There are several accounts on what happened on and in Wall Street in the months and days leading up to the great financial meltdown of 2008. Some, like Andrew Ross Sorkin’s Too Big To Fail, are exemplary in their sheer reporting insights and access. You can hear the most private of conversations between the giants of Wall Street and the men and women of the US government in the last, dark days. You see, in stark and often pitiful detail, how the most powerful bankers on Wall Street were reduced to miserable beggars — organisationally, not personally, as their wealth will undoubtedly outlive them.
Most accounts portray the final, nail-biting moments over several sleepless nights and wrecked weekends (in more ways than one). The hectic parleys, lobbying and desperate bargaining that saw the rescue of some banks and the collapse of others, as hundreds of billions of dollars of taxpayers’ money was poured into the raging fire. To what effect is not clear even two years later.
But if you want a gripping, ringside view of what really went wrong, from the genesis of it all, read Lawrence G McDonald’s Colossal Failure of Common Sense, The Inside Story of the Collapse of Lehman Brothers. More than an account of an event, it scores as a primer for any CEO managing a modern-day corporation or a manager working in one, on Wall Street or Main Street. It’s an enjoyable account that’s extremely relevant even today. McDonald was vice president of Distressed Debt and Convertible Securities Trading at Lehman Brothers — and left before the firm disintegrated.
Colossal Failure is more than a Wall Street fable. It’s about what happens when business leaders lose their way, the why and how. It’s about greed and heady growth numbers corrupting the incorruptible. And the thrill of the quarterly bottom line glow causing near insanity. The picture of Lehman Brothers’ Chairman Dick Fuld painted by McDonald (and for that matter by many others) in the last days before the shutdown is of a zombie in utter self-denial.
Sample this: In a 2007 meeting with top executives, McDonald writes, trader Larry McCarthy laid out, loud and clear, the trouble ahead (the top brass did not attend this meet). “You see that right there?” McCarthy demanded hypothetically. “That’s a f---ing iceberg, and we’re headed straight for it, flank speed. Even the g--d---ed Titanic tried to swerve.”
The first takeaway from Colossal Failure is that you must increase the reading of business books not written by CEOs. After all, you do that all the time. You are rewarded with insights into new markets, growth strategies, challenges faced and overcome. And, of course, the growing up in the tough neighbourhood bit. There are stories of failures too. But usually the ending is happy — otherwise the book is not written.
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Few can or will describe what it feels like inside the palace when the king and his advisers are losing it. Few will admit they knew when the first cracks appeared on the pillars in the basement, because it’s likely they didn’t spot it. Few will acknowledge the crisis took hold when the best people down the line began leaving the organisation and the mediocre and yes-men took over.
Let me quote from McDonald somewhere in the beginning, “If only Chairman Fuld had kept his ear close to the ground on the inner workings of his firm — both its triumphs and its mistakes. If he had listened to his generals, met people who formed the heart and soul of Lehman Brothers, the catastrophe might have been avoided. But instead of this, he secluded himself in his palatial offices up there on the thirty-first floor, remote from the action, dreaming only of accelerating growth, nursing ambitions far removed from reality.”
Of course, that’s one viewpoint of the matter. But the fact is even the regulators knew little of what was going on. And it’s clear, albeit in perfect hindsight, that no one raised the red flag.
As McDonald writes, “Lehman Brothers continually visited the short-term commercial paper market, and borrowed more and more money, massive amounts, billions of dollars, always pledging their new toys as collateral. You would have thought someone might have yelled ‘STOP!’ or ‘BASSA!’ or ‘ARRETE!’ or ‘ACHTUNG!’ or even ‘HOLY SHIT!’ — because the toys were bought with borrowed money! And those toys were time-bombs despite their fancy names, CDO, CLO, ABS, CMBS.”
The financial world has learnt lessons from the meltdown of 2008. If anything, it has taught regulators in countries like India that it pays to stand up to Wall Street lobby pressure to open up financial markets. It has re-taught some of us the old rules that there is no easy money to be made. And that banks must be run like banks, with an overhang of public service, and not as stock-option-juiced money-making machines for obscenely paid bankers.
The bottom line is that two years later, the sorcerers of securities — McDonald’s line, not mine — are still lurking out there. Tough regulation and oversight have pushed them back from frontline finance. But return they will. Their minds are undoubtedly plotting the next big “legal” financial product that can change the world and their fortunes. And they will attack with greater conviction and force. The question is: will we believe them and go with the ride or will we fight back?
COLOSSAL FAILURE OF COMMON SENSE
The Inside Story of the Collapse of Lehman Brothers
Lawrence G McDonald with Patrick Robinson
Crown Business
351 pages; $16
