Books: The colossal failure of Lehman Brothers

Ahead of the anniversary of Lehman Brothers' disastrous collapse, we've been reading a first-hand account.

by
Last Updated: 25 Oct 2010

If you’re looking for the inside track on exactly how and why Lehman Brothers became the biggest (and arguably most far-reaching) bankruptcy in history, you could do a lot worse than read Larry McDonald’s book, ‘A Colossal Failure of Common Sense’. A former trader and VP at the now ex-bank, McDonald had a ringside seat for the decline and fall of one of Wall Street’s most venerable institutions – and now he’s put it in a book for our benefit, utilising the skills of thriller writer Patrick Robinson to help with his split infinitives, melodramatic similes and so on.

McDonald’s an interesting character in his own right. Unlike many of the Wall Street rocket scientists, he didn’t make it to the Lehman trading floor via a prestigious Ivy League college, because he didn’t have the grades. Instead he went to University of Massachusetts at Dartmouth and worked his way up via a series of sales jobs – starting with pork chops before moving onto stocks and bonds – and then an online start-up, which he flogged to Morgan Stanley for a seven-figure sum at the height of the dotcom boom. (Although the stuff on the jacket about him ‘rising from a housing project’ is slightly disingenuous – his dad is a millionaire, he makes loads of his best contacts via the golf club, and he eventually gets the Lehman job through an old school buddy…)

McDonald was only actually at Lehman for four years, working as a high yield trader in the fixed income department. And the book provides an interesting insight into life on the trading floor, with some colourful vignettes about his team’s successes. Since they spent most of their time identifying companies that were about to go bust, he also has an interesting perspective on the sub-prime dross that ultimately brought down the bank. And judging by McDonald’s account, his brilliant team spent years generating huge profits and warning the powers-that-be of the risks they were taking, only to be cruelly ignored as the mortgage guys upstairs ruled the roost. It’s hard not to think there may be some rose-tinted hindsight going on here – Larry’s chums are uniformly brilliant Wall Street legends, while pretty much everyone else in the bank is worse than useless - but perhaps that's to be expected.

Still, there’s no question who he ultimately blames for Lehman’s collapse: the bank’s now-notorious chairman and CEO Dick Fuld. According to McDonald, Fuld was a reckless, power-hungry and irresponsible leader who surrounded himself with yes-men, couldn’t understand the complexities of high finance, and spent his entire time cocooned in his 31st floor office. In fact, McDonald claims that most of the senior team had never even met the man, which seems a fairly remarkable approach for a corporate leader to take (apparently Fuld isn’t too pleased about his portrayal in the book, and we’re not surprised).

You’ll probably gather that this book is a pretty one-eyed account, which is both a strength and a weakness. It’s not exactly the most dispassionate or disinterested Lehman post-mortem, but on the other hand it does give a great sense of what it was like to be behind the scenes for what will no doubt go down as one of the most dramatic episodes in financial history...


'A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers' by Larry McDonald (with Patrick Robinson) is out now, published by Ebury Press.


In today's bulletin:

Inflation down again - as high street delivers mixed results
Banks failing to heed the lessons of Lehman
Editor's blog: The childishness of the cuts debate
Can offsetting help SMEs avoid redundancies?
Books Special: The colossal failure of Lehman Brothers

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