Books

Lehman Brothers: Wall Street's Titanic


A Colossal Failure of Common Sense:
The Inside Story of the Collapse of Lehman Brothers
By Lawrence G. McDonald and Patrick Robinson
Crown; 351 pp.; $27
Everyone knows how this story ends. Lehman Brothers, the once storied investment bank, collapses in the fall of 2008. Its bankruptcy—the largest ever—triggers a financial crisis, which sends the global economy into a tailspin. But the story of the bank's journey to its grave has never been so poignantly told as in A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald, a vice-president at Lehman from 2004 to 2008, and Patrick Robinson. While the crisis has spawned many books, McDonald's is among the first from an insider and is the front-runner on the subject of Lehman. He witnessed, often in amazement and disgust, the corporate dysfunction and hubristic leadership that led to the bank's demise. At its core the book is a memoir, chronicling McDonald's rise from pork chop salesman to dot-com entrepreneur to Lehman bond trader. To drum up brokerage clients for Merrill Lynch ( (BAC)) in the early 1990s, he rang doorbells on the Main Line of Philadelphia, stole golf club membership lists, and rifled through Ivy League alumni yearbooks. He made $5 million in a day in 2005 at Lehman by betting against energy provider Calpine ( (CPN)). McDonald deftly brings in the broader context, describing the financial products, regulatory changes, and economic environment that created a breeding ground for a multitude of follies and blunders. Even his explanations of collateralized debt obligations are engaging. This may be a testament to the skill of co-author Robinson, who also co-wrote the best-selling Lone Survivor, an account of an ill-fated 2005 U.S. Navy Seal mission in Afghanistan. By setting his personal narrative against the macro backdrop, McDonald gives readers a taste of life at Lehman. This 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. 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. But Fuld and the others in Lehman's "ivory tower" 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. 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. And the company relied 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.

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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.98 USD
    • 0.05
    • 0.28%
  • CPN
    (Calpine Corp)
    • $21.99 USD
    • 0.40
    • 1.82%
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