While impressive, these strides leave Lehman far short of its goal. By early next year it will have pared total costs by roughly $300 million, or about 11%. It has already chopped its bloated work force from 9,400 in early 1994 to some 8,000, partly by trimming its army of brokers for private clients. Lehman pegs its survival as an independent outfit on the laudable goal of achieving a 15% return on equity within two or three years, a target it will try to reach by taming expenses and increasing revenues. At some point that well is bound to run dry. Lehman sharply curtailed the funding of merchant-banking activities in 1994, and since then it has mostly been pulling out money. Worse, a big piece of its profits flows not from its staple businesses but from gains on merchant-banking investments made in 1989 and the early 1990s. Bernstein & Co., a figure way below the industry average (see chart). Excluding extraordinary gains, Lehman is expected to post around a 7% return on equity for the fiscal year ended November 1995, according to Sanford C. Lehman's pay scale is de rigueur for the gilded indus- try, but its profits are not. That averages more than $150,000 a year per person, pretty pricey considering that the work force includes a humble flock of secretaries and computer operators. Roughly half the firm's revenues-they reached $2.7 billion in the 11 months ended November 1994-are spoken for in the form of salaries and benefits. Like all of Wall Street, Lehman already faces mountainous people costs. The restricted stock is lavished only on highly valued staff, but it vests so quickly-after just one year-that it will hold them only if the shares perform well, a prospect made dimmer by the ongoing dilution. It has also crimped its own stock market performance with a compensation plan that heaps enormous quantities of restricted shares on employees, diluting the stake of current investors. 2 in the enormous yet low-margin fixed-income trade but trails in far more profitable areas like equities, where rivals like Merrill Lynch make real killings. The hard fact is that the firm today suffers from a poor mix of businesses. Lehman's problems aren't all the result of Golub's harsh terms. To Golub, it was probably a fair assessment designed to fetch Amex a decent return on its multibillion-dollar investment in Shearson/Lehman.
At the time of the roughly $2 billion spinoff in 1994, Golub forced the firm to shoulder potentially damaging liabilities for a bunch of failed limited partnerships, to agree to hand over a big chunk of Lehman's future profits, and, some contend, to take a chunk of Amex's expensive office space. When Amex CEO Harvey Golub dumped first Shearson and then Lehman as he sought to extricate his company from the volatile brokerage business, he saddled Lehman with enough financial claims to make Lehman's future a struggle. So far, it is lagging behind in that race, hobbled in part by the heavy financial burden that it carries-a legacy of its bondage to American Express. "We have scars on our back from working for a travel company," he says disparagingly of the ten-year period when American Express called the shots.īut whether Lehman's future leads to glory or servitude will depend on whether Pettit can quickly get it up to speed with the Morgan Stanleys and Goldman Sachses and achieve the same profitability. Under those rules, Pettit's dream doesn't square with the numbers: Lehman's stock sells at less than book value, offering a low-cost move into Wall Street for some acquisition-hungry European bank or even a domestic financial services company. The rules of this era are simple: the strong acquire and the weak work out severance packages. This is, after all, the Nineties, the decade of the great financial consolidation, where banks, brokers, and financial wannabes are folding into one. Huh? Hearing of that vision, one might reasonably wonder whether Pettit dreams too much. "Many, many years from now," he says, "I want my name etched in granite in the corridors of Lehman." It's not a job, he seems to believe, it's his destiny. Pettit, Lehman's chief operating officer, also has a more personal objective: to wind Lehman back closer to how he found it in 1977 when he signed on as a young salesman fresh out of teaching math in junior high school-a proud institution run by loyal partners.
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Pettit and Richard Fuld, the firm's top strategist and CEO, see an investment bank reaching into the global big time by serving the full financial needs of giant corporations and wealthy individuals.
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