A bank needed to fail in order to push the banking rescue program through the US Senate, Lehman Brothers insider Lawrence McDonald says. His company was the scapegoat.
Lehman Brothers' bankruptcy shook financial markets
September 2008 saw the financial crisis reach its apex. Merrill Lynch was sold to Bank of America. Mortgage companies Fannie Mae and Freddie Mac were rescued by the government. And in the early hours of Monday September 15, famed investment bank Lehman Brothers filed for bankruptcy.
Lawrence McDonald worked as a trading vice president on the third floor of the 158-year-old institution. In 2009 he published an insider’s account of the Lehman failure: "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers," which has now been translated into German.
Lawrence McDonald worked on Lehman Brothers' trading floor
'I watched giants weep'
Two years after the bank's failure, McDonald spoke to Deutsche Welle about the events that took place.
"You remember the days of the summer of 2008 - holding out hope. Hope, hope, hope," he said. "We thought we would be the last Wall Street Bank that was left alone to die. And we thought that right up to the end."
When compiling material for his book, McDonald didn’t just rely on his own memories, but on interviews with his co-workers as well.
"It was like watching giants weep," he said. Many of the people he interviewed had been with the firm for decades, and many had lost a large part of their wealth when the firm went under.
"I sat down with person after person, broken men, broken women. Hearts crushed, lives really thrown in tatters."
The 158-year-old institution took the rap for what many others had done as well, the author says
Harsh criticism of leadership
McDonald argues that it was not the Lehman Brothers employees who were unscrupulous bankers - it was the leadership that ruined the firm.
"Lehman Brothers was never rotten at the core, she was rotten at the head," McDonald said. "Picture in your mind a rocket ship, 3000 feet high: At the top there is a capsule. And in the capsule there are some astronauts from the 1980s. But inside the rocket there is 21st century fuel, 21st century technology, 21st century power."
In other words: the bosses were out of touch. McDonald is particularly critical of former Lehman Brothers CEO Richard Fuld, who he said was never seen on the third floor by traders.
Ex-Lehman CEO Richard Fuld ignored warnings, McDonald says
"The 31st floor at Lehman Brothers should have been the nerve center of a 750 billion dollar hedge fund, which is what Lehman had become," McDonald said. “They were just consumed with growth, consumed with globalization" and missed any signs that might have shown problems lay ahead.
A fateful moment?
For those on the trading floor, signs that something was wrong were visible as early as 2006. But when an insider tried to inform the bosses of a problem, he was fired a few weeks later, McDonald said.
McDonald blames Fuld for not wanting to hear about problems - not even from then-Treasury Secretary Henry Paulson. He said Paulson, who spent years working at Goldman Sachs as Fuld's competition, tried to warn the Lehman boss at a meeting in the summer of 2008.
"At the dinner Paulson was saying to our CEO, 'Listen, you guys have to reduce risk. We just saved Bear Stearns, this is getting worse, you need to really clean up your act.' And at one point our CEO slammed the fork down on his plate and he said: 'I've been in my seat a lot longer than you were at yours at Goldman Sachs. Don't tell me how to do my job.'"
That is the moment that could have sealed Lehman's fate, McDonald says today.
Drowning - and watching the bubbles
Other banks - including AIG, Bear Stearns and Merill Lynch - invested in the same products and made the same mistakes as Lehman Brothers, McDonald said. When the government saw banking chaos headed its way, it decided to sacrifice one institution in order to get the Senate to pass the planned banking rescue package.
At a dinner, Henry Paulson tried to warn the CEO
"Our secretary Hank Paulson, our government, they took Lehman Brothers' head, they put it under water – and then watched the bubbles," McDonald said.
Today, banks are in better shape than they were two years ago. Their balance sheets are cleaned up, and they carry less risk. "Not because of finance reform, but out of fear," McDonald said.
Two years after the fact, there are still hearings taking place before Congress and investigations meant to shed light on the darkness - and to finger the guilty parties.
But according to McDonald, US efforts to assign blame for the banking system failure haven't gone far enough. Germany has done a better job, he said.
"The SEC has actually been embarrassed because in Germany the CEO of IKB Bank is facing criminal charges,” he said. “It looks like he might go to jail for comments he made on a conference call back in 2007. And in the United States, we had CEOs - including our executives at Lehman Brothers - some of them that did the same thing and nobody is facing jail time. That is wrong."
Author: Miriam Braun (jen)
Editor: Sam Edmonds