It was 24,992 people making money and eight guys losing it.
A very small number had direct exposure and what they witnessed was staggering.
In the four years McDonald worked for the company he never once saw Fuld. Top management never saw Fuld either.
This lack of interaction meant that warning calls from traders on the frontline were not heard, and certainly not heeded, in the years leading to the collapse.
“The most important players were Mike Gelband, managing director and global head of fixed income; Alex Kirk, managing director and global head of high-yield and leveraged loans; and my immediate boss and best friend, Larry McCarthy, managing director and global head of distressed bond trading. Then there was Richard Gatward, managing director and global head of convertible securities trading; Christine Daley, managing director and head of distressed debt research; Madelyn Antoncic, managing director and chief risk officer; and myself.
“Most of these brave leaders implored the chairman, and our president Joe Gregory, to change course.”
They turned their backs on many warnings. They were betting the ranch.
Larry McDonald called the sub-prime bubble early and started to short mortgage lenders such as Countrywide, Fannie Mae and Freddie Mac. All the while Lehman was increasing its exposure to the very same products.
“For every dollar I was making, they were losing six. I was making money betting against the edicts that were coming out of the 31st floor.”
He believes jealousy played a part in the board’s insatiable desire for the toxic assets that would ultimately sink it.
“They were chasing all of this real estate stuff because Blackstone, which was founded by former Lehman guys, was doing it and there’s always been this intense rivalry between the two. Goldman Sachs was big in it too. It was Goldman-envy and Blackstone-envy.”
Instead of reviewing the bank’s risk management systems, the executive directors would have endless meetings discussing the corporate dress code as Fuld was a stickler for appearances.
A dangerous lack of awareness about the technical financial products the bank was playing with didn’t help matters.
I think the board was afraid of interacting with the people who genuinely understood things like credit derivatives because they might get caught out.
“The management team was from a different era, they weren’t 21st century financial people.”
McDonald’s book ‘A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers‘ points the finger of blame at Fuld and his board, accusing them of taking dangerous risks in pursuit of short-term profits.
Lawrence McDonald at New Statesman, “We all knew it was coming.“
Summary link at The Times.