NY Times Lehman Post Mortem: The Power of Denial

There is a not bad piece at the New York Times on the fates of various ex-Lehman employees a year after the collapse.

The story vividly if unwittingly illustrates the old saying that fish rot from the head. The people profiled were all involved in mortgage securitization, either directly or indirectly. Most seem unable to acknowledge that they played a role in precipitating the crisis, as in firms like Lehman packaged and peddled toxic debt. And the way they operated was grossly irresponsible. I’m now reading Gillian Tett’s Fool’s Gold, and it discusses at some length how JP Morgan was catching a lot of heat in the 2005-2006 era for its crappy earnings and low market share in a lot of investment banking businesses, particularly securitization and collateralized debt obligations. Yet the bank’s staff could see subprime defaults were rising in an economic expansion, an unheard of event. They also could not figure out how to make the deals work from an economic perspective. Now the book underplays that JP Morgan was badly singed in 2005 when GM and Ford were downgraded, and that was no doubt a big wakeup call as far as risk modeling and management were concerned. JP Morgan’s stance was hardly altruistic;  it wound up with residual risk on deals, and couldn’t figure out how to make the business model work in the later days given the pricing in the markets. But notice that the bank took that view because enough employees at the firm were concerned about firm risks, not individual bonuses, to keep the House of Morgan from getting drunk at the risk party (that is not to say the bank was a paragon, merely that it dodged one of the biggest bullets).

It is human nature for people to deny their involvement in questionable practices, particularly when the result produces lots of cash and prizes. And the most senior people interviewed, the ones who also came out of their time with the firm in the best financial shape, offer the most cringe-making rationalizations of their roles.

From the New York Times:

Ken Linton gives little thought to the approaching anniversary of Lehman’s collapse — or his role in it.

A senior trader on Lehman’s mortgage desk, Mr. Linton evaluated mortgages that were later sliced and diced into securitized investments…

When Lehman closed its origination business, Mr. Linton lost his job. Rich and single, he has pursued a life of leisure since then — sailing in his 37-foot boat, playing jazz trombone and, at the moment, taking a week to learn how to fly Russian fighter jets and gliders in New Mexico. He briefly considered attending culinary school.

Although Lehman laid him off in early 2008, his departure turned out to be a boon for Mr. Linton. Being forced out convinced him to bet against the firm’s stock as a counterweight against the Lehman shares he still owned, which protected him when the stock’s value plummeted. Combined with a well-timed sale of his Manhattan apartment and a stream of income from real estate investments, the moves gave him financial padding that frees him from job worries.

“I have been fortunate to have some nice toys,” he says. “And they are all paid up. It’s a nice situation to be in.”

He recalls vividly the days in early 2007 at Lehman when his financial models began to throw up more warnings showing delinquencies and defaults, and he remembers colleagues on his desk raising questions about loan quality.

Yves here. As the JP Morgan contrast demonstrates, Lehman was awfully late to realize there was trouble afoot. There subprime market was in an obvious downdraft; in fact some banks were eyeing and buying mortgage originators then, convinced the problem was temporary. Back to the story:

He says he has no qualms about his work at Lehman or its economic aftereffects. “Anyone at our level who had a different view from senior management would find themselves going somewhere else quick,” he says. “You are not paid to rock the boat.”

Yves here. The worst is that this sort of logic is seldom challenged. “Someone would have done my job anyhow, so what harm was there in my doing it?” Use that same reasoning for, say, the people who operated the gas chambers in World War II and you’ll recognize how spurious it is. Parents don’t accept the “everyone was doing it” defense from their kids. Why do we tolerate it from adults? Back to the story:

Jeff Schaefer, who helped oversee mortgage originations as a Lehman managing director, is now running a Mobil gas station and a car wash…Just two years ago, Mr. Schaefer supervised sales at Aurora Loan Services, Lehman’s mortgage-origination arm in Colorado. In the boom years, he led a 400-person team that stockpiled often-risky mortgages to disperse to the firm’s financial engineers and salesmen. He used to talk with Mr. Linton three to four times a day to get his marching orders on mortgage pricing and credit standards. It was those conversations, he says, that helped him decide whether to require borrowers to document their income or whether to give them so-called no-doc loans…

Too many people, he says, blame firms like Lehman, but he says all that Lehman did was create a product that investors were demanding to buy from the firm.

