Richard Fuld Jr. has come a long way in the past six years. He has headed Lehman Brothers Holdings since it was spun off from Shearson American Express in 1994. Lehman certainly was not very impressive in those days, known mainly as a fixed-income shop.

Though still not a "bulge bracket" firm, Lehman's reputation and earnings have mushroomed. In addition to having become a more diversified player, it became the nation's most profitable banking company last year, producing the biggest combination of return on equity and growth in per-share income among the 100 largest banking companies.

Much of that is due to Fuld, who says he was left with a "hodgepodge" business after the firm was spun off from American Express. He quickly set about restructuring it, and within the first two years, he trimmed expenses to less than $1 billion, from $1.25 billion. He fired readily. The staff dropped to 7,500 people, from 9,400.

"Within a week or 10 days we fired 60% of the 550 brokers," recalls Fuld. "They weren't representing the firm; they must wear the Lehman hat."

Lehman now has 450 brokers, with the average producing $2 million in revenues, a far cry from the $500,000 when Fuld took over. (Of course, the last few years have been booming for the brokerage business in general.)

Equally important, Fuld set about to build a high-margin business, strengthening Lehman's equity side. At the time, equities was a $600 million business; that has quintupled to about $3 billion. "That business was hardly profitable at the time, now it's among the highest-return businesses," Fuld says.

Fuld also focused on stepping up investment banking profits from mergers and acquisitions and equity and debt originations. He decided the firm had to increase the number of its clients, and began bolstering its research team. At the time, Lehman placed about 14th on Institutional Investor's ranking. Today it ranks eighth. In more recent years, it has been building its capabilities in Europe, and now has 3,000 people there, who are producing 31% of Lehman's revenue.

Lehman also is building its funds management business, but is taking a different route than most. Its private equity unit focuses on the very wealthy and invests their money in what Fuld calls "alternative investments," such as merchant banking and venture capital. Lehman now has $5 billion under management, up from $1.2 billion four years ago. "We're making real headway," he says.

Fuld acknowledges that "we're in tough times," but says this is the time to grow. At a time when most other investment banks are laying off people, "we're still hiring."

But he says he doesn't know whether Lehman can earn the return on equity it did last year. Fuld is not happy with the price-to-earnings ratio on Lehman's stock, which has been far below industry averages. "It bothers me very much that our multiple isn't as high as the others," he says. "We're still the new guy on the block. We've been at it only since 1994. Everybody says, 'Let's see how they perform in a downturn.' Well, we're there now and we've performed well."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.