bad!!). Lots to do on this, been speaking to Jesse and Kunho. Sounds like the Koreans are serious on this and are looking to do something aggressive. Could be interesting timing for them, to get some attention away from faster growth Asian economies. Could be interesting, but as we know these thing often don’t go further then the rhetoric.”
On June 1 a small team of Lehman bankers had headed to New Jersey’s Teterboro Airport and set off for Korea in the firm’s Gulfstream. The senior person aboard, Tom Russo, Lehman’s chief legal officer, had little deal-making experience, but as one of Fuld’s confidants, he could serve as a trusted pair of eyes and ears. Mark Shafir, the firm’s head of global mergers and acquisitions (and the brother of Robert Shafir, whom Gregory had unceremoniously forced to quit), was the lead deal banker, along with Brad Whitman, a talented acquisitions expert who had spent most of his career merging the nation’s far-flung telecommunications firms into a handful of powerful players. Completing the group were Larry Wieseneck, the firm’s head of global finance, and lawyer Jay Clayton of Sullivan & Cromwell. They would meet Kunho and Bhattal when they got there.
With a stop for refueling in Anchorage, the jet made the trip in nineteen hours, and on arrival the exhausted Lehman contingent took a fleet of cars to their hotel on the outskirts of Seoul. The Shilla was a peculiar place with a lobby that looked like a spaceship, but at least it had a bar.
The first meeting in Seoul involved only lower-level officials of KDB and Hana Financial, which was also considering an investment. Shafir and Whitman could tell immediately that this was not a deal that was likely to happen. Neither Korean firm had brought along lawyers or hired its own U.S. advisers. And Min, who had not yet officially started as chief executive of KDB, could not even take part in the talks.
“This is bullshit,” Wieseneck exclaimed after the initial session ended, having served little purpose other than to make introductions. Even as the talks progressed, the Lehman team could hardly tell to whom they were speaking. At one point Russo engaged in what he thought was a productive exchange with an individual who turned out to be an outside accountant. “Relying on Kunho is like bottom of the ninth, two outs, in the World Series,” Shafir complained to his American colleagues the first night in the bar, “and you send up a guy to the plate who hasn’t gotten a hit all year.”
Lehman had wanted to start discussions at $40 a share, but by the end of the first day the stock was at $30. Nobody—not even this group of deal-hungry Koreans—was going to pay a 33 percent premium. The whole affair became increasingly unreal.
No food was served at the meetings, so the Lehman bankers were starving by the time they got back to their hotel, where the meals were generally dreadful. The only palatable item they could find on the menu was tuna, which most of them ate every day of their stay.
But neither the subpar accommodations nor the Koreans’ erratic behavior could dent Russo’s enthusiasm: He was going to make this happen. “They’re going to do this deal,” he told his colleagues, supported by Kunho and Bhattal. “They’re going to put in $10 billion. They’re going to make their balance sheet available for loans.”
Sitting on a hotel room bed crowded around the speakerphone, the group called Fuld back in New York, with Russo leading the conversation. “Dick, I’m feeling very good about it,” Russo enthused. “I think we have a 70 percent chance of getting something done with these guys.”
Fuld’s delight at the news, however, was short-lived. The group returned to New York empty-handed on June 5; efforts to come up with even a rudimentary term sheet had completely failed. The Koreans had obviously been deterred by Lehman’s cratering stock and simply may not have had the wherewithal to bring about such a major piece of business. Even Russo had lost confidence. “We’re not going to get a deal with these yoyos,” he told Fuld.
Moments after hearing the news, Fuld, frustrated as ever, screamed down the hall at Steven Berkenfeld, a member of the firm’s executive committee.
“Were you the one who said you can’t trust the Koreans?” he asked.
“I don’t think I phrased it that way,” Berkenfeld said.
“Yes, you did,” Fuld said. “And you were right.”
The Korean deal wouldn’t go away quietly, though. A few days later, Min called Fuld and insisted he still wanted to get something done. Fuld figured the only way it was remotely possible was if the Koreans hired a real adviser. So he called up Joseph Perella, the mergers and acquisitions guru who had recently started a new firm, Perella Weinberg Partners.
“Listen, I’ve got something for you,” Fuld told Perella. “You’re going to get a call from ES. Do you know him? He used to work for me.”
Fuld was explicit about what he needed out of the deal. “We’re trading at about $25. Our book value is $32. We need a premium, so we’d take $35 to $40.”
Perella, who assigned the project to his colleague Gary Barancik, didn’t think the odds were good. KDB was a national institution with what seemed to him to be a local charter. They had no business branching out with a risky international deal. “It’s like the Long Island energy utility trying to buy something in Russia,” he told Barancik.
But they promised to do the best they could.
Fuld was also dealing with another problem: a potential whistle-blower.
One of Lehman’s employees, Matthew Lee, a senior vice president in the finance division whom Fuld scarcely even knew existed, had just weeks earlier sent a letter to the company’s senior management in which he claimed to have uncovered a series of accounting and management problems at the firm.
Fuld’s inner circle dutifully forwarded the letter to the firm’s auditors and the board, but weren’t overly concerned by it. To them, Lee had always been something of a troublemaker. Because they had recently demoted him and were planning to fire him, they viewed the letter as more of an extortion attempt by a disgruntled employee looking for a severance agreement than anything they should worry about.
However, during a meeting with the firm’s auditors, Ernst & Young, Lee raised a serious red flag about one of the firm’s practices that was also quietly being questioned in other parts of company: an accounting trick known as Repo 105.
What the public did not know—nor did some of Lehman’s top executives, including Fuld—was that Lehman had been artificially lowering its quarterly leverage ratio by using an accounting sleight of hand. At the end of every quarter, Lehman’s government securities business would “sell” securities to a counterparty in exchange for cash,