“How do you blame us? A lot of what we did from an origination standpoint was based on investors’ appetite,” he says. “Do you think we would just go out and say, ‘I think we’re going to do $100 million in no-doc loans?’ ”

Yves here. If we take this at face value, Lehman and its ilk were mere passive order takers. They had nothing to do with creating demand, nothing to do with the frenzy that pushed the margins of product design further and further out, so that high-yield, meaning risky, product was necessary to make the complex deals work. And no one looked too hard in the securitization sausage factory, that took pieces of deals and ground them up and made more appetizing end product called collateralized debt obligations, that it was the financial equivalent of sawdust and rat tails that were increasingly part of the product. Nah, if customers were happy to buy the stuff, why should a merchant care?

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  1. fresno dan

    Well, it shows at least that not everybody “didn’t see it coming.” But as they say, if a man’s bonuses depends on him on seeing something, he will not see it.

  2. fresno dan

    O good grief. Sorry.
    Thats: But as they say, if a man’s bonuses depends on him NOT seeing something, he will not see it.

  3. RebelEconomist

    I never worked on the sell side, but I do think they are being blamed disproportionately here. In buying low and selling high, with some repackaging if necessary, the dealers did pretty much what they are supposed to do. The real villains are the buy side managers who bought risky “product” with other peoples’ money, either without understanding it properly, or worse, knowing the risks but reassuring their clients while keeping their fingers crossed, and claiming the performance fee for “active management” discretion. And not without responsibility are the millions of ordinary investors looking for more return on their investments without really accepting the risk (as in money market funds) while begrudging paying on their own liabilities. But, as a rich minority, the bankers are an easy target.

    1. DownSouth

      Rebel Economist,

      Your argument to exculpate the former Lehman employees is two-pronged.

      In the first prong, you impugn the motives of those who accuse them. The implication is that, if those motives can be shown to be impure, that somehow makes the transgressions disappear.

      George Orwell deconstructs this line of argument in his essay “Looking Back on the Spanish War.” In that conflict he observes that the Republicans and the Fascists, without a scintilla of doubt, both committed atrocities. “But, what impressed me then, and has impressed me ever since,” he muses, “is that atrocities are believed in or disbelieved in solely on the grounds of political predilection.”

      “The truth, it is felt, becomes untruth when your enemy utters it,” he surmises.

      He then goes on to point out the fallacy in this sort of thinking:

      But the truth about atrocities is far worse than that they are lied about and made into propaganda. The truth is that they happen… These things really happened, that is the thing to keep one’s eye on. They happened even though Lord Halifax said they happened. The raping and butchering in Chinese cities, Jewish professors flung into cesspools, the machine-gunning of refugees along the Spanish roads—they all happened, and they did not happen any the less because the “Daily Telegraph” has suddenly found out about them…

    2. DownSouth


      The second prong of your defense of the Lehman bunch is to argue that they were just hapless, blameless observers to all this. “The real villains,” you tell us, “are the buy side managers.”

      It was perhaps Martin Luther King, Jr. who inveighed most adamantly against this sort of morality. “[I]t is as much a moral obligation to refuse to cooperate with evil as it is to cooperate with good,” he tells us. “Noncooperation with evil is as much a moral obligation as the cooperation with good.”

      But it is Errol Morris in “Bamboozling Ourselves” who gives us a compelling example of where this brand of morality leads.

      On May 10, 1940, the Nazis marched into and occupied Holland. The Nazis first began a program to identify the Jews which finally ended in, as Morris explains, “the rounding up of Jews, their imprisonment at various transit camps, principally Westerbork, and ultimately, their deportation by train to the extermination camps in the east.”

      “But there is a larger point to be made,” Morris continues, “about Dutch complicity in the Holocaust and their collaboration with the Nazis. The Dutch were among the worst.”

