Guest Post: Recent Lehman MD Reviews "A Colossal Failure of Common Sense"

Submitted by Arthur Doyle, a managing director at Lehman Brothers until the summer of 2008.

When an apple has ripened and falls, why does it fall? Because of its attraction to the earth, because its stalk withers, because it is dried by the sun, because it grows heavier, because the wind shakes it, or because the boy standing below wants to eat it?

Extra points if you recognize this selection from the beginning of Tolstoy’s “War and Peace,” his critique of the “Great Man” theory of history, in which he argues that events follow organically from the circumstances of peoples rather than from the actions of kings who are “the slaves of history.” In contrast, historians such as Thomas Carlyle argued that “the history of the world is but the biography of great men.” Carlyle’s view held great sway for much of the 19th and 20th centuries, only gradually giving way after World War II with the rise of new disciplines such as social and economic history.

Some ideas, however, die more easily than others. Though the “great man” theory has lost its hold on Ivy League history departments, it lives on in popular culture. And nowhere is it stronger than in business journalism, with its breathless accounts of heroes and villains…the crazed homophobic Jimmy Cayne, the bloodless executioner Hank Paulson, the naively overreaching Ken Lewis, and so forth.

In this tradition comes “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” by former Lehman trader Lawrence McDonald and best-selling ghostwriter Patrick Robinson (Crown Brothers, New York, 2009, $27.00). McDonald traded high yield bonds for Lehman from 2004 to early 2008. He worked for, and admired, Mike Gelband and Alex Kirk who were Lehman’s heads of fixed income and high-yield trading. Gelband and Kirk were known within Lehman to be critics of CEO Dick Fuld’s strategy of aggressive expansion of the firm’s real estate business during the late stages of the credit bubble. Both men left Lehman in 2007 after losing internal political struggles over the direction of the firm (and its excessive leverage), only to return in its final days in a doomed effort to steer the Titanic away from the iceberg.

Mr. McDonald’s tale, as told by Mr. Robinson, is a thriller. However you may disagree with his premise (that Lehman was a firm filled with heroes and geniuses, lain low by the treachery of a handful of stubborn fools), it is impossible not to get caught up in the narrative. McDonald has a somewhat unorthodox rise, from community college to pork chop sales to retail stock brokerage to, finally, a coveted place on a Wall Street trading floor. And the Lehman Brothers he finds is everything he hoped it would be: razor-sharp analysts teaming with gutsy traders, taking million dollar risks and earning multi-million dollar paydays. We are, predictably, regaled with tales of wildly extravagant spending on meals and toys, huge casino wins and huger losses, all absorbed with aplomb.

Mr. McDonald and his merry band, Larry McCarthy, Rich Gatward, Alex Kirk, and the rest, move from one success to the next: at one moment shrewdly buying Delta Airlines bonds when the firm goes into bankruptcy (on the advice of researcher Jane Castle, who knows so much about the airline she “could tell you what meal they served in first class on this morning’s flight from JFK to Berlin”), the next moment shorting the bonds of Calpine, the electric utility.

But it doesn’t take long to get our first indication that all is not well at the House of Lehman. McDonald never meets the firm’s reclusive CEO, Richard Fuld. Not that unusual for a vice president…but then he reveals that his boss has never met Fuld either, and that his boss’s boss, Mr. Kirk, has only “seen” Mr. Fuld on a couple of brief occasions. McDonald has very little idea about what kind of person Mr. Fuld is, other than anecdotes retold by colleagues or clippings from the press, but what little he knows makes him nervous: Fuld is reclusive, zipping from his chauffeured Mercedes to a private elevator directly to the 31st floor executive suite, never stopping to mingle with the troops along the way. And Fuld, it seems to McDonald and his colleagues, is under the spell of the firm’s largest profit generators, the mortgage and real estate groups. Mr. McDonald doesn’t know these folks well, either, but once again what little he knows he doesn’t like: the mortgage traders are said to resemble Hollywood divas, making late entrances to meetings due to their supposed fondness for “long walks on the lake at Central Park.”

