventh Avenue still stands, i.e. Penn Station/MSG adjacent. Good for those commuting into the city on the Midtown Direct already/can’t resist Auntie Anne’s. Bad for anyone under 40/more importantly, those with an aversion to the types of people who ride the LIRR (read: anyone who doesn’t ride the LIRR and even some of those who do. Self-loathing. You know how it is).

Merrill Lynch & Co.:
Also considering the Hotel Pennsylvania site, in addition to the new WTC area currently under construction. Lease is up in 2013. The clock is ticking.

J.P. Morgan Chase & Co.:
Talks with the Port Authority are “progressing but not a done deal yet.” The only thing we know about the Port Authority is that it’s a good place to pick up hookers…and with our analyst and associate attrition…you do the math.

Morgan Stanley
Has “talked with several landlords about spaces large enough for improved trading facilities, though its plans are unclear.” A spokesperson for Morgan declined to comment though we’ve heard that Robert Kindler will only entertain the possibility of venues large enough to host the Mergers and Acquisitions book party.

Wall Street Firms Vie To Expand Trading Floors [WSJ]

It’s down to crunch time on the auction for Chrysler and major private equity firms have lined up their bankers to support their buyout proposals, according to a report this morning from the Detroit News. Blackstone and Centerbridge—who are working together—have Bank of America, Lazard and Lehman Brothers in their corner. Meanwhile, Cerberus Capital Management LLC, is said to have recruited Goldman Sachs Group.

The General Motors bid, reportedly made way back in January, appears to have set off the star Chrysler sell off but to have been too skimpy to be seriously considered. All GM offered was 10 percent of its equity, no cash, and a requirement that DaimlerChyrsler pay GM $1 billion.

Six weeks ago we pointed out that GM seemed unlikely to pick-up Chrysler for this very reason

Another problem: GM boss Rick Wagoner is a tightwad. Remember the outsized dowry he and the GM board demanded from Ghosn when they considered the combination with Nissan-Renault? How much would GM pay up for Chrysler? When we called one of our banker friends to ask for a valuation on what GM might pay for Chrysler, he joked that GM might ask Daimler to pay them to take it off their hands.

Big banks latch on to Chrysler talks [Detroit News]

The Wall Street Journal's Dennis Berman has more details on the departure of George H. "Woody" Young III from Lehman Brothers on Friday.

• Word first broke after Woody "gathered his troops and told them he was leaving at once." Talk about sudden departures.
• He quit on his 47th birthday!
• More rumors that Woody left after losing a power struggle. Or, as the journal put it " as part of the brutal and high-stakes jockeying that's part of life on the Street."
• Young sought to re-organize Lehman's investment bankers, moving resources away from small, less active clients to concentrate on top corporate and private equity clients.
• Young wasn't happy with the banks decision to do business with a client that he saw as having a conflict of interest with an existing client, presumably one of his.

Our deep research on Young has so far struck out when it comes to his activities last week, on Friday or this weekend. But we have learned that he graduated from Brown and served as a White House Fellow in 1991-92. He's also a pretty big donor to the Democratic party.

Feel free to drop any more details in the comments section below or email us at tips(at)dealbreaker(dot)com.

A Top Lehman Banker Exits in Apparent Rift [Wall Street Journal]

Over the weekend we started hearing rumors that a big shot at Lehman Brothers had quit the firm, perhaps because he was passed over for the job of running the corporate finance group.

This morning Andrew Sorkin reports that telecom banking giant George H. Young IIII (aka, "Woody") resigned from Lehman on Friday. According to Sorkin, Woody was "the top producing banker at Lehman Brothers." Running the global communications group—Lehman's most profitable—Woody was responsible for bringing in mountains of fees last year, advising on a reported $231 billion of deals last year.

Of course, Woody's not talking and no-one is going on the record about why he left or where he's likely to land next. A source who once attended a fundraiser for John Edwards in Woody's Chelsea home describes him as "very nice." Which is no fun at all. So feel free to engage in irresponsible speculation or swap random Woody tales in the comments section below.

Top-Producing Banker Resigns Abruptly at Lehman Brothers [New York Times]

Bonus season officially got underway yesterday when Lehman Brothers announced the restricted stock bonuses of it's top executives. Chairman and Chief Executive Officer Richard Fuld is getting $10.9 million in stock for 2006, and five other top executives at Lehman will divide up another $25 million of stock bonuses.

Fuld's stock bonus is actually less than last year, when he got $14.9 million, which has left some scratching their heads. But this probably reflects two things. First, Fuld's compensation package at Lehman was recently re-negotiated to guarantee him $180 million of stock on top of his annual salary and bonus, to be paid over the next ten years provided he stays with Lehman. And really, how much Lehman stock does any one person need.

Second, some of Wall Street's top executives are becoming wary of stock bonuses due to the critical attention they get from analysts when they sell the stock. Such insider stock sales get reported to the SEC, and can provoke concerns about the financial health of the company. So, at the top levels of investment banks, these stock awards can become very illiquid.

One thing that seems certain is that Fuld's total compensation for 2006, a year in which Lehman performed very well even in comparison to its high-flying rivals, will not be lower than last year's $34.5 million.

Lehman Awards Fuld $10.9 Million in First Stock Bonus [Bloomberg]

Let's just call this the first installment of the bonus watch. Start big.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, said it will pay Chairman and Chief Executive Officer Richard Fuld an extra $186 million over the next 10 years.

Fuld was awarded grants a decade ago for about 2.5 million shares, which would have been payable if New York-based Lehman was sold. Instead, the board plans to give Fuld 10 annual installments of 246,395 shares starting next year provided he stays at the company, according to a Dec. 1 regulatory filing. Lehman shares rose 51 cents to $75.89 in New York Stock Exchange composite trading at 10:50 a.m.