      The role the Dutch played is probably nowhere made more poignant than a photograph Morris includes in his essay. As Morris explains:

      From the pictures around it, it seemed to be a photograph of Jews being rounded up by the Nazis. Dutch gentiles are walking along the sidewalk. It all looks so neat and orderly. Do they know what’s happening? Do we know what’s happening? Am I imagining things? Am I looking at the picture with the hindsight of 60-plus years of historical knowledge?

      I asked a friend, the Dutch Holocaust historian Robert-Jan van Pelt, to look at the book and translate the text referring back to the photograph. Here is his translation: “A photo of a roundup (razzia) of Jews was made by Jack Dudok van Heel. Dudok van Heel was in contact with Fritz Kahlenberg in the group ‘The Hidden Camera.’ On a sunny spring day he photographed a calm roundup, as calm as silent churchgoers strolling to Mass on a sunny Sunday morning. The photograph was taken from the window of his in-laws’ house on the corner of the Albrecht Durerstraat and the Euterpestraat.”

      The text ends with: “Dudok van Heel recalls with absolute certainty that the scene was a razzia of Jews.”

      (the photo can be seen here http://morris.blogs.nytimes.com/2009/06/03/bamboozling-ourselves-part-6/ )

      All told, Morris says, “the Dutch were part of the Nazi apparatus that sent over 100,000 Dutch Jews to their deaths in Auschwitz and Sobibor, approximately 3/4 of their Jewish population.”

      The defense you use, RebelEconomist, to defend the Lehman bunch is the same that Louis de Jong, a Jewish-Dutch historian, used after the war to defend the Dutch. “In De Jong’s account,” Morris explains, “the elements of German deception are enumerated, but the Dutch are almost absent. There are only the Germans (the villains) and the Jews (the victims).”

      To drive home the point that there were moral alternatives to collaboration with the Nazis, Morris goes on to recount the plight of several who chose to resist the Nazis and to help the Jews. The price they paid, however, was extremely high. I found the story of the arrest and execution of the artist, art historian, and critic Willem Arondeus especially moving:

      On March 27, 1943, Van der Veen, Arondeus and a few friends raided the (Bevolkingsregister) Municipal Registry of Amsterdam, setting the building and its files on fire. The fire partially destroyed census records (used to prove Jewish ancestry). Arondeus was arrested, sentenced to death and on July 1, 1943, executed. On the evening of his execution he asked a visitor to tell the world that “homosexuals are no less courageous than other people.”

      1. danm

        You have a point of view but there are many different schools of thought and philosophers still cannot agree among themselves. They can’t even agree on the concept of free will.

        If you don’t believe in free will then, morality is moot and basically it all comes down to our survival instinct. All our actions will be based on this and our actions will depend on our genetics, evironment, upbringing, past experiences…

        If you don’t believe in free will, it changes you entire view of the world. For example, you don’t believe in punishing or scapegoating but in finding ways to make sure these holocausts/crises never happen again.

        If we put human beings in certain types of positions, atrocities will occur. That we know because we’ve witnesed it over and over again. You can’t push people over the edge and expect miracles.

  4. john c. halasz

    “the millions of ordinary investors”- There’s a smell of fallacy in that phrase. It should be more like “the investors of ordinary millions”.

  5. danm

    Yves here. The worst is that this sort of logic is seldom challenged. “Someone would have done my job anyhow, so what harm was there in my doing it?” Use that same reasoning for, say, the people who operated the gas chambers in World War II and you’ll recognize how spurious it is. Parents don’t accept the “everyone was doing it” defense from their kids. Why do we tolerate it from adults? Back to the story:
    Well, quite a few Jews helped the operators of the gas chambers… to survive.

    I understand your viewpoint but I find it extreme. I was one of the naysayers and I was out of a job without the multimilion dollar cushion. And because of my viewpoints I’ve been practically unemployable since 2005. Now my phone is ringing off the hook, being called for risk management positions. But most of it is window dressing.

    But I kept my life simple so I could tolerate the hit. That is not the case will most people out there. And in our increasingly complex world, it is unrealistic to expect most people to really understand what is going on until it is too late.