Some time in 2006, Mr. McDonald and his bosses begin to sense cracks in the housing market, and begin to worry that residential mortgage securitization will freeze up and leave Lehman Brothers holding millions of mortgages, originated by its partners, that it will be unable to sell on to hedge funds, pension funds and other clients. This could weigh down the firm’s balance sheet and profit stream, and potentially put the firm’s survival in doubt. The traders begin to take short positions in homebuilders and mortgage brokers, to try to offset this risk, but soon realize that the scale of the potential problem is too large to be addressed by their desk alone. When their attempts to persuade the mortgage guys to “slow down” are met with mockery, Gelband, head of the fixed income division, goes to Fuld himself to try to get the firm to take steps to protect itself against the downturn.

Predictable results ensue: the ignorant Fuld and his jealous deputy Joe Gregory attack the bearers of bad news and call for more and faster growth. As though determined to go to ground as spectacularly as possible, in mid-2007, a full 18 months after the beginning of the real estate downturn, Lehman buys Archstone-Smith, one of the largest residential apartment owners in the country. The rest follows inevitably: from the collapse of sub-prime, to Bear Stearns’ failure in Mar 2008, to Fannie & Freddie’s nationalization, to Lehman’s final collapse in September. Mr. McDonald’s account, though interesting, adds little to what is publicly known about Lehman’s last days. This may be because he left the firm in March of 2008, shortly after his mentor, Larry McCarthy, had resigned.

Ultimately, Mr. McDonald’s view is that Lehman’s collapse was an unfortunate and totally preventable disaster caused by a failure of leadership. Mr. Fuld, a trader from a different era, used the wrong playbook for the 21st century, and his personality defects (jealousy, arrogance, hubris) prevented him from taking counsel from those who could have helped steer him clear of trouble. He chose to listen to those who flattered him and those who delivered the largest short-term gains, and blinded himself to the risks of leverage.

This is clearly what Mr. McDonald and his colleagues believe happened to Lehman, but is it the truth?

In a narrow sense, yes, since it was Fuld’s specific decisions regarding the real estate and mortgage businesses that led the firm to fail.

But in a broader sense, Fuld is irrelevant. Given the combination of the credit bubble and the availability of cheap, plentiful leverage, along with an asymmetric reward structure (which paid out huge bonuses to managers from profits generated from that leverage but had no mechanism to punish those managers for taking risks that led to bad outcomes), wasn’t Lehman’s outcome inevitable? Doesn’t the fact that all of Lehman’s close peers–Bear Stearns, Merrill Lynch, Citigroup, Bank of America—either collapsed along with it or were saved through quasi-nationalization argue that there is something a little fishy about making Fuld, obnoxious as he was, into the lone gunman in the Lehman homicide?

To take it a step further, what might have happened had Fuld elected to sit out the latter stages of the mortgage securitization and leveraged loan booms? Lehman didn’t have Goldman’s strength in proprietary trading or Morgan’s banking franchise, so the firm’s profit and return on equity would have lagged behind peers. Gasparino and Cramer and the rest of the TV donkeys would have called for Fuld’s head instead of praising his “brilliance” and “toughness.” With a smaller bonus pool and weaker stock, Lehman’s talent would have been easy picking for hyper-aggressive peers like Deutsche Bank and UBS. So why not, in the famously ill-timed words of Citigroup’s Chuck Prince, “keep dancing until the music stops?”

The eagerness of the Street and the media to pin this meltdown, which has ruined millions of lives and cost trillions of dollars, on a couple of old guys (however greedy, vain and stupid they were), rather than on an out-of-control financial system desperately in need of reform, speaks volumes about who creates the narrative in this country, and how much those narrators feel they have to gain by retaining the status quo.

