Wednesday, December 09, 2009

Lehman Brothers Book Reviews

Recently I took the time to read through the two books recently released about the fall of Lehman Brothers -- A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Lawrence McDonald, and The Murder of Lehman Brothers by Joseph Tibman. The author of the former was a vice president in the firm's distressed-debt department, which means he was at the bottom of the upper class of Lehman employees, and in the good days he was a guy making 7 figures a year. The author of the latter, Joseph Tibman, is unknown, as that name is simply a pen name for "Joe The Investment Banker Man" in an attempt to retain his anonymity. He was, however, an investment banker for Lehman Brothers over the several years prior to and leading up to the firm's collapse. Both stories give some decent insight and stories, clearly from insiders with each their own perspective on what happened over the final few years for the 150-year-old firm that went bankrupt to spark the U.S. market collapse late in 2008.

A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers is the first book I read on this topic, obviously of special interest to me since I worked at Lehman for its final few years of existence myself and have my own set of experiences, preconceived notions and ideas about just what went wrong and when at the storied investment bank. I enjoyed this book, as it tells a good story from start to finish, albeit IMO focusing a bit too much up front on McDonald's former life before he got his start in investment banking as a convertible bond specialist. But McDonald does a good job of telling the story from the insider's perspective of Lehman's amassing of hundreds of billions of dollars of toxic real estate assets. The author does I think a very good job of giving a basic understanding of the derivative type of financial products which got the country's banks into this mess in the first place -- CMBS, RMBS, CDS, securitization of bonds in general, etc. -- and what Lehman Brothers' role was in the expansion of such financial instruments. McDonald worked in the fixed income division of Lehman, which is where all the shit hit the proverbial fan in 2007-2008, and as a result you really do get a very cool look from the inside from a guy who literally sat on Lehman's proprietary trading desk over Lehman's final few years, including several moments of foreshadowing where, according to the author, the directors in his area called the financial crisis a good couple of years before everything finally collapsed. The particularly good inside stuff in this book includes the stories behind some of the big trades made by Lehman with its own account both for and against subprime mortgage companies over the several months as the credit crunch first began in mid 2007 and into 2008, and especially the details of the secret meeting of 20 or so of Lehman's top managing directors in late Spring 2008 at a swank restaurant in the Upper East Side of Manhattan where it was decided that CEO and COO Dick Fuld and Joe Gregory were going to be overthrown.

One of the downsides to getting this particular insider's view, however, is I think the importance that McDonald seems to put on his group having seen the light all along with respect to the bets Lehman Brothers (and many other large banks) were making on real estate assets. To believe this author, his group and his group alone knew all along that Lehman was betting the firm on U.S. and eventually globally real estate prices continuing their inexorable march upwards, they regularly tried to scream it out to anyone who would listen, but unfortunately his smart leadership continually got pooh-poohed, silenced, or even pushed out of the firm if they did not simply back down from their calls for better risk management. In truth I am sure the reality is somewhere less clear than that, but for whatever reason this is the spin we get from reading A Colossal Failure of Common Sense, which to me smacks of self-servitude and untruth.

The other big downside to this particular book is that McDonald was laid off early in 2008 as the fixed income market deteriorated, and that is where the inside scoop and other details of the daily goings-on of the core of the firm really start to grow thin, because the author was no longer employed by Lehman Brothers and was no longer around in the thick of the battle day in and day out. And unfortunately for McDonald, mid-March -- just after he was laid off -- was the beginning of far and away the craziest, most volatile and ultimately most interesting part of the whole Lehman Brothers saga, including the collapse of Bear Stearns and then the several months of slow-motion downward sprial that eventually led to Lehman Brothers' bankruptcy and liquidation. To have all this great inside insight into what things were really like at the firm from 2005-2008, but then not have any personal insights regarding the period from March 2008 through to September when the firm filed its historic bankruptcy, causes this book ultimately to land far short of its potential if written by someone who stuck around the four walls of 745 7th Avenue all the way through to The End.

The Murder of Lehman Brothers does not suffer from this particular problem. Although the author intimates that he, too, lost his job in the wake of Lehman Brothers' bankruptcy declaration and subsequent sale of the U.S. investment banking business to the UK's Barclays Captial, he at least was present all through 2008, which is really where the rubber met the road on the fall of the company, and ultimately it's what everybody wants to read the most about. Joseph Tibman represents himself as a longtime Lehmanite, different from McDonald who only joined in 2005 while the credit bubble was still ramping up, and as such he includes some more details of the recent history of the firm, and in particular the rise to power of Dick Fuld as CEO of evnetually the nation's fourth largest investment bank. Tibman, like McDonald, does a good job of describing the process behind Lehman's amassing of billions of dollars of overinflated real estate assets. Tibman, being a more senior officer of the company than McDonald (who was just a vice president), also has probably better insights into the character of the leadership of the firm, the changes in the company's CFO, lead Risk Manager and COO along the way and what was really going on behind the scenes with each.