    Using *the* logic, a huge percentage of people should not be working as a huge chunk of the economy should not even exist. Car salespeople should not be selling luxury cars because most payments come from credit excesses. Doctors should refuse to do plastic surgery because most of it is probably financed with credit bubble money. Pro sport players should refuse to play because most money is from credit excesses. I could go on and on and on. Every sector of the economy has thrived on this dirty money.

    We are trying to find a scapegoat when it’s the entire system that stinks. And that is human nature. People know that if it’s the system, nothing will get fixed. So we have to find a culprit to make us feel better by passing our blame onto that one person.

    What is happening now in the US is proof that human beings have not evolved much psychologically in the last couple thousand years. This scapegoaing thing is identical to the sacrifices done in earlier religions.

  6. Siggy

    I find it moderately instructive to learn that Ex-Lehmanites are largely in denial and have little remorse for the products they created and sold. After all, they see their role as being servicers of the market. But then I reflect on the implication of their attitude. Then I see it as a stalking horse for a larger and profoundly more serious problem.

    The first securitization of a pool of mortgages is an efficient approach for the intermediation of loanable funds. A following securitization of the income streams attributable to the less than A tranches of the pool is the crime. That second securitization, the CDO, represents a concentration of risk. The fact that the rating agencies were able to award AAA ratings to any tranche of a CDO is astounding. In fact it may come to pass that the Justice Department will consider such ratings as fraudulent. But then, who paid for the ratings?

    And then there is the not so minor problem of where in the world did all the loanable funds come from? Thank you Alan Greenspan for all that lovely cash. And, since it’s so easy to come by, why shouldn’t the public go out and buy something they otherwise would not be able to afford. Ah yes, thank you Barney Frank and Chris Dodd and all the rest of the poltroons in Congress.

    And since we’re having such a lovely party and the regulators are sonombulent, why don’t we all just misbehave (Sorry Cole but the needle here is just as apt as it was in your era).

    In a great many ways our Great Recession is far worse and far more of a threat to the Republic than the Great Depression ever was. The attitude of Ex-Lehmanites is merely a sniffle caused by the pneumonia of credit that we are drowning in.

  7. Anon

    To parahprase what others have said,

    “What’s left at large corporations and government offices after years of negative selection is an employee base of those who are blind and deaf.”

  8. RebelEconomist


    I used to trade with Lehman. If they offered me an investment I was not comfortable with, I just said “no, thanks”. I am not sure where that fits in with your Nazi analogy.

    And by the way, most of my contacts at Lehman were nice people as far as I could tell!

    1. DownSouth


      No one can live in a third-world country as I do and not be familiar with the attitude of which you speak.

      I am an avid collector of colonial art and have more than once been sold fakes. The most amazing part to me, though, is the reaction of my Mexican friends when I tell them of my misfortune. “Pendejo!” they tell me. “Te dejaron chingarte!” (You idiot! You let them screw you!) These exclamations reveal a very different business ethic than what one finds in the US (or at least used to find). Here in Mexico, where there are almost no consumer protection laws, guilt is affixed upon the person that allows someone to defraud them. In the US it is quite different and guilt is affixed on the defrauder.

      The US may actually be one of the few countries in the world where the expectation of honesty and integrity, in both private and public life, exists. I say this because Hannah Arendt, in speaking about the aftereffects of the Vietnam War in which “the extravagant lengths to which the commitment to nontruthfulness in politics went on at the highest level of government,” observed:

      To be specific, it has produced the “credibility gap,” which means that those in power are no longer believed—quite apart from whether one agrees with them or not. I know that in Europe politicians never have been believed that, indeed, people are of the opinion that politicians must and should lie as part of their trade. But that was not the case in America.

      Arendt says that in America there are actually two social contracts: “One was concluded between individual persons and supposedly gave birth to society; the other was concluded between a people and its ruler and supposedly resulted in legitimate government.”

      “The mutual contract by which people bind themselves together in order to form a community is based on reciprocity and presupposes equality; its actual content is a promise, and its result is indeed a ‘society’ or ‘cosociation’ in the old Roman sense of societas, which means alliance,” Arendt continues. “Such an alliance gathers together the isolated strength of the allied partners and binds them into a new power structure by virtue of ‘free and sincere promises’.”