Mr. McDonald has a bit more self-awareness than the average Wall Street trader, but there is a delicious moment of unintended irony when he stops talking, for a moment, about Lehman’s excessive leverage and risk taking, and instead focuses on his own complaint that his bonus for 2007 is inadequate. Mr. McDonald’s trading book generated over $30 million in profits for the year, and, he says, that there was an unwritten rule that every $20 million in profit should generate a bonus of $1 million for the trader. At the same time, he whines, Mr. Fuld and Mr. Gregory took home bonuses of $35 million and $29 million, despite the fact that Lehman’s problems were, by then, becoming apparent (in spite of the excellent reported results for the year ending November 2007).

There is almost too much material in this thought to tease it all out properly. For one thing, where does Mr. McDonald think that all the money came from for him, a junior trader at a relatively poorly capitalized firm (compared with its peers), to generate profits of $30 million? Could it be possible that without the 30-1 or 40-1 leverage that Mr. McDonald decries, there would not have been capital available for him to put on his trades? Or that, without the leverage, the firm would have had to have been much larger for him to have made the same bets, meaning that there would be more mouths to feed besides his own?

For another thing, which is it? Was Lehman doing really well at the end of 2007, in which case Fuld and Gregory (and McDonald) should be entitled to big bonuses, or was it teetering on the brink? By McDonald’s outraged reaction to Fuld and Gregory’s payouts (which were roughly flat with their 2006 bonuses), clearly he thinks that the firm’s published financials did NOT really reflect the firm’s fiscal health, so large bonuses to EVERYONE (Mr. McDonald included) were not appropriate.

The most important questions of all are not even asked in “A Colossal Failure of Common Sense,” or in any other account I have so far seen of the Lehman failure. Simply put, how did Lehman’s published financial statements, as recently as its final 10-Q published in July of 2008, show a positive net worth of $26 billion, when the bankruptcy liquidators are saying that they are looking at a negative net worth of $130 billion?

Put another way, “Why is it that Lehman’s $660 billion balance sheet, heavily weighted in real estate and residential mortgages, experienced no writedowns whatsoever before February 2008, and writdowns of less than 1% of total assets thereafter, in the midst of the largest collapse in value of such assets in recorded history?” And why did Lehman management assert, repeatedly, through the crisis that it had no problem with liquidity or solvency, when clearly it had problems with both? How is it that the sale of preferred equity securities by the firm in April of 2008 was accomplished without revealing that the firm’s assets would soon be revealed to be worth over $100 billion less than its liabilities? Doesn’t any or all this constitute securities fraud? And shouldn’t there be criminal liability for the executives who signed the firm’s 10-K and 10-Q’s, who under Sarbanes-Oxley are responsible for material misstatements made in those documents?

All of these questions may or may not be answered in the fullness of time, once the bankruptcy is concluded. And it will be satisfying, in some sense, if those who knowingly committed securities fraud, if that is what occurred, are brought to justice.

But in a larger sense, books like Mr. McDonald’s, focusing as they do on heroes and villains, rather than on real flaws in how we conduct our financial capitalism, and how we regulate our systemically important institutions, are doing greater damage than what may have been specifically wrought by Mr. Fuld and Mr. Gregory. They promote the myth that, in the end, Lehman is a tale about a few bad apples who screwed up a great bank, rather than about a system run amok, where insiders reaped enormous rewards for creating risks borne by the society at large.

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  1. attempter

    This is another in the pattern of such pieces meant to isolate the "bad apple" and exonerate the system.

    Thus we recently had Gladwell's piece on Bear and Jimmy Cayne and the "overconfidence" of leadership, and Lewis' piece on how Cassano was an insecure jerk who single-handedly brought down AIG.

    I don't know to what extent these individual writers are trying intentionally to exculpate the FIRE sector itself, as opposed to it being a cynical assessment of what makes for a good story, as opposed to their truly believing in the bad-apple version of the great man theory.

    Of course what I just said about "individual writers" runs the risk of focusing too much on individuals. The most likely structural explanation is a combo of the corporate media having an exculpatory agenda, with its self-interest in punching up and personalizing the story as much as possible.

