Personality and Financial Management

People in the world of finance tend not to be very thoughtful about personality—and there are overwhelming data to support this generalization. But personality affects the decisions of financial managers just like everyone else. In addition, the success or failure of every organization is the sum of the decisions that the leaders make on a daily basis. Ultimately, then, the success of an organization depends to a significant degree on the personality of the leaders. Consider the case of Lehman Brothers, a 150 year old Wall Street investment bank with 25,000 employees world wide. It was the fourth largest investment bank in the world, and it declared bankruptcy on September 15th, 2008.

The CEO of Lehman Brothers is Richard Fuld. Starting in the summer of 2007, Fuld made a series of decisions that ultimately doomed his company. As the subprime mortgage business slumped, Fuld decided that money could be made by investing as others retreated, so he “doubled down” on mortgage backed derivatives. As they continued to decline in value, so did Lehman’s holdings. But Fuld seemed not to notice. As Joe Nocera remarks in the New York Times (9/15/08), “And yet, even as they lowered the value of their mortgage-backed securities, firms like Lehman had still priced them too high.” David Einhorn, a hedge fund manager, described Lehman’s mark-to-market pricing as “dishonest”; Nocera called it wishful thinking.

For at least a year, Lehman Brothers needed to sell parts of itself to remain solvent. Over the past several months, a series of interested buyers approached Lehman, but in each case, Fuld thought Lehman was worth more than the price offered. He maintained this position right into bankruptcy.

Why did Richard Fuld make these decisions? What sort of person is he? The question is hard to answer because the only information we have is in the financial press, which is not insightful about psychology. Fuld received a BS from the University of Colorado in 1969 and an MBA from NYU in 1973. He joined Lehman Brothers in 1969 as a commercial paper trader, and Lehman is the only place he has ever worked. He rose rapidly, and has been the CEO since 1993. The Institutional Investor magazine named Fuld the #1 CEO in the industry in 2006. Fuld’s salary in 2007 was $51.7 million dollars and in March, 2008 he received a $22 million dollar bonus for 2007. Over the past five years, Lehman paid him $311.9 million dollars in compensation.

Here are some other facts about Richard Fuld:

  • In 1969 his “career” in the Air Force ended when he got into a fist fight with his commanding officer.
  • He is known to be a “competitive squash player.” As a former competitive squash player, I can say that Fuld must be very competitive.
  • His Wall Street nick name is “the Gorilla.”
  • The Times of London (9-16-08) describes him as “the brawler known as the scariest man on Wall Street.”
  • Observers of Fuld’s performance think he began to believe his own press notices, and that the accolades fed his risk taking tendencies.

In terms of the taxonomy provided by the Hogan Development Survey, Richard Fuld seems to be high Reserved and high Bold. Such persons are tough, private, incommunicative, impervious to criticism, combative, overconfident, and unable to admit mistakes or learn from them. They also consistently overestimate their own talent and capabilities and underestimate the challenges that they face. Observers report that, up until the final hours, Fuld thought he could “save” Lehman Brothers.