It all started with a presumably well—intentioned but thoroughly bad idea. It was compounded by equal parts of avarice, arrogance and sheer stupidity by a cast of thousands. And it almost brought down the world banking and economic systems … and still might.
That’s the conclusion drawn from reading A Colossal Failure of Common Sense: the inside story of the collapse of Lehman Brothers by Lawrence McDonald and Patrick Robinson. McDonald is a former Lehman VP who adds a welcome human level to a narration that is essentially about finance. Robinson is a best-selling author of techno-thrillers and he keeps the story moving nicely.
Colossal Failure is valuable because it puts the Lehman collapse into the context of history. The thoroughly bad idea was the Clinton administration forcing banks to give mortgages to people who did not merit them financially. Over time, the wizards of Wall Street figured out how to bundle these mortgages into securities that paid a higher return (because of the higher risk) and sell to them to institutional investors in the U.S. and abroad.
The Bush administration continued the Clinton policies and the machine hummed along. Everyone on the money trail took a profit and handed off the risk to the next organization in line. The painfully-conflicted rating agencies were complicit – McDonald’s view – or incredibly naïve, or both. They raised no red flags. But the risk never went away.
And everything was fine as long as housing prices continued to rise. And then, in 2007, they stopped. The whole scheme started to unravel, slowly at first and then like a tsunami in 2008, which opened with the forced sale of Bear Stearns to J.P. Morgan Chase, saw Lehman die in September, and the year close with the bailouts of Merrill Lynch, Citigroup, AIG, Fannie Mae and Freddie Mac.
There are many memorable characters in McDonald’s book, probably none more so than Lehman’s aloof dictatorial CEO Richard Fuld. McDonald reminds you that even in high finance, it’s all about people at the end of the day.
(Photo by World Resources Institute Staff)
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