Today is my 35th birthday, and I would like to share a special story with you. It’s a story that I have never shared publicly, and no one really actually knows about. It’s a story that I often think about, but have never publicly shared. The story is a little long, but it also reflects what I believe is my single biggest act of courage in all my 35 years. Read the story of why I left Lehman Brothers exactly 80 days before the firm filed for Chapter 11 bankruptcy.
For anyone who needs a little refresher on Wall Street in 2004 to 2008, working as an analyst at a global investment banking like Lehman Brothers was a “big deal”, and there was a lot of competition across Wall Street to work on bigger and bigger deals, and it became that the definition of a “good deal” was a deal that happened to be larger than the one before it. It was also no doubt that my investment banking analyst position at Lehman Brothers was great win for my alma mater at the Kelley School of Business at Indiana University, where I earned my finance degree, magna cum laude, from the business honors program (I also sneaked into Stanford University to score that job at Lehman Brothers).
When Lehman Brothers hired me, I was very excited. Here I was, working for a highly reputable investment bank where I would surely learn more about business and finance than I would ever know, and maybe even about myself in the process. And then there was the enormous salary on top of that (my salary as a first-year investment banking analyst at Lehman Brothers at 23 years old paid me more than each of my parents’ salaries at the height of their careers). Then, a couple years later, I was selected to work on Wall Street’s biggest deal. I thought nothing could get better than this! But instead, things got worse.
Read the story of why I left Lehman Brothers 80 days before it went bankrupt.
It was the Spring of 2007, and I was selected to work on the biggest [i] leveraged buyout [ii] in the history of leveraged buyouts. Big deals were exclusively reserved for the firm’s top analysts in the merger’s and acquisitions group, and any deal over $1 billion was considered “big”. Further, it was a “big deal” to be selected to work on a “big deal”, and working on a once-in-a-lifetime deal was a “very big deal”. And because of it’s record-breaking size, this was certainly a “good deal” to work on.
At 25 years old, as the analyst on the deal, I was principally responsible for Lehman Brothers’ financial model of the proposed $51.8 billion dollar leveraged buyout of Bell Canada Enterprises (“BCE”). BCE is one of Canada’s largest companies and communications providers – it is basically like the AT&T or Verizon of Canada (BCE was called Bell Canada Enterprises because it was named after Alexander Graham Bell, who was the inventor of the telephone).
Our clients were several large institutional Canadian-based pension and investment funds that were interesting in bidding for the company. The financial model was highly complex, with thousands of individual assumptions. My role as Analyst was to maintain the financial model and organize all the analysis, while keeping track of thousands of variables and inputs while running different scenarios. This huge deal also attracted the best bankers within Lehman Brothers, and I was excited to work with and learn from some of the best within the firm.
This deal was expected to generate $34 billion of new debt ($34 billion was also the GDP for the entire country of Guatemala in 2007), and it was estimated that $500 million to $1 billion of fees would be generated for Wall Street investment banks if the deal went through.
Lehman Brothers expected to achieve huge financial gains, and every major investment bank on Wall Street wanted to quench its thirst with this BCE deal. For any bank that didn’t get a cut of this deal, their competitors surely would, and by default they were forced to try to be involved in this deal just to keep up with the fierce competition across Wall Street. There were hundreds, if not thousands of investment bankers across all the major Wall Street firms all competing against each-other and all wanting a piece of this action. With all this money to be made for Wall Street investment banks, this deal was certainly turning out to be a “good deal” for everyone involved.
I was eager and excited to start working on this deal, and the first step was to build the financial model from scratch using a blank Excel spreadsheet. For anyone that knows me, I pride myself on being an Excel Master – just like Mozart mastered the piano to make beautiful music, I mastered Excel to make beautiful spreadsheets.