    The dour, sinister Richard Fuld as villain makes for a more exciting story than the history of mortgage deductions, financialization, and deregulation. (Although there we have the evil and snarling Phil Gramm. If you really need a personalized villain, he's closer to the structural core than the likes of Fuld.)

  2. wintermute

    The last sentence summs it up. The insiders, executive officers, reaped huge rewards. In fact they could reap in one year in renumeration than they would need for the rest of their lives.

    So they had zero concern about Lehman Brothers the company in ten or even five years hence. No writedowns occured because they did not care if the ship hit the iceberg because they had offloaded all the gold already.

    The company was being used as a get-rich cash cow by the people most trusted to run it prudently. We saw the same with Tyco and Enron and Countrywide. Yet regulators had zero concern that the "corporate pillage" was rampant at Lehmans or indeed many firms.

    The regulators just wanted to see the big numbers pile up, keep the casino running, because it made them feel like masters of the universe too. Eventually the head of the NYSE (a regulatory position) was raking in the same egregious sums – corporate pillage spilling into the regulatory space.

  3. Ina Pickle

    Excellent review. I agree wholeheartedly that it was the system itself that caused the problem – and continues to cause it, as it remains utterly unreformed and unchanged. It interests me how deep the human desire runs for heroes and villains rather than for reflection on how chained we are to the system itself. It's like blaming a hamster in a cage for soiling its bedding.

    But considering that this is the story that people want to believe, and that this is the story being sold at all levels of the media, and the banksters are working overtime spending public money to buy lobbiests who will subvert the public's interest in reform of the system, how are we going to fix it?

  4. DownSouth

    Arthur Doyle's excellent review only sets the stage for many more questions. How much control do Americans, or any nation, actually have over their national destiny? Was America' rise to prominence due to how advanced and virtuous we were (certainly the view most popular amongst Americans), or was it due more to providence? Once a hegemon descends to the level of economic, military, moral and intellectual decline that the U.S. has, is restoration even possible?

    Kevin Phillips in his trilogy of books– Bad Money, American Theocracy and Wealth and Democracy–makes the rather pessimistic case that no post-Renaissance hegemon (Spain, Holland or Great Britain) has staged a comeback once decline began.

    A more optimistic outlook is provided here by Peter Turchin:

    Turchin posits what he calls "the puzzle of empire:"

    There have been hundreds of books that historians and other social thinkers have written on empires, but most of them focus on the decline and fall of empires… But I think a much more challenging question is how is it possible for such huge territorial states to exist in the first place. What are the social forces that held together across history huge societies that controlled millions of square kilometers and populations of tens, or even hundreds, of millions of people?

    Turchin says his favorite theory to explain "the puzzle of empire" is that of "multi-level selection". It is being developed by scholars such as David Sloan Wilson, Rob Boyd, Pete Ricerson, Sam Bowles and many others. This theory holds that "cooperation is really the glue that holds societies together."

    For a more detailed explanation of the theory of multi-level selection, this lecture by Jonathan Haidt gives a general overview:

    Turchin goes on to make the case that religions and philosophies began to evolve during the period 800 to 200 B.C. that provided the the "integrative ideology"–the glue of cooperation–that allowed societies to evolve on a much greater scale than anything seen before.

    The integrative ideology that came to dominate Western culture since the eighteenth century is known as modernism. As Daniel Yankelovich points out in Coming to Public Judgment,

    its principal features are its emphasis on market values and other manifestations of individual choice, secularism, a concept of instrumental rationality, democracy as a political system, and a culture characterized by individualism, diversity, and pluralism in values and forms of cultural expression.

    I believe it goes without saying that the behavior of persons like Fuld, and even those of people like McDonald, are extremely destructive to social cohesion.

    I think a more difficult question, however, is whether their behavior falls within the guidelines of modernism, which would call into question the entire ideology of modernism and its role as a socially integrative ideology, or if their behavior is a corruption or perversion of modernism.

