The Lehman Equity Research Playbook


Lehman’s U.S. equity research department made the climb from obscurity to a top ranking twice in recent history, and now its successor has similar designs in Europe and Asia.  The goal looks overly ambitious, especially in Asia, but past history argues against counting them out.

Lehman managed to pull its equity research department from mediocrity not once, but twice.   The department went from 15th in Institutional Investor‘s rankings in 1987 to number 1 three years later, a feat that shocked its bulge bracket competitors.  In the turmoil surrounding Lehman’s spin out from American Express in 1994, the rankings plummeted, falling to a low of 13th in 1995.  In 1999, the firm began rebuilding its research franchise, and by 2003 regained the top spot in the U.S., which it has retained ever since.

The Challenge

Barclays Capital purchased Lehman’s North America franchise in 2008, and their goal now is to replicate Lehman’s meteoric rise in Europe and Asia, starting from scratch.  The challenge is daunting.  In Europe, BarCap is ranked 14th in the 2010 II rankings.  UBS, the powerhouse equity player in Europe, has held the top title for nine years.  It dwarfs competition with 28 ranked analysts compared to 22 for the next highest.  [Note: UBS made a minority investment in Integrity Research in 2008.]

BarCap is not alone in challenging for the top spot in Europe.  UBS arch-rival, Credit Suisse, went from number 5 in 2009 to number 2 in 2010.  Nomura, which acquired Lehman’s non-U.S. operations including Lehman’s European equity research team, rose from number 8 in 2009 to a tie for number 2 with Credit Suisse and JP Morgan.  Collectively, UBS and the three firms tied for second have 94 ranked analysts.  Barclays Capital has two.

If anything, Asia is an even tougher problem.  Each of the top five firms has 20 or more ranked analysts in Institutional Investor‘s 2009 All-Asia Research league tables.  Citi is on top with 28 ranked analysts, followed by UBS, JP Morgan, Credit Suisse and BOA – Merrill Lynch.  Nomura, now having Lehman’s Asian research team, tied for eighth place with Deutsche Bank and Morgan Stanley, each with seven ranked analysts.  BarCap was not ranked.

The Lehman Playbook

Lehman’s secret of success centered on building versus buying.  Its first ascent was engineered in 1987 by Jack Rivkin, who along with his COO Fred Fraenkel , pursued a strategy of growing talent rather than hiring it away from competitors.  Rivkin implemented rigorous training programs, performance measurement systems that evaluated skills including client outreach and circulated regular reports measuring analytic activity.  He and Fraenkel emphasized a team culture, adopting dress down Fridays and holding team-building off site meetings.

Women analysts thrived in the Rivkin/Fraenkel environment.  Nearly 30% of the analytic staff was female when the norm on Wall Street was 10%.  They were rewarded by having some of the top female talent on the Street including Elaine Garzarelli, a first teamer who had correctly called the ’87 crash (and is now an indie researcher with her own strategy firm.)  60% of Lehman’s women analysts were ranked compared to 40% of the men.

One of the advantages of Rivkin’s approach was the loyalty it engendered.  Lehman was able to run its research on a lower budget than its competitors.   In 1992, its budget was around $70 million compared to $105 million at Goldman and $125 million at Merrill (budgets are significantly larger now, even post-crisis.)  Its top ranked analysts were wooed by competitors offering higher salaries, but unwilling to leave their colleagues at Lehman.  The ensuing salary gaps were referred to within the department as the “Rivkin discount”.

The Fall

The wheels came off as American Express prepared to spin off Lehman.  Richard Fuld, then head of Lehman’s fixed income division, was put in charge of Lehman’s institutional businesses — capital markets and investment banking.  Fuld, a tough no-nonsense trader who had grown up in Lehman’s buttoned-down fixed income division, could not have been more different from Rivkin.  Rivkin’s dress-down Fridays, off site meetings and generally free-wheeling style were alien to the structured environment Fuld had built in fixed income.  Rivkin was ousted in 1992.

Lehman’s priority was to improve profitability in preparation for a spin-off in 1994.  Personnel and budgets were cut across the board, including equity research.   Compounding the stress, Fuld gave the top equity jobs to fixed income lieutenants who were hostile to the culture that Rivkin and Fraenkel had built.  Fraenkel held out until quitting in 1995.  The number of ranked analysts plummeted from nearly 40 in 1992 to 10 in 1995, and Lehman dropped from #1 to #13 in 1995.

Act II

Turnover became so great that in 1996 Fuld made fixing the equity division a priority and began replacing the managers he had previously appointed.  There were attempts to poach ranked analysts from other firms, and Lehman was able to move from a low of 13th in 1995 to 8th in 1998.  Real traction didn’t begin until 1999 when Steve Hash, an equity analyst, was put in charge of the US equity research department.  Hash had joined Lehman in 1993, catching the tail end of Fraenkel’s administration.

Rather than recruiting ranked analysts, Hash focused on building internal talent, restoring many of the techniques from the Rivkin/Fraenkel era.  Training programs were reinstituted, team building became important, and metrics were re-established.  The destruction of Lehman’s offices during 9-11 gave Hash an opportunity to pull the department together during the adversity.  Morale improved, the exodus of ranked analysts stopped, and recruiting young talent became much easier.  The number of Lehman’s II ranked analysts climbed from 19 in 1999 to 50 in 2003, as Lehman rose from #8 to #1, where it remained.

The Lehman bankruptcy in 2008 was a severe test.  We, like many others, were expecting that Lehman’s equity research would be toppled as analysts fled to new homes.  Instead, Barclays Capital was able to keep most of Lehman’s operations intact, maintaining the top ranking in the 2009 II polls.  Undoubtedly, Lehman’s strong culture helped, as well as the fact that most other bulge firms were also distressed.  Like the 9-11 experience, the bankruptcy helped bring the employees closer together.   The biggest blow from the bankruptcy was the loss of Lehman’s international operations, which was sold separately to Nomura.

The Outlook

Can Barclays Capital pull off an Act III, extending its top ranking in the U.S. to Europe and Asia?  The recipe for success is no secret.  It has been documented in a four-part Harvard Business School case.  Steve Hash, who was instrumental in rebuilding the department the second time, made no secret of using the HBS case as his blueprint for revitalizing the equity research department.  His actions, in turn, are now memorialized in the latest installment to the case.

Much hinges on the integration of the Lehman culture within Barclays Capital.  In the U.S. the culture is strong, but outside the U.S. it needs to be built from scratch.  Barclays brings strengths, particularly in Europe, but will its culture end up clashing with or diluting the Lehman gestalt?  This problem is not insurmountable, as UBS’s success in Europe attests, or Citi’s in Asia.  Nevertheless, cultural integration can be tricky and will need to be handled adroitly.

The other question is whether the Lehman playbook can be exported.  The core precept is growing talent rather than buying ranked analysts.  While much of the playbook translates well, it requires talented local managers who can recruit and nurture local talent.   This will be the key to Barclays Capital’s ultimate success in its goals.

BarCap’s non-U.S. goals are extremely aggressive.  Its competitors are well entrenched, and Barclays has  started with next to nothing.  However, Lehman pulled it off before, not once but twice.  With the right commitment from Barclays – analogous to Amex’s commitment to Rivkin in 1987, strong local managers, and some luck, it is possible there will be a fifth installment to the Harvard Business school case.


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email:

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