READ THIS: A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald with Patrick Robinson
Once upon a time, Peachy Deegan lived in another city and worked at a brokerage firm although she was underemployed. She had big dreams, and after eleven interviews for an investment banking analyst position, Lehman Brothers offered her the opportunity to come to Manhattan and work for them in this pre-9/11 world. So, if it were not for Lehman Brothers, Peachy would not have ended up in Manhattan and would not be writing Whom You Know today.
She loved most aspects of working at Lehman Brothers, and worked with many great people, some of them are our closest friends to this day. On 9/11 she was running a bit late to work as she had voted for Mayor Bloomberg in the primary that morning on her way to 3 World Financial Center, and just missed walking under the towers as the planes went into them. The firm stuck together then though and moved uptown to occupy the space in Times Square that Morgan Stanley had built, although it was not big enough for the whole firm, so some including Peachy went to 399 Park. We left long before the collapse, but were particularly interested in what Lawrence G. McDonald had to say. The former VP at Lehman Brothers reveals the real story behind one of the biggest bank failures in American history. This new book includes never-before-told-stories about the crash that didn’t have to happen. Like McDonald, we are no longer angry about this but just very sad. The collapse of Lehman, a distinguished 158-year old American banking institution, is the largest bankruptcy in history and has indeed obliterated the world's economy, as McDonald states.
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald, former vice president of Lehman Brothers, with Patrick Robinson, tells the tale of the fall of legendary financial house Lehman Brothers, a pivotal moment for the global economy. Many consider it the epicenter of a worldwide economic crisis that sent the financial world into a tailspin as Merrill Lynch, Bank of America, AIG, and others fought to survive the aftermath. Among other things, Americans saw their 401(k)s decimated, home-equity lines slashed, and even paychecks bounce. Surprisingly, the story of what really happened behind the scenes has gone untold until now.
Lawrence G. McDonald, in A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (Crown Business, on sale 7/21/09), is the first to bring us inside what is considered to be the greatest bank failure in American history and answers the questions that still haunt so many: What happened at Lehman Brothers and why was it allowed to fail? We at Whom You Know feel that this is important reading for every Manhattanite who wonders why the city has changed so in this economy-it is packed with answers to that question. Even if you are not in finance, you will find this a riveting read, and perhaps if you aren't in finance it is even more necessary for you to understand this world rather than be part of the ignorant, idiotic herd mentality that condemns Wall Street as a whole rather than look at the details of the problems. We would have to vehemently agree with McDonald when he says on p.320 that: "It was like 24,992 people making dough and 8 losing it."
Lawrence G. McDonald, former vice president of distressed debt and convertible securities trading at Lehman Brothers, offers as clear an explanation as possible about the real reasons why the storied financial institution met with such a swift ending. “The lessons therein are important for beginning to understand how we can prevent such disasters in the future,” he says, “and I hope will ultimately help Wall Street do a better job of serving Main Street.” Over the course of writing the book, McDonald interviewed more than 150 employees at all levels of the company, from the highest ranks down.
What you, the reader, needs to realize is that this was a national problem before it was a Lehman Brothers problem. McDonald eloquently and succinctly lays forth facts that are irrefutable. Right off the bat on page four he states how the government during the Clinton administration incentivized banks to lend to those who were not necessarily credit-worthy, to put it nicely as we do try to do at Whom You Know- in order to achieve a good community reinvestment act rating. The repeal of Glass-Steagall also played an instrumental role as a catalyst to this financial collapse.
In the book, we get a close-up account of the participants in the Lehman collapse, especially those who saw it coming with a helpless, angry certainty. We meet those at the top, whose reckless, pedal-to-the-floor addiction to growth finally demolished the nation’s oldest investment bank. The Wall Street we encounter here is a ruthless place, where brilliance, arrogance, ambition, greed, capacity for relentless toil, and other human traits combine in a potent mix that sometimes fuels prosperity but occasionally destroys it.
The book reveals never-before-told stories about how those at the helm refused to heed warnings that the company was headed for an iceberg. McDonald also introduces us to the hard-working, devoted people who valiantly fought to get Lehman off its disastrous course. Ultimately, he shows us that it was a crash that didn’t have to happen. Other revelations include:
There were several attempts within the company to stave off disaster, but those at the helm refused to listen
Never-before-told efforts to save Lehman in the last days, including a call to the White House by the former president’s cousin
How anyone who warned of impending disaster or that the company’s addiction to leverage and risk was dangerous was fired
The secret mutiny by high-powered managing directors that set up a coup against chairman and CEO Richard Fuld and president and chief operating officer Joe Gregory
The details of a call between a Lehman managing director and Hank Paulson in 2007
That the team running the company was totally disconnected to the people on the trading floor and to the complexities of today’s financial products
There were major warnings starting as early as May 2005 that could have pulled Lehman back from the madness of the housing market
How a dinner between Dick Fuld and Hank Paulson may have sealed Lehman’s fate
A Colossal Failure of Common Sense also follows the personal journey of McDonald—his rise from a Massachusetts housing project to the third floor of Lehman’s New York headquarters, home of one of the world’s toughest trading floors.
The full significance of the dissolution of Lehman Brothers remains to be measured. This much is certain: It was a devastating blow to America’s—and the world’s—financial system. And it should never have happened. This is the story of why it did.
Included in the book are life lessons not to overlook: the author's father told him in life, it is not where you start, it's where you finish...tenacity counts for quite a lot and winners never quit and quitters never win...and sometimes to get what you want you have to be a bit cunning and dress like the pizza delivery boy (or girl). Perhaps more important than understanding the components that led to this financial collapse is the picture McDonald paints of a work environment that can be impossible to succeed in, and also shows what downfalls can come when personalities and alliances don't work for the greater good and don't understand specific problems. Particularly when they are pulling the the trigger for many...
Among Lehman Brothers other problems are the mismanagement of risk and the lack of resources devoted to that area. We at Whom You Know are all about risk management and doing smart things in all aspects of life. Not that diversity isn't great, but we found it surprising that on p. 214 we learned the top dog in diversity was making $2mm a year and that that group had a bigger budget and more people than risk management. Perhaps if more was devoted to risk management, LEH would still be trading today.
Most troubling is the lack of respect it seems was given to experts in certain matters: on p. 234 the Head of Fixed Income warned the powers that be of the coming credit crunch. And then the powers that be on p. 274 nicely rewarded themselves for being asleep at the wheel...
Among the most ironic quotes is found on p. 317 where Dick Fuld, former Lehman CEO, is quoted as saying: "The key to risk management is never putting yourself in a position where you cannot live to fight another day."
Good luck to everyone at Barclays and everywhere on Wall Street who is still fighting.
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ABOUT THE AUTHORS: LAWRENCE G. MCDONALD is a managing director of Pangea Capital Management LP. He was, until 2008, vice president of distressed debt and convertible securities trading at Lehman Brothers. He ran a joint venture between the firm’s fixed income and equity divisions and was one of Lehman’s most consistently profitable traders. McDonald is also cofounder of Convertbond.com, named by Forbes magazine as “Best of the Web” from 2000 to 2003, specifically citing it as the Web’s premier source for convertible securities information, valuation, and news.
PATRICK ROBINSON’s most recent book is Lone Survivor.