With all of the senior-level focus of The Murder of Lehman Brothers, though, Tibman ends up focusing more on that but less on telling a good story, which shows as his book almost reads more like a factual report whereas McDonald's attempt to chronicle the fall of Lehman reads more like a novel. And although Tibman does not attempt to make his own department look like the only people in the company who foresaw the firm's impending doom and tried to stop it, Tibman does in his own way spend a little too much time glorifying the investment banker lifestyle that he was ingrained with. Believe me, I've worked plenty of hard and potentially mind-numbing jobs in my day and I most definitely do not need a speech about how i-bankers are the best because they live in the moment with each deal, totally engrossing themselves, available 24-7, weekends, holidays, vacations, you name it. That sounds an awful lot like my current job as well as those I have held recently, and that bit gets a bit old for me just like McDonald's insistence on trumpeting up his own people and managers like they were the all-knowing ones trying to save the world.

In the end, there are a couple of themes conspicuously common to both books that I thought makes them worth mentioning here. First and foremost, the utter and complete hatred and disbelief towards Dick Fuld, and even more surprising, his #2 in command guy Joe Gregory. Each book absolutely shreds Fuld, depicting him as completely out of touch with what his firm was actually investing in and the positions it was taking, with Tibman repeatedly referring to Fuld's "castle" up on the 31st floor at the Lehman headquarters and how he continually withdrew from seeing anyone but his top lieutenants. Each book also saves special criticism for Joe Gregory, a guy I used to see all the time in my days at the firm, with both authors essentially blaming Gregory for the firm's insistence on building up its real estate portfolio, even in some cases without Fuld's active knowledge or blessing. This surprised me, as I can tell you that within the firm Gregory was not identified as being particularly responsible other than as someone who simply carried out the orders of his superior in Dick Fuld.

The other person who gets absolutely lambasted in both books is Treasury Secretary Hank Paulson, the man behind the massive financial bailout package as well as the guy at the helm when Lehman Brothers ended up being allowed to fall. Basically, both authors prominently advance the favorite invective among former Lehman employees that Hank Paulson made the most disastrous financial decision in the history of the country in allowing Lehman Brothers to fail, and both authors go on to place the blame for the resulting crumbling in equity prices around the world squarely on the mantle of that decision being made. On this point I believe both authors totally miss the mark and like I said each falls victim in my view to the standard response of Lehman employees whose lives were thrown into total tumult as a result of the bankruptcy. But even with the benefit of hindsight, even having seen what happened to asset prices immediately following Lehman's failure, not only do I not think Hank Paulson "caused" the last and worst wave of the crisis by allowing Lehman to fall, but I tend to think of not bailing out Lehman as the one bright spot in what was otherwise a comically horrible run of decisions coming out of Treasury, the Fed and the rest of the Bush administration during late 2008. It's sad to me in a way that the authors of both of the books to come out detailing the fall of Lehman Brothers are unable to divorce themselves from the dogma that Lehman internally fed to its minions for months and months leading up to the firm's eventual downfall. But back at the time, basically nobody I know wanted the government (read that as "us taxpayers") to bail out Lehman Brothers, and the moral hazard argument simply has to stop somewhere lest we risk every financial institution knowing that they can risk whatever they want, act as recklessly as possible in pursuit of high returns, comfortable in the knowledge that the government will save them if things go sour. So no, I don't agree at all with the conclusion of both Lehman books that Paulson's greatest mistake was in allowing Lehman to fail. As I said at the time right here in the blog, I think Lehman should have been allowed to fail, after its CEO made very obvious gaffe after very obvious gaffe as his back got pushed closer and closer to the wall all through the spring and summer of 2008, and in fact I only wish that Hank Paulson had done a little more of "let failing" and a little less of "bailing out" than he did do throughout the financial crisis in 2008.