But before building the financial model, I had to first understand BCE through its financial statements. When analyzing the income statement of BCE in 2006, we see that (A) Revenue is at $17.7 billion, and if you look at that Revenue from 2002 to 2006, you see that the numbers are stable, and it’s not really growing. This makes sense because this company is basically like a public utility and has very consistent and steady revenue because everyone needs a telephone but there are not too many prospects of significant growth (back then, people still had telephones wired in their homes so we had to model the growth of mobile phones but at the same time we knew people would be cutting off their contracts for their home phones, so it was basically a wash). We also see that (B) their Net Earnings is $2.0 billion, and that number is also very steady. $2.0 billion might seem like a lot of money, but given the company’s operating and financial cost structure of $15.7 billion, which pays for the salaries of tens of thousands of employees, re-investments in new infrastructure, and more – BCE’s earnings were on very thin margins.
Now let’s look at their balance sheet. As you see, (A) BCE only has $581 million of cash in its bank account, which is like nothing. Further, we see that (B) their long-term debt is at $11.9 billion, so adding $34 billion of new debt is a tremendous amount (even though BCE could potentially add on some additional debt, $34 billion could pose a big threat to the long-term sustainability of the company). Further, the proceeds of the $34 billion in new debt would be used to buyout the existing owners, so the company wouldn’t get the benefit of having the cash generated from the debt on its balance sheet.
It took a couple days of putting the financial model together, and when it was finished I noticed that this deal would only generate a return of 7-8% at best, with the peppiest revenue growth prospects and highest-possible reductions in cost structure. Further, the addition of new debt would significantly slash the net income of the company and it would deteriorate its ability to generate meaningful cash flow to shareholders.
At the end of the day, a good deal is defined by its Return On Investment (“ROI”), and this deal did not have a good ROI. It seems like the existing owners of BCE would get bought out at a good price, Wall Street investment banks would make a lot of money in fees, and yet our clients would only make 7-8% financial gain on the deal at best (and much less or even worse if things didn’t work out as planned, which tends to always happen). Our clients didn’t seem like they would be the big winners, yet everyone else was (which did not include the existing bondholders whose investment in BCE’s existing debt would be negatively impacted by the addition of new debt on the company).
Everyone who had a short-term stake in BCE would be winners (the old equity stakeholders and the Wall Street investment banks) and everyone who had a long-term stake in BCE would be losers (the new equity stakeholders and new and existing debt holders of the company). You could also argue that you could take all of that money and just invest in the S&P 500 (which has an average rate of return of 10%). It was always understood that you only do a leveraged buyout if the deal gets you at least a 20%+ return because of all of the risks involved. At the end of the day this didn’t seem like a “good deal”.
As you can imagine, my superiors didn’t like returns of only 7-8%, and they wanted to show the deal looking better than it actually was. They wanted the clients excited about making this deal happen since this Lehman Brothers could make a lot of money from it. What that meant for me was instead of spending time on this deal learning new insights, I felt myself digging a hole, then filing it back up, then digging another hole again, and then filling it back up.
Tweaking numbers made no difference to this financial model, the deal was weak, but it seemed like no one wanted to listen. I spent months changing financial model assumptions in thousands of ways, back-and-forth, and back-and-forth. Needless to say, the work was very tedious, and at times I felt I was going insane.
Even though I was the youngest and most junior banker working on the deal, I knew that the Bell Canada Enterprises leveraged buyout was not financially sound and could potentially bankrupt the company within a couple years – the numbers were clear and all of my financial modeling said so. I remember thinking to myself it should not be this difficult to identify a good deal, and we were all spending more time and work helping make this deal look better than it actually was.
In school, I learned that I should became proficient in the art of interpreting the language of numbers. Numbers speak if you listen. And if you listen, numbers will tell you their story. But, I realized my job was to do as I’m told and be a numbers whisperer. The numbers were loud; yet no one seemed to care enough to listen. I started my career at Lehman Brothers to learn as much as I could as I always wanted to be an entrepreneur, but changing numbers back and forth to make the deal look good is not learning. Numbers tell a story – numbers are black and white, and they don’t lie. The best thing you can do in business is be true to your numbers and add value to someone else.