Fuld, 60, has been in charge of Lehman since leading the firm's spinoff from American Express Co. in 1994. Shares of Lehman soared 10-fold over the past decade, outperforming rivals including Merrill Lynch & Co. and Bear Stearns. Fuld was paid $34.5 million last year, less than Merrill CEO Stan O'Neal and more than Bear Stearns CEO James Cayne.

Lehman's Fuld to Get $186 Million Over Next 10 Years [Bloomberg]

Keep in mind that these stories are based on analysts estimates. We’re hoping to see some real (or at least rumored) numbers soon, and we’ll start updating the numbers as soon as possible. (Email your tips to us here with the subject line “Bonus Watch. The identities of all tipsters are kept anonymous, unless you are retiring or something and want some credit for your work.)

The New York Daily News has the short version of the Bloomberg story:

Never in the history of Wall Street have so many earned so much in so little time.

Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros. and Bear Stearns are about to reward their 173,000 employees with $36 billion of bonuses.

That's a 30% increase from last year's record, and it doesn't include the billions more that will be paid by Citigroup, Bank of America and J.P. Morgan Chase, the three largest U.S. banks, as well as the hundreds of hedge funds and private-equity firms that constitute the financial industry.

The longer version gives estimates for individual firms.

Average compensation/average bonus (U.S. dollars):

Goldman $658,946 / $397,707

Morgan $257,594 / $154,556

Merrill $291,139 / $174,683

Lehman $351,160 / $210,696

Bear $338,462 / $203,077

And DealBook says that traders will once again reap the largest rewards.

On Wall Street, it will again be the traders, who make investment bets for their firms, and those who operate in the complex world of structured products and derivatives, who take home the biggest checks this year, with top-end estimates in the range of $40 million to $50 million, according to The New York Times.

“Traders are making more than bankers and that will probably continue for one more year,” Alan Johnson, the managing director of Alan Johnson Associates, told the Times. “Then it will be a horse race.”

36B seen in bonuses at top firms [Bloomberg in Daily News]

Wall Streeters to reap record bonuses [Bloomberg in Globe & Mail]

Wall Street Set for Bountiful Bonuses [New York Times]

Citigroup scored a major coup on Friday, taking an entire team of bankers specializing in financial services deals from Lehman brothers. The defectors are led by Henry Michaels and John Roddy, and includes director Jerry Wiant, VP Sean Burke and associates John Minor and Donald Lacey. The best part--or at least a really great part of the deal--is that whole group isn't starting for a month, after taking a thirty day break to comply with exisiting non-compete agreements.

Contractually obligatory summer vacations. So effin hot.

Citigroup Hires Six FIG Bankers From Lehman [Dow Jones Wire on CNNMoney.Com]

As we mentioned this morning, Lehman brothers made a billion bucks last quarter and trumpeted it in this morning's press release. Despite a 47% increase in earnings, shares of Lehman fell today.

A former Lehman trader who still owns shares and options in his former employer expressed his dismay to us in language suitable for late-night cable television and SEC filings.

Sector Snap: Brokers Fall [Associated Press in the Houston Chronicle]

Lehman Brothers reported a 47 percent increase in profits for the second-quarter of 2006, soundly surpassing market expectations. Net income reached $1 billion dollars, largely thanks to gains in stock-trading and M&A advisory fees.

Details on Lehman’s gains after the jump.

From Market Watch.

Lehman Brothers Holdings Inc.'s (LEH) biggest geographical gap lies in Asia, the fastest-growing markets for investment banks, the company's chief financial officer said Monday.

Lehman generated 37% of its revenue outside the United States last year, beating all its peers, CFO David Goldfarb said in a Webcast of a UBS investors' conference in New York. However, the company trails them in most businesses in Asia and in some areas such as prime brokerage and investment banking.

The firm's share price and profitability have beaten its competitors in recent years as it strives to close gaps through hiring and some acquisitions, he said.

Goldfarb has previously said that Lehman's top investment priority this year is building its business in Asia. The firm employed 800 people there in the late 1990s, currently has about 1,500, and expects to grow the number to 2,500.

Lehman's biggest gap is Asia, CFO Goldfarb says [Market Watch]

Lehman and Goldman both came in at the top ranks of Barron's survey of corporate performance. DealBook has the details.

Both companies, of course, have benefited from hot capital markets around the world. Barron’s depicts Lehman, which ranked No. 1, as having successfully transformed itself from a stodgy old bond house into a hot-shot player in both investment banking and asset management. It recorded record profits this year, and its stock price has doubled.

Phrases like "hot capital markets" and "hot-shot player" make us happy. It's as close as we get to literary bank smut.

Lehman, Goldman Top Barron’s 500 List[DealBook]

Reuters is reporting that Lehman Brothers and Goldman Sachs are battling it out for the love of George H. Walker, IV. Walker is President George W. Bush second cousin. At 29 he became the youngest ever partner at Goldman and currently heads its alternative investment group. He reportedly lives on Greene Street in Soho.

More importantly, according to at least one source inside of Goldman, he’s a "total fox."
Lehman Trying To Poach Goldman Star Walker [Reuters]

Correction: Our commenters are correct. Eric Mindich holds the "youngest Goldman partner ever" record. He made partner in October, 1994 at the tender age of 27. He had been at Goldman since 1988.

With today’s Wachovia-Golden West merger news, Lehman jumps from 15th to 2nd place among M&A advisors to financial companies on deals announced in the U.S. this year, according to Thomson Financial. The big boys at Citigroup hold on to the numero uno slot, while Goldman has shrunk to third place. This is big news because, regardless of what anyone says, on Wall Street size still matters.
Lehman M&A profile rises with Monday's deals [MarketWatch]