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Book review: What happened to Lehman Brothers?

A clerk works his post on the trading floor of the New York Stock Exchange on 2/21/2010
AP Photo/David Karp

A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald with Patrick Robinson

When the mermaids were singing their deadly song, many traders and corporate heads happily steered their ships toward such beauty, ignoring all warnings of catastrophe. The disaster that ensued is still ongoing.

The final chapter
Lehman Brothers did not go down because the Government did not bail them out. It was indeed a perfect storm:

  • Their corporate culture rewarded handsomely the most aggressive trading operations
  • In 2005 a group of experienced top managers sounded the alarm that disaster was ahead. They were ignored and deemed old-school
  • The Board of Directors did not perform their duties as gate-keepers and protectors of all stakeholders' interests
  • A powerful CEO who was disconnected from the trading floor and the new model of business running the company.

In the end, not even the President of the United States wanted anything to do with them.

The real story
The arrogance of youth and the sight of a pot of gold at the end of the rainbow lead the banks and then the whole world into the current chaos. The biggest banks in America got together and convinced Congress and President Bill Clinton that they could play safe under less supervision and with a larger bonfire.

Instead, the banks created new money games so sophisticated that shareholders, directors, corporate officers and even the CEOs in some cases, did not understand.

One of these new financial securities were bets on assets they did not have possession of: the infamous derivatives. It is like selling a house that you know has bad wiring and then taking out a fire insurance policy on that house without telling the buyer what you did. Unfortunately the fire insurance policy that you bought would not pay off when the house caugth fire. The insurance company had no requirement by law to reserve the money to pay you.  

About the book
"For the ones curious about how our economy went down and hauled along the developed world". The traditional Lehman Brothers company the public knew for over 150 years was no longer in existence. It had been taken over by people with different names and different motives over a decade ago.
They were part of the new wave of business in the wake of new legislation allowing banks to get too big to fail. They hired the credit ratings agencies and paid top dollars for favorable analysis of mortgages.
They had mortgage companies selling those as fast as hot cakes. They had specialists bundling all mortgages, slicing and dicing those bundles, and selling different pieces to different people worldwide. They had people receiving millions in bonuses on future revenues that would likely never materialize, except in a perfect world.

What they did not have was common sense.

About the author
Lawrence G. McDonald is a former Vice-President of Lehman Brothers and tells his inside story with explanations that are easy to grasp even if one is not an economist or financial expert. He is less interested in telling this story for your amusement. He is trying to explain what happened in his own life, for one. How he fought so hard to overcome not being born into wealth and learned how to advance professionally with education and hard work. His life story is no different than many employees at Lehman Brothers. He ended up in the unemployment line too. What is different is that he's capable of writing about it and sharing it candidly with us.