Lehman Brothers: A Crisis of Value

Good read for a event some may deem niche but affected many. Recommended read.

A necessary book for anyone willing to understand what got us to where we are, and how investment banking, regulators and investors failed to protect the public and themselves from a huge crash.

Some might say that the books have already been written on the failure of Lehman’s; so there no need to read another one. However, the key element missed in this opinion is that it is often quite valuable to let a number of years elapse before all the components in such a crisis can be fully digested. In this case, Oonagh McDonald has been able to review the pools of facts, interpretations and opinions of most all the players before coming to her own conclusions. In addition, as the bankruptcy process takes years to complete, several facts do not come out until after at least four or five years. I should also note that after enough time elapses, we can all look at a tragic event through more objective eyes. Thus, the process that author uses to present both the story and conclusions is quite insightful, even to those of us who had studied the disaster considerably.The author is quite balanced in her critique of the myriad of actors in this tragedy. She makes sure we understand where each player was well meaning properly active even as the crisis unfolded. No one is left blameless though credit is given where it is deserved.In the end, we see that what was and remains most important is that ensuring proper valuation is central to minimizing many a financial crisis. It is just not setting a valuation, but also ensuring that the process takes in truly independent views of values, does not rely on any single value but rather makes sure to look at a range of values and assumptions, and ensures that the process is fully transparent to all those affected. Equally important, ongoing and timely monitoring is imperative if we are to keep crises from growing. Of course, it is always better when the participants - the regulators, politicians, market leaders - all act in a responsible way in organizing the proper checks and balances and making decisions based on what is best for the overall good. But since we can seldom count on such a perfect environment, we at least ought to work on ensuring that proper value metrics are exposed in a timely manner.I applaud Oonagh McDonald in her evaluation of as she calls the “Chimera” that resulted in the Lehman Brothers collapse.Timothy F. McCarthy, Author of the Safe Investor

As reviewers said of her prior book on the GSEs, this book is an intelligent account of the demise of the subject organization marred by negligent composition and editing. Her analysis is generally astute, if not all that surprising; still, a rational voice is welcome in an arena overly populated by ignorant populism. Basically, she portrays Lehman, with detailed substantiation, as an organization that abandoned its pre-existing, well-regarded risk management culture, beginning in late 2006, in favor of asset and market share growth, telling itself nothing more sophisticated than, we've survived in the past when people thought we wouldn't. She does not delve into the motivations for this change too deeply, although it is generally believed in the New York financial community to have been CEO's Dick Fuld's envy of the success his former Lehman colleague and rival, Steve Schwarzman, was having investing in real estate at Blackstone. Fuld, sadly, was operating a much more leveraged entity than Blackstone. As well, the author explains, not with as much detail as I would like, that Lehman financed its acquisition of large real estate related positions primarily with short-term debt, a fundamental disregard of basic principles of Finance 101, since real estate assets are generally illiquid, and valuations get haircut, in periods of credit contraction (when your short-term debt stops rolling over). The reason I say she offers less detail than I like is that Fuld contended the short-term debt was matched by T-bill holdings and similar cash equivalents and I would have liked to see her address that account.Correctly, in my view, she dismisses accounts of the collapse tied to "Glass-Steagall" (Lehman was never regulated by Glass Steagall even before the bipartisan Gramm-Leach modifications of 1999); tied to the "efficient market hypothesis"; tied to the grown of derivatives and several other factors. She provides a nuanced view of the failure of regulators -- not that they were faithless or bought off but (a) at all levels, from the monitors at Lehman, to the very top political appointees, failed to understand the facts about both Lehman and about its interconnectedness, and (b) to the extent they did grasp any aspect of the problem, they were classic bureaucrats, unwilling to expose themselves to criticism by acting proactively. I generally agree, although I think she underestimates a third failure of regulation, namely, the way Basel II pushed financial institutions around the world into high yielding MBS.I grade this at less than 5 stars for two reasons. First, there is no original research in here. This is just her digesting other work out there. Honestly, thousands of people could have written this book. Second, the lack of care in writing is so substandard that it needs to be called out. There are non-sentences on about 5% of the pages (page 213, for example: "Just as Shiller does, but with a wider range of examples of irrational behavior demonstrated by examining long-term trends in stock market prices and the volatility of movements in prices."). Several times early on, things or persons are referred to as if the author has previously explained who or what they are, which she hadn't, while the actual description of them appears only chapters later (example: "Harvey Miller" is quoted on page 64; only 50 pages later does she explain who he was (he was the bankruptcy attorney for Lehman); similarly, early on she refers to "the Examiner" without any explanation who or what that is (it was a lawyer appointed in the bankruptcy case to examine the reasons for Lehman's collapse); she refers early on to the "EU supervisory directive" as if the reader knows what that is (I happen to, but it's a very technical and low visibility factor and I doubt the average reader does; she only explains it chapters later). It feels as if she rearranged the chapters at the last minute and did not bother to go through the proof to fix the confusion that resulted. Last, she has titled a chapter "The Largest Bankruptcy in American History" but the chapter isn't about the bankruptcy, it's about Lehman's valuation and accounting before the bankruptcy. It's one of her most important chapters, you'd think someone might have noticed the mismatch between contents and title.This book badly needed an editor. It is a shame because the substance is smart and astute, and because similar comments were made about her last book.

A financially advanced reader might find this too elementary. But I, as a self-taught amateur, found it enlightening. It nicely unpacked the parts of these instruments, and showed the effects of the surrounding market shifts on each.