  5. Anonymous

    One of the structural changes that preceded this downfall was that the securitization business broke down the walls between investment banking and trading. Traders are thinking about how to sell and asset before they even bid on it. Investment bankers traditionally were kept in check by the process.

    When bankers are given free reign to take down positions, this is the result.

    Fuld fancied himself to be a trader, but neither he or Gregory were really traders. Fuld came out of commercial paper which is really a game of corporate credits, not trading.

    I agree, btw, that there wasn't a good way to be 'smart' during this bubble. The old phrase that 'the market can be irrational longer than you can stay solvent' applies here.

    Even Goldman's approach didn't really work. The hedges with AIG failed (save for the government bailout) and they were on the hook just like everyone else.

  6. "DoctoRx"

    1. A fine, well-written review.

    2. We all know about the systemic problems. But what happened to each IB firm was in retrospect predictable:

    a. Bear was widely hated and went down first; the Street partied and JPM got a gift.

    b. Merrill had too good a name to die and so BofA's masters saved BofA only if it would save Merrill and use its name.

    c. Goldman was fated to be the big winner. Think they had a friend at Treasury?

    d. Morgan Stanley, as the offshoot of JP Morgan who "saved" the US Govt in 1907, was going to be OK.

    e. That leaves Lehman: jump ball.
    Well-liked as a firm historically, perhaps, but then there was Fuld. And no name such as Merrill Lynch of value to a "retailer" . . So I'm not sure I fully agree with the reviewer's conclusion.

    3. Re Phil Gramm ("attempter 5:53 AM): A senior Congressman who was my patient assured me that he was, indeed, a nasty man.

  7. Anonymous Jones

    This was an excellent, well considered review. I wish more analysts were as attuned to the real context of business as Doyle is. To blame this on individuals in charge is foolish, of course, once one realizes that the system is set up in such a way that there is no other possibility than that such individuals will end up in charge. Power and capital will flow to the most profitable in the short term. This is the market. The idea that decision makers are sufficiently attuned to long term repercussions is not borne out by any fact set in the history of humanity.

    Throughout the real estate bubble, especially here in the West, I saw many a prudent company simply fade, leaving only the most aggressive operators. This is what happens in a bubble, the most aggressive (and often the least intelligent) out-compete the prudent. There is no other possibility. Obviously these "winners" blew up in the last two years.

    Hayek fairly well establishes the the virtues of competition: in setting market prices, increasing efficiency, and establishing anchors for what is really valued by individuals. At the same time, if one cannot realize that competition, in certain circumstances, simply results in a "race to the bottom," one's input to the debate is likely to prove hollow. There has to be a balance in which society tries to regulate away the behavior that leads to mutually assured destruction while preserving the benefits of liberty and competition.

    Anyway, this was a great review and a great addition to this blog.

  8. Rolfe Winkler

    Great post Yves. Would love to hear more about the lies on Lehman's balance sheet. What DOES account for the gap in net worth exposed by Lehman's liquidators? What are the balance sheet implications for other large financials?

  9. Siggy

    Down South,

    Well done! Fuld, Cayne, McDonald etal cannot exist without something being seriously amis with the generally accepted ethos. As much as we are 'bailout nation' we are also morbidly obese. I've got my Hummer and McMansion, screw you! The attitude is appalling in its self-centered focus. Back in the late thirties a professor at the University of Chicago wrote about social class in America and and took the position that wealth, race and education were the principle definers of status. Over the years we've dumbed down our educational system inorder to make class mobility available to all. The overiding negative factor for our society is numerical growth that fosters an increase in mediocrity. The current players are cut from the same cloth as the 'Robber Barons' of the mid to late 1800's. The significant difference is that the current crop of kleptocrats are leaving us with only a legacy of debt rather than a rail system, some oil refineries and steel mills. The government now plans to initiate a consumer protection agency. Sounds a lot like 'I'm from the government and I'm here to help'. What ever happened to caveat emptor? What ever happened to personal responsibility? It seems to me that Bear Stearns, Merrill, AIG and Lehman each failed but in slightly different ways. What is especially troubling is the fact that a number of people who probably belong in jail wont go there. As I see the systemic risk we face is that we are incapable of doing what is necessary to extricate ourselves from this mess. That is liquidate the defaulted debt and if that means bankruptcy, so be it. If that means 25% unemployment, so be it! And if that means revolution, so be it!

