Dick Fuld, Wall Street's starchiest and longest-serving C.E.O, relishes his image for truth-telling as much as his oft-touted penchant for pugnacity.

As a kid, he made a last-minute confession to his father about breaking a neighbor's window because he knew the old man would see through his planned lie. As the longtime leader of Lehman Brothers, he knows that brutal honesty is the best way to deal with employees and shareholders.

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But Fuld's months-long insistence, repeated this week, that Lehman is "on the right track,'' that it is poised to exploit global opportunities, and that its employees are "holding [up] wonderfully'' as their mortgage-scarred fortunes wane has the self-deluded ring of a Crusader whose thirst for capturing Jerusalem blinds him to the losses he is suffering. And it may well cost Fuld his job and Lehman its franchise.

It's certainly not fooling shareholders. Lehman shares, which traded close to $68 in the past year, is approaching penny-stock territory, falling as low as $3.88 earlier today after plunging 55 percent on Tuesday and Wednesday. And the cost of insuring the firm's debt spiked up.

"Confidence and perception issues are overwhelming Lehman's franchise value," a Citigroup analyst, Prashant Bhatia, wrote today.

Investors weren't persuaded by the radical but far-from-complete plans Fuld hurriedly disclosed on Wednesday to sell most of Lehman's profitable investment management division and to unload some $30 billion of still-deteriorating mortgages and related assets into an independent "bad" bank that Lehman shareholders would own. 

And they're still choking at the $6.7 billion of losses that Lehman—the smallest of Wall Street's Big Four investment banks and the one with the closest profile to the late Bear Stearns—recorded in the last two quarters.

Holding the mortgages to maturity, or letting shareholders benefit by selling them when things improve, is far better than mimicking competitors like Merrill Lynch by selling them at drastic discounts today, said Fuld.

The solidity of the plan unraveled, however, after analysts drew out from Lehman executives that they might have to pump more than $6 billion of scarce equity into the new company to support it and also might have to finance the prospective buyers of the investment management group. And they began having new concerns that a slimmed-down Lehman has a bleak future since revenue in such core business as bond and stock underwriting was weaker than expected in the third quarter.

"We believe that Lehman still faces challenges to earnings given a lower capital markets environment for the next several quarters and further write-downs to its risk exposures,'' Oppenheimer analyst Meredith Whitney told clients.

Fuld's obstinancy—his minions tout his nickname of "Gorilla" to enhance his reputation as a boss who will stop at nothing to enrich the firm's reputation and treasury—may be his demise. Lehman, whose employees own about 25 percent of its shares, is reported to have balked at offers from Korea Development Bank to buy the whole firm at a discount to its book value.

The same could be said about his difficulty in selling the company's asset-management unit, which includes its Neuberger Berman fund franchise. Lehman officials left analysts scratching their heads yesterday by saying that though they are close to a sale of about 55 percent of the division they expect to retain a majority of the unit's income after the sale.  

Shortly before buying Neuberger Berman in 2003, Fuld said money-management was Lehman's one biggest gap, but acknowledged that he was wary of overpaying for an acquisition. Now he doesn't want to give it up, though a sale is integral to gaining the capital Lehman needs to finance the new bad-loan bank.

Moreover, a sale is likely to accelerate Lehman's risks, since it would probably sell most of the business to a private equity firm that will require financing from the broker. Lehman officials conceded on Wednesday that may happen, but they also said they will continue to prosper by retaining the most profitable parts of the division—including Lehman's minority investments in several hedge funds (though some are now in the doghouse) as well as its profitable middle-market money management operations.

There's also a family-jewels element to the asset-management sale. Without the division that provides steady fees for its assets under management, Lehman's entire business profile becomes more risky. It will be left even more dependent on its trading businesses, which require much more capital and are more vulnerable to economic cycles.

Fuld built his career on his smarts as a bond trader, and at least four times in his career has saved Lehman from crises that doomsayers said spelled its end. But in this crisis he may have played his last card. The Federal Reserve's decision to let large bond dealers like Lehman borrow directly from the central bank should have eradicated fears it would suffer the same liquidity stress as Bear Stearns, Fuld said last spring.

But as Bob Teitelman of The Deal observed, "allowing Lehman to shrink itself down to the point that its failure—if it comes—would not create a systemic disaster" for the Fed, because Lehman has been struggling for so long that trading counterparties and holders of its credit default swaps have had time to ameliorate their Lehman exposures.

The Wall Street Journal reports that Fuld has been scrambling to win assurances from his longtime colleagues at the likes of Goldman Sachs Group and Morgan Stanley that they will continue trading with Lehman, but well-placed sources at those firms and throughout Wall Street have for months said they have dramatically cut their exposures to the credit-stressed company.
 
Perhaps Fuld still believes he has the confidence of his board of directors, who awarded him more than $40 million of cash and stock last year for "successfully navigating the difficult credit and mortgage market environments and maintaining the firm's strong risk controls,'' in the words of the company's March 2008 proxy statement.

That same proxy congratulated Fuld for increasing Lehman's stock price by 104 percent over the previous five years, despite a 15 percent decline in fiscal 2007, and for fostering "an employee-ownership culture that promotes long-term alignment with stockholder interests.''

On Wednesday Fuld harked back to the firm's "long track record of pulling together when times are tough and then taking advantage of global opportunities.''

Honest broker that he is, as well as Lehman's biggest individual investor, he knows better. He's already dismantled his much-vaunted culture of corporate loyalty by eliminating the bulk of his management team over the last six months, and he can't help remembering that his former president and long-time ally Joe Gregory told shareholders at the company's annual meeting in April: "We've been down these bumps in the roads before…We're closer to the end than the beginning.''

For the 62-year-old Fuld, the end may indeed be in sight.

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