The last thing I would mention is that I also think both books did a sorry job of capturing some of the more generalized, less mortgage-specific mistakes that in my personal view as my own sort of insider clearly led to Lehman's downfall. For starters, Lehman Brothers, more than any other bank and frankly more than any other company I've ever heard of, insisted on clearly differentiating between the worth of its "front-office" people -- the revenue centers for the firm -- and the "back office" -- the cost centers. Sure, every large company has a lot of both, but at Lehman this differentiation was purposefully palpable -- almost like a modern-day caste system -- and not a day went by when you weren't impacted by it in some way. The firm's headquarters at 50th and 7th Ave in midtown was essentially reserved only for the revenue people. If you weren't directly generating revenue for the firm -- ie, if you weren't in the fixed income or equities divisions, a trader or a banker in some form -- then you could not even sit in the same building as the revenue guys. Instead of the posh Lehman-owned space in the HQ building, us back office folk were relegated to rented space on floors of other nearby buildings, sans the amenities and sans the cachet of working over at 745. The back office people had a nice holiday party ever year, but you should have seen the investment bankers' party which was always held on the same night but at a much more expensive (and fancy) location. The back office had a separate summer intern program from which I hired an intern in each of my three full years at the firm, but again the events, the expenditure, the opportunities were nothing compared to the business units' summer program, which was lavish to a fault. And the end result of all this palpable and deliberate focus on the non-revenue guys being second class citizens within Lehman had a dastardly effect on the firm in 2008, because among other things, the back office squarely included the Legal, Audit and Risk functions for the firm. When I see such a massive and clear failure of the firm to adequately protect itself in a period of flux in the marketplace, and yet the very functions like Legal, Audit and Risk being treated as lowlifes by the Brahman bankers and traders, more or less ignored for the most part company-wide, it becomes crystal clear that this was a major oversight on the part of Lehman's management that surely had a noticeable effect in the firm's last couple of years. Being a trader and a banker, the authors of these two Lehman books were both too hopelessly on the inside (and at the top) of this quasi-caste system to even see it for what it was, but the in my view the firm suffered immeasurably from this top-down belittling of the importance of the firm's back office functions to the long-term survival of the company.

The other factor which was totally ignored in each book but which I contend played a major role in the downfall of Lehman Brothers was the inexperience of the people in management positions at the firm, another thing I have also written about extensively here before. This was a bank where, for whatever reason, a ton of junior-type of people and less-skilled people received promotions and were, by the time the mid-2000s rolled along, occupying many positions of importance within the firm. I personally worked with multiple managers in the risk management function of the bank who were young -- as in, "never before seen a bear market" young, or "weren't even working in finance when the dot com bubble burst not that long ago" young. It was hard enough for any experienced risk manager to be able to decipher the mess of subprime and Alt-A mortgages that were packed into these complex mortgage backed securities that Lehman was amassing and selling in its last few years. To ask a young kid, someone who's never even lived through a time when the market's general bias is downwards, who's never lived through a real-life financial crisis of some kind, to be able to appreciate that risk, let alone to adequately hedge against it, is sheer folly. Similarly, not just some but most of the manager- level traders I used to work for at Lehman were young guys -- in their 30s, some even their 20s, and these were the guys being entrusted to run many areas of the firm's trading desks, to make decisions that impacted the firm's revenues and profits in a direct way during what proved to be a violent inflection point in the marketplace. Shit, even my own boss at Lehman was a 30-something, a guy with absolutely zero prior management experience, and boy did that ever show in how he ran our group. And this was not atypical at all at Lehman -- in retrospect, it was like a bunch of little kids trying to masquerade as if they were running the firm, doing all the "big people" jobs that they all could not believe they were able to land at such young, inexperienced times of their lives. And the result? Extreme pain.

In all, I did enjoy reading both A Total Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Lawrence McDonald, and The Murder of Lehman Brothers by Joseph Tibman, but it's hard for me to know how much of that is translatable to those who were not also on the inside while the whole thing went down in 2008. The McDonald book overall is a better story -- more of a true novel, as I mentioned above -- while the Tibman book does a much better job of describing the details of what the final six months or so was like for people working inside Lehman during the firm's final slow-motion collapse to nothing. Each book contains some good discussion of what went wrong with the firm's bloated real estate portfolio, and each is full of the standard ex-Lehmanite rhetoric about our former CEO and what an egotistical, blinded buffoon he clearly was. But at the same time I think each author missed a golden opportunity to really tell the story of what took down this firm, probably because each of them was hopelessly on the inside of the systemic problems I was able to see as so prevalent so easily in my time at Lehman Brothers.

I would be interested in comments from anyone who might have read either or both books, or any other similar reading regarding last year's massive changes in the investment banking landscape.

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Blogger KenP said...

Maybe you should have written the book instead of them.

The dumbing/deaging of the workforce is a very common 'solution' for today's CEO's planning. It happens across industries. Young is cheaper. The result is that knowledge leaves without replacement.

3:30 AM  
Blogger Hammer Player a.k.a Hoyazo said...


Believe me, if things had gone just a lil bit differently I would have. As it is I probably wrote about 20% of a book here on the blog and in some non-published posts.

Title: Leaving Lehman

6:36 AM  
Blogger BWoP said...

The i-banker party *was* kinda nice.


Thanks for the summary. I doubt that I would have gotten around to reading these books.

12:41 AM  

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