  10. Anonymous

    Interesting that there is always the worry and fear of talent fleeing to competitors. So the attraction must be kept for future bonus incentives.

    Because it's criminal, you don't really see to many books or articles on bonus payout schemes other than 'outrage' pieces with no substance.

    Backdating options, an arrogant plan largely conducted as typical and acceptable until exposed.

  11. fresno dan

    "But in a larger sense, books like Mr. McDonald’s, focusing as they do on heroes and villains, rather than on real flaws in how we conduct our financial capitalism, and how we regulate our systemically important institutions, are doing greater damage than what may have been specifically wrought by Mr. Fuld and Mr. Gregory. They promote the myth that, in the end, Lehman is a tale about a few bad apples who screwed up a great bank, rather than about a system run amok, where insiders reaped enormous rewards for creating risks borne by the society at large."
    Excellent analysis (I guess I think its excellent because I agree with it totally)

  12. dugger

    Dick Fuld was an easy choice to throw under the bus because he was so nasty. None too many regretted his exit from the corridors of Wall Street. That aside, I wanted to state my admiration for the quality of the writing found in this article. A lovely bit of prose and construction.

  13. DownSouth

    @dugger said…"I wanted to state my admiration for the quality of the writing found in this article. A lovely bit of prose and construction."

    I'd like to second that and add a quote from George Orwell's Politics and the English Language that I think is apropos:

    If you simplify your English, you are freed from the worst follies of orthodoxy. You cannot speak any of the necessary dialects, and when you make a stupid remark its stupidity will be obvious, even to yourself. Political language–and with variations this is true of all political parties, from Conservatives to Anarchists–is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change all this in a moment, but one can at lease change one's own habits…

  14. LeeAnne

    "You can't build a phone booth without oversight" That's common sense.

    By Felix Rohatyn, former partner Lazard Freres; leader of NYCs 1970s fiscal crisis restructuring; backer of Ross Perot, and former United States Ambassador to France.

  15. Hugh

    Thanks for this review. I agree that McDonald was as much a product of a paper speculative economy as those he criticized.

    You ask how Lehman could justify its balance sheet at the end, showing it to be in the black when a few months later it was clear it was massively in the red. But isn't that really what has been going throughout the banking industry? Lehman is one of the few who were caught out on this, but it has been government policy for some time now to abet and facilitate financial firms lying about their assets and liabilities.

    One issue, tangential to this review, but which I think is important to raise, is the unquestioning acceptance of the story that no one knew about the money markets's exposure to Lehman. My question is why did nobody know? Think about it if you were in a position to decide on Lehman's fate, wouldn't you ask first about Lehman's financial condition. And if you were allowing the rest of the banking industry to cook their books, why would you not let Lehman do so in the same way? If you did, Lehman's financial position would I think have looked better than AIG's. OTOH if you didn't, why weren't these writedowns extended across the industry? But even if you thought Lehman's balance sheet was crap, wouldn't the next thing you do be to find out who the bondholders were so you could assess what the likely fallout would be on them and on markets? What gets me is how the story has been spun since into a "no one could have predicted" and "no one could know". But this simply isn't true. The people at Lehman would have known. Paulson, Geithner, and Bernanke should have known. They certainly all knew about Goldman's exposure to AIG.

    This is the part of the Lehman story which smells wrong to me. An effort was made to ascertain the fallout in the Bear Stearns and AIG cases and action was taken, but not in the Lehman case. Why not? Why are we still being told that precisely the first questions we or anyone would ask in such a situation were not asked, and more than that why it was natural not to ask in the Lehman case, and even if asked, no one could have known? This is the part of the Lehman story that has never made any sense to me.