So, after three months of working over 100-hour-weeks on this deal with financial modeling all telling the same story, I finally mustered up the courage to walk into the office of my supervisor to tell him I have to walk away from working on this deal.
I couldn’t keep on working on something I didn’t believe in and just changing numbers back and forth and back and forth. I told him that I’m not the right analyst for this project and told him I didn’t think this deal would work. I also felt I was going to throw-up, but there was nothing more I could humanly do.
Doing this was unheard of. If your superior gave you a project, you accomplished it to the best of your abilities. As an investment banking analyst, going against your superiors was like being a solider in the military going against the commands of your higher ranking officer – your role is to execute the commands of the officers above you, and you do not have the authority to go against them. Approaching my superior in this way was insubordination. Further, doing so on such a once-in-a-lifetime, record breaking deal was unprecedented. However, for me, being selected as the analyst to work on this record-breaking deal was an honor that meant that nothing if I wasn’t being true to myself and true to my numbers.
Walking away was also hard because it also meant walking away from my colleagues and teammates. I’m 100% a team player, and I felt that walking away was like going against my colleagues and friends (we even smuggled beer inside duffel bags and put our colleagues together at Lehman Brothers). Still, I had to do what was best for me because the numbers were loud, and I didn’t believe that just piling on a ton of debt onto a company was the right thing given its revenue prospects and cost structure. I ultimately did not feel proud to be part of this, but I also didn’t want others to think I’m being weak or that I’m not able to perform because I wasn’t able to perform my job.
Arguably, it wasn’t the bank’s decision to move forward with the deal, it was our clients who wanted to potentially acquire the BCE. But, I could also analogize a situation that a plastic surgeon must feel if he or she has a client who wants to have multiple plastic surgeries. It is ultimately your client’s decision to do multiple plastic surgeries and you can continue to perform them for your client and get paid significantly for it, but at some point you might say to yourself no I can’t do this anymore. You risk the client going to another plastic surgeon and you risk losing on getting paid, but at least you have had the integrity and ethics of telling your client what is ultimately right for them.
A year later, in May 2008, Lehman Brothers offered me a promotion to be an Associate, which was a promotion from being an Analyst and the starting salary would be $250,000 per year plus bonus. At 26 years old, I turned that offer down and formally left the firm.
A month later, in June 2008, my apartment burnt down and I luckily escaped death and destruction.
A month later, in July 2008, I was hired to work for hedge fund Aurelius Capital Management. What struck me as interesting when I was interviewing at Aurelius was it was focused on distressed debt. Out of all the hundreds of other financial firms I was looking at, there was no firm that I came across that was focused on distressed credit. I said to myself, this is interesting, this is unique. At Aurelius they also truly valued the opinions of their Analysts to provide critical and independent thinking and it’s also where I learned a significant amount about finance, business, and decision making.
The first thing Founder & CEO of Aurelius Capital Management Mark Brodsky told me to do was to read the book Fooling Some of the People All of the Time by hedge fund legend David Einhorn. Today, I can still say that Einhorn’s book is most inspirational one that I have ever read, and it’s a story of how hard and persistent David Einhorn had to be in digging the truth out of a company, and because the truth was hidden so deeply, there were immense profits to achieve in revealing the truth. I agreed 100% with this philosophy and the duty of hedge funds like Aurelius Capital to reveal the truth – I said to myself finally, this firm would be the perfect fit for me post-Lehman Brothers.
Two months later, on September 15, 2008, Lehman Brothers filed for bankruptcy, and the bankruptcy evoked a flood of troubled credit and distressed debt. Aurelius turned out to be the perfect career decision to position myself in a post-Lehman Brothers bankruptcy world. I actually escaped destruction again.
