Recently Dan and I both started trying to read less military history because the books tend to be depressing. Knowing that I was going to be stuck on an airplane for a few hours and needing some light “by the poolside” reading I picked up A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
A bit of background; Lehman Brothers is a famous financial firm that failed during the 2008 crisis and became the biggest bankruptcy case in US history, since it had a balance sheet of over $600 Billion in listed assets at the time of its collapse. Here is a wikipedia summary of the bankruptcy proceedings. Note that at the time of its bankruptcy Lehman had a 33-1 asset leverage ratio, meaning that only a small decline in asset values wiped out the equity and made the firm insolvent. The US Government declined to rescue Lehman Brothers, which remains controversial to this day, and the fall of Lehman also caused an immediate crisis at AIG which led to a huge US government backstop of $85B to halt further failures of other investment institutions.
While the book is interesting, the author, who is a trader, misses most of the essential elements of WHY Lehman was doomed to collapse, focusing on the remoteness of the CEO Fuld, the exposure to toxic real estate mortgages that couldn’t be “packaged” into assets and sold (because the securitization market had collapsed), and Lehman’s purchase of real estate at the “high water” time of 2007 (virtually everything bought in 2007 turned out to be a bad idea, look at your portfolio at the time).
Note that I think that the book is very interesting and entertaining and recommend that readers buy it. These are more “conceptual” than “literary” or typical journalism reviewer type concerns.
PUBLIC COMPANY CEO CAPTURE
However, these items are merely symptoms of the root cause. The author inadvertently stumbled upon the root cause while discussing the history of Lehman and Fuld’s rise to power, when disputes among the partners led to partners leaving the firm, taking significant amounts of their capital with them (the firm had to utilize their cash to buy back their stock).
When Lehman was spun back out as a public entity, in 1994, essentially the partners no longer mattered, regardless of their title, because Lehman was a public company and the board was “captured” by Dick Fuld. The board was admirably satirized in the book:
Nine members of the ten-person board were retired. Four of them were 75 years of age or older… only two of them had direct experience in the financial services industry – and they were all from a different era.
From this disparate group of old stagers, Lehman created a risk committee, chosen and controlled by Fuld himself. It met only a couple of times a year, which is an unusual way to monitor the company’s ongoing risk.
In addition to “capturing” the board and stuffing it with out-of-touch retirees, and nullifying its risk management capabilities, Fuld did what many CEOs do, installed a #2 who was in no position to challenge him to ever run the company.
A key factor in the appointment was that his ambitions did not apparently include becoming CEO. His great concern was with what he called the “culture” of Lehman Brothers.
Packing the board with retired and out-of-touch geezers, ensuring that no one competent is in place to succeed you, and limiting opportunities for your already-supine board to govern your actions are often immediate actions of CEOs that want to ensure their reign will be long and profitable (for themselves).