  16. Anonymous

    Fuld had watched Lehman sold in the early 1980s to Shearson/American Express (read Ken Auletta's Greed and Glory on Wall St for the details).

    Lehman was later kicked to the curb by Amex in the early 1990s. Little more than a big bond shop when it was spun out, Lehman was never expected to do as well as it did, and credit was due to Fuld for whipping it back into shape. For instance, Lehman's equity business, weak when it was spun out in the early 90s, became one of the strongest on the street.

    At the same time, having been through the trauma of the early 1980s sale of Lehman to Shearson, Fuld was absolutely committed to keeping Lehman independent and it's not too much of a stretch to think that this may have slowed him from selling Lehman to another institution. Had Lehman been sold in early 2008, it might still be with us today.

  17. Anonymous

    To argue that outcomes are either purely from circumstance or purely from character is to embrace a false duality.

    Character interacts with aspects of circumstance that have degrees of predictability and malleability.

    It is just our psychology that predisposes us to give weight to one aspect or another. A "successful" person may minimize the importance of a lucky break occurring vs. their ability to capitalize on it. Ideally we should all be imbued with both gratitude and accountability.

    At the end of the day, there is not a million dollar job available to every single capable, hard working person who wants one, so there something beyond desire and diligence that is allocating these jobs.

  18. Kevin

    I enjoy scapegoating certain highly paid individuals as much as the next guy, especially after spending years telling anyone who would listen that all was not well in NeverNeverLand and being treated like a nut for it.

    But could the Fulds, the Greenbergs, the Cassanos really have done much differently? If a Dick Fuld had said in November, 2007 that subprime was a time bomb, that exotic derivatives would lead to unpredictable results and that Lehman needed to reduce its leverage, his board of directors would politely but firmly suggest that the stress was getting to him and he should strongly consider retirement.

    If Lehman were to have actually reduced its exposure in 2007, shareholders would go a step further and sue. If the Fed were to have taken away the punchbowl, the masses would have howled formore KoolAid now! (remember how investors screamed before 2000 that Greenspan was too cautious?)

    And the irony is: these people were paid to be experts on money and markets, paid bonuses so crass they would have embarrassed Caligula, managed only to collapse their erstwhile employers in spectacular fashion. But if they hadn't, Wall Street would have brought in someone else who would have done exactly the same.

  19. Anonymous

    Short quote:
    Jane Castle, who knows so much about the airline she “could tell you what meal they served in first class on this morning’s flight from JFK to Berlin”

    I can do better than that: I immediately knew there were no morning flights JFK to Germany. All the flights from JFK to Europe( except the no defunct concorde) leave in the afternoon or evening.

  20. Gentlemutt

    Down South,

    Many thanks for the link to the J. Haidt lecture, and for that matter to the whole series! Much appreciated.
    (btw I just finished re-reading Philip's Bad Money, and his observation about the role of finance in hegemon end-times weighs heavy…)


    Fulds, Greenbergs, et al could have done differently, even while staying within the cultural boundaries of predatory finance — they could have imitated Goldman! And you ascribe far too much independence of action to boards of directors at most firms, especially at finance firms — these are winners at the go-along-get-along game and there is no way they would have revolted at Lehman in 2007 if Fuld had ordered a change in direction.

  21. Anonymous

    Dick Fuld and Joe Gregory were seriously out-of-touch guys…never on the trading floor, always smelling each others' butts…not a pretty sight. The book strikes me as more on point than most Lehman apologists on this board are willing to let on.

  22. Gentlemutt


    Again, thanks. Ms. Pustilnik's address sure was a fun survey to hear, but I think you are multiple jump-steps ahead of me with respect to the concern about implications for modernism (Lukacs?).

    "I think a more difficult question, however, is whether their behavior falls within the guidelines of modernism, which would call into question the entire ideology of modernism and its role as a socially integrative ideology, or if their behavior is a corruption or perversion of modernism."