Three months later, on December 11, 2008, the proposed leveraged buyout of Bell Canada Enterprises officially went dead. After the credit crisis, all the Wall Street investment banks wanted to wash their hands clean of issuing any new debt because they knew they would incur huge loses once they would issue that debt. In regards to the BCE deal, the official nail-in-the-coffin was when accounting firm KPMG issued a report stating that the transaction failed its solvency test, which was a requirement for the deal to go through. That meant it was in KPMG’s professional opinion that BCE would go bankrupt if company would issue $34 billion in new debt. No expensive KPMG report was needed, it was all clear to me over a year and a half earlier.
In 1992, when my father was an aerospace engineer at NASA, he won NASA’s Space Flight Awareness award. The Award is one of the highest and most prestigious awards available to employees of the NASA’s spaceflight team for their dedication to quality work and flight safety. My father specifically won the award because he predicted that an upcoming NASA shuttle launch would explode. My dad was so certain of his analysis that he went out of his way to alter the highest of NASA’s current’s missions to abort the launch and publicly challenged his superiors with his models and investigation when they all disagreed with his analysis. My father risked his reputation by going against his superiors, and the delay of the launch cost NASA millions of dollars. It was later determined by NASA that my father was right, and he saved the lives of those astronauts and billions of dollars. It’s those stories you never hear about or get advertised. It was also my father who taught me to go against what everyone else says if you believe it’s right. My father also taught me to always follow my gut, because that’s how you find the truth.
This is an image of the Award. It was signed by Astronauts David Wolf and Eileen Collins, both of whom I also thrilled to met at the awards ceremony and I was 10 years old at the time (it’s a dream to meet an astronaut when you’re in elementary school), and I was extremely proud of my father.
If you’re still reading this story, I want you to take away at least this one thing today:
Value your relationships with others above everything else.
Coincidentally, the one thing I remember everyone always talking about at Lehman Brothers was how important it was to value relationships with your clients; that’s what ultimately matters the most. You never know how what you’re doing today will ultimately leverage you to where you hope to be. Always stay true to your values, and be good to the people around you.
I have many, many friends in investment banking and I am very supportive of its function within the industry. And to all my friends working in finance, please remember with all the power you have, you have that much more in responsibility.[iii] Everything ultimately in business relates to people, and passing money between people constitutes a relationship. Relationships are the most important thing we have in life, and they are more important than any deal or amount of money you might stand to make.
[i] Capital B intentional: Only transactions larger than $1 billion were considered “Big” according to Lehman Brothers’ Mergers & Acquisitions Investing Group.
At a projected valuation of $51.8 billion, the unprecedented Bell Canada Enterprises leveraged buyout of 2007 would have set a new world record and raised $34 billion in new debt.
Only the top analysts in the group were selected to work on Big deals like this one. Foremost, leveraged buyouts of this magnitude involved complex financial models embedded with intricate line items, all with individual assumptions per line item transaction.
If this sounds like confusing financial analyst jargon to you, just picture a Knex scale model of the United States, and you’re living inside it with the rest of your universe. Now imagine a whole bunch of analysts coming in and shifting pieces around. They better know what they’re doing, right? So basically, Lehman Brothers was highly selective in deciding who to assign on to big deals. Each move that I made had from hundreds to thousands of pieces at stake, all of which may directly affect the lives of at least as many people.
[ii] A leveraged buyout is a type of transaction that would enable investors to finance the purchase of a company through raising debt.
Think about how you buy a house. As a buyer of the home, you put 10% or maybe 20% of the total value of the house in cash, and then a bank would loan you the rest of the money needed to purchase the home. You obviously need to make enough income to support your mortgage every month, and the worst case in this example is that you can’t pay your mortgage, which then puts you in default of your loan. Ultimately you might be forced to give your home back to the bank.
In finance, this would be called a bankruptcy, and the buyer would have to give his ownership of the company to the lenders who would then likely restructure the company and sell it to new buyers. And that’s essentially how leveraged buyout deals work.
[iii] Remember again: Every line of revenue line item relates to people paying for a product or service, and every expensive line item relates to someone getting paid for their product or service. Everything ultimately in business relates to people, and passing money between people constitutes a relationship. Value your relationships.