      And the social contract between individual persons has its roots even before the advent of the revolution. “American faith was not at all based on a semi-religious trust in human nature, but on the contrary, on the possibility of checking human nature in its singularity by virtue of common bonds and mutual promises,” Arendt theorizes. “ The hope for man in his singularity lay in the fact that not man but men inhabit the earth and form a world between them.”

      George Washington did an excellent post the other day in which he cites a number of sources on just how important the restoration of this trust is to the recovery of the economy:


  9. DoctoRx

    The past year and a half increasingly looks like a well-executed consolidation that benefits the politically favored favored Big Finance companies. Is anyone saying that Merrill was worth $29 a share and Lehman zero?

    The main orchestrator was the Nixon Admin aide Henry Paulson.

    The question is how manipulated the markets and economy are going to be in the future. Does “The Quiet Coup” present the best paradigm?

  10. Hugh

    I am completely unsurprised that ex-Lehman employees are still in denial about their role in the economic and financial disaster they helped visit upon us. My thesis is that there is no difference between what they did and what their colleagues at Goldman, JPMorgan, Citi, BAC, and MS continue to do. Looking at these others, they can tell themselves that they weren’t crooks, just unlucky. If they had been working at Goldman, they would still be pulling down bonuses and reading hagiographic accounts of their activities in the press. The day Lloyd Blankfein and Jamie Dimon do perp walks maybe they will change their minds but not before.

  11. moslof

    These Lehman people were simply caught up in the same worldwide mania that almost everyone else was. Per Prechter, people become arrogant during major market tops. My experience in the defense industry was that starting in the mid-nineties, the only way to advance was to become a “yes man”. We used to laugh at people like that in the seventies because they were a small minority. Socionomics sounds lame at first, but it really does explain all this crowd madness pretty well. Watch “History’s Hidden Engine”

  12. danm

    We used to laugh at people like that in the seventies because they were a small minority. Socionomics sounds lame at first, but it really does explain all this crowd madness pretty well. Watch “History’s Hidden Engine
    The way I see it, it’s just like gaining weight. You put on a pound or 2 per year, then a few years down the road, you wonder how you got so big.

  13. ernest

    lots of good points above

    what stands out most for me is the lack of consideration towards the rest of society.. the lehman mortgage players may not feel ‘guilty’ as such, but do they not see any role in the transmission of a financial-grounded phenomena directly into the real economy with lasting impact on ordinary people?

    how many people need to lose their jobs/homes before a collective sense of responsibility decides to do something positively beneficial for all of society?

  14. Skippy

    Is it not a case of faces. If one could only sell to family, friends and neighbors with no chance of absconding retribution upon felonious discovery would certainly heighten social sensibility’s.

    The distance we put between our selves in this macro world of buy and sell affords too much cover and concealment of deeds done in the name of profits.

    As DownSouth points out, in the third world one must take better care and if found wanting will suffer indignation or pay back.

    Skippy…leaders before all must shoulder the responsibility, as much enjoy adulation.

  15. Ginger Yellow

    While I agree with the blase Mr Schaefer that (many, though not all) investors deserve a lot more of the blame than they have received, Lehman can hardly pretend to be mere conduits for investor demand. Lehman were extreme outliers in the proprietary risk they took on. By the time the boom bust, they owned half of the subprime originators in the UK by volume. Nobody forced them to do that. They did it because it guaranteed them a supply of mortgages to securitise, with the resultant fees.

  16. Joseph Tibman

    Agree. Good article. Subprime was part of a fine financial industry tradition of drinking the Kool-Aid. Look at all the dot.com IPOs done for companies that were obviously without plausible business models, to name but one of very many examples. Iwas at Lehman for 20 years and saw this phenomenon on the street repeatedly. Isn’t it time that we reinvent regulation so that faulty constructs, such as subprime securitization, or at least the lofty ratings assigned to them, are overseen in some real and objective fashion?

    Joseph Tibman, Author, The Murder of Lehman, An Insider’s Look at the Global Meltdown

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