    My admittedly rustic view is that modernism does not really exist as far as most of us are concerned, so the smart-aleck temptation is to answer 'Yes' to the question you pose, and seek to further input from you. A slightly less smart-alecky response might be to suggest that the behavior of Fuld, et al, does indeed fit the guidelines of that definition of modernism, much as did Milton Friedman's famous rhetorical question, "Why not have them use spoons?" The lack of real respect for other folks and the approval of predatory behavior are what they shared.

    In any case, thanks again, & cheers.

  23. Palmer Eldritch

    Yves, this piece is written with an artful touch that is never found anywhere anymore.

  24. Captain Teeb


    While admitting that Fuld et al had many choices to make along the way, I have to agree with Kevin in the broader sense. Just as bad money drives out good, so bubble business drives out conventional business.

    This is particularly true when the expansion lasts so long that there are few around who have experienced a bust. Aggressive companies, more profitable in the short term, will drive out or take over their more-prudent competitors until aggressive operators are all that is left.

    A culture of the short term arises, not only in business, but also in government and among consumers. The culture is so powerful that, even now, it has not disappeared; short-term greed has simply morphed into short-term fear.

  25. Gentlemutt

    @Captain Teeb,

    I certainly agree with your points in the broader sense, as you carefully write. In the specific situation, however, in my opinion Kevin did over-reach a little bit to absolve Fuld et al of all responsibility for their actions. Hence the effort, however clumsy, to gently point out that the specific elements of their 'destiny trap' were in fact quite avoidable: Fuld could have turned LB in another direction, and he certainly would not have been tossed out by his obsequiously supine board of directors.

    That said, this all harkens back to one of the excellent questions posed earlier by DownSouth, which appears to me to really get to the heart of this matter:

    "Arthur Doyle's excellent review only sets the stage for many more questions. How much control do Americans, or any nation, actually have over their national destiny? Was America' rise to prominence due to how advanced and virtuous we were (certainly the view most popular amongst Americans), or was it due more to providence? Once a hegemon descends to the level of economic, military, moral and intellectual decline that the U.S. has, is restoration even possible?"

    My view is that cultures which accept the notion that external forces absolve individuals of personal responsibility do surely give up control over their destiny.

    To lighten things up a bit, here is a (seasonal) favorite example. MLB is grappling with a rash of broken bats, dangerous to players and fans alike. After a number of years it has finally moved to collect data about the characteristics of the bats which break. But so far as I know it is not collecting data about the bats which do not break, so this study may be flawed right out of the gate. The general consensus is that competitive forces have moved players to reshape their bats to maximize inertia along the end of the barrel, and in so doing have thinned the handles of their bats literally to the breaking point.

    How will MLB ever deal with this? Committees will be formed, debates and technical analysis will ensue, and just as for the steroid era time will pass and people will wring their hands about the unfortunate dangers resulting from the intense competition at the MLB level.

    Well, how about simply declaring that if the bat breaks the batter is out? Pick your own destiny, batter.

  26. Carl

    Most insightful review yet of the book !

    Arthur Doyle, I will be the first to buy your book on the systemic issues you raise if and when you produce such a document.

    In the interim, I'm grateful that you have concisely illuminated what has been well-known to many of us that have spent decades on Wall Street (I guess it helps that we were never diverted into pork-chop sales or petty thievery as totally-out-of-the-loop McDonald admits he was in his improbable grooming for becoming a self-proclaimed "brilliant" trader at Lehman).

    The fundamental problem goes much deeper and is substantially more embedded than might be apparent from simply indulging in the cheap thrills offered by McDonald of focusing on what egregiously reckless decisions (and even more inexplicably stupid non-decisions) that a few hard-core scummers like Fuld and his cadre of enablers made.

    P.S. But Patrick Robinson, the ghostwriter on the book, is fabulous – he's taken stuff not substantive enough for even ten minutes on the Oxygen Channel and transformed it into an excellent half-hour beach speed-read !

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