Wednesday , 17 April 2024

"A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers" – A Book by MacDonald/Robinson

The book is by no means an exhaustive, play-by-play breakdown of the collapse. Instead, it introduces readers to a host of little-known Lehmanites, many of whom vilify the company’s top management, among others. Lehman “was headed directly for the biggest subprime iceberg ever seen,” but unlike the captain of the RMS Titanic, McDonald writes, CEO Dick Fuld and his No. 2, Joe Gregory, didn’t try to swerve. Words: 560

In further edited excerpts from the original review* Adrienne Carter ( goes on to say:

There were plenty of warnings. In June 2005, McDonald attended a briefing at 7 a.m. during which Michael Gelband, Lehman’s new global head of fixed income, declared the U.S. real estate market “was pumped up like an athlete on steroids.” With amazing prescience, Gelband said that Countrywide (BAC), New Century Financial, and other aggressive lenders had created $1 trillion in economic activity that was built on “false money” and was sure to falter. Other executives made similar warnings about excessive leverage.

Soon after, McDonald and his colleagues started betting heavily against the mortgage market. As part of their research, they flew to California to spy on subprime brokers, the hypertanned “body builders” pushing dubious home loans. First stop on their mission was the headquarters of New Century, with its parking lot crammed with Ferraris and Lotuses. The “meatheads” told the undercover Lehman traders: “Our job is to sell the mortgage policies,” and after that “it’s someone else’s problem.” McDonald’s group made buckets shorting New Century and its brethren.

Fuld and the others in Lehman’s “ivory tower”, however, ignored the red flags. When the company’s risk expert, Madelyn Antoncic, became bearish in 2006, the myopic CEO started excluding her from meetings on big deals and then he fired her. Others, like Gelband, quit, dismayed their insight was ignored.

Fuld didn’t bother to retreat when the U.S. mortgage market started to unravel in 2007. Instead, he disastrously decided to diversify by scooping up hedge funds and commercial real estate and by making private equity deals with the company relying on borrowed money to do so.

In mid-2008 a group of top executives led a coup that dethroned Gregory and seemingly stripped Fuld of power. The new president restocked the management team, even bringing back Gelband. They tried to save Lehman, “fighting for the bank they all loved” but it was too late. On Sept. 15, Lehman failed.

For all his anger and frustration, McDonald, who was let go in mass layoffs at Lehman in early 2008, never loses his respect or admiration for the institution. Its demise, he writes, “will always make me profoundly sad,” and not just because so many employees’ life savings were “obliterated” and careers “wrecked.”

By offering a view from the eye of the storm, McDonald will make many readers feel something that may surprise them: sympathy for investment bankers.


Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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