A Colossal Failure of
Common Sense

The Incredible Inside Story of
The Collapse of Lehman Brothers

Larry McDonald,
Patrick Robinson

(Ebury Press)
You want to know who to blame for credit crash of 2008 - 2009? Well, among others, it would be Richard S. Fuld, Jr., Alan Greeenspan, and Bill Clinton.

Fuld? He was the Chairman of the Board of Lehman Brothers right up there to the end, when the whole thing bobbled over, taking him with it, but leaving behind for his troubles some $31,000,000 in bonuses (for 2007) and four houses.

Greenspan? You remember him ... the guy with the smelly cigar and the jowls, peering out at you from the TV, the head of the Federal Reserve, the guy who as of June 30, 2003 set the price of money so low --- 1% --- that anybody and his mother could get a loan.

Clinton? He should have known better. After all, he did get a degree in PP&E (philosophy, politics, and economics) from the College of the Great Hall of the University of Oxford England. Despite that, in 1999, he signed a bill to repeal the Glass-Stegall Act, the depression-era law that separated investment banks from commercial banks.

By getting rid of Glass-Stegall, investment banks would no longer be forbidden from using customers' money (your money, my money) for foolish gambles in funny money ... "derivatives" known in the trade as CDOs, CLOs, RMBSs, SIVs, LBOs, MBSs. All being paper cooked up by those guys on the third floor at Lehmans, along with others at Goldman Sachs, American Express, Citibank, Bank of America.

The whole mess started with NINJAs --- loans for those with no income, no job, no assets, loans to people with nothing to pay back the loans on their houses, which were then bundled together to sell to the sheep out there, all stacked with AAA credit ratings from the big-three rating agencies (Moody's, S&P, Fitch).

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All this muckery is explained with great clarity by author Larry McDonald. He started off as a hot-shot trader in "debt instruments" (bonds, convertibles) at Lehman a decade before the sky fell in. Did he love his work? He claims that he looked up at the Lehman Building at 575 - 7th Avenue in Manhattan with tears as he come to his first day on the job at 6 a.m (you have to be an early-riser to buy and sell stocks and bonds).

Tears, too, on his last day of work, when he got shitcanned, shortly before everything fell apart. How much longer would he have been willing to work there. "1,000 years" he tells us ... again, wet in the eyes. These guys do get moist.

Colossal Failure is a gripper from start to finish, and I couldn't get it out of my hands (nor off my mind). Why? It has all you need for a good novel, a novel with strange characters like Fuld, Greenspan, Timothy F. Geithner (Secretary of the U. S. Treasury) and Ben Bernanke, Present Chairman of the U. S. Federal Reserve ... and possibly Larry McDonald the author himself.

How much did he love trading? Well, he only mentions the fact, and then only as a one sentence aside, that during the time he worked for Lehman (and on this book) he did, it turns out, get married, and that it lasted but a year. Obviously, as my psychiatrist would say, a guy "who divorced his family and married his job."

If you want to know what caused the demise of credit in one of the biggest bubbles in the history of finance and investments, this could be it. McDonald is excellent at spelling out the differences between weird stuff like CDOs (collateralized debt obligations) and CLOs (collateralized loan obligations).

You want to know about "commercial paper?" Look no further than page 258.

    Commercial paper is the quickest, cheapest, and easiest way for them [blue chip corporations] to raise a fast loan that is not regulated by the SEC.

These loans, he tells us, are good for thirty to forty days. You and I need not apply.

And here you can find out the difference between a million and a billion dollars: "$1 million stacked up in $100 bills is a couple of feet high. A billion is more than three times as high as the Washington Monument."

One of the reasons that I couldn't put this one down has to do with the fact that I've suffered so gravely in the stock market. See these scars? Scar #1 is because when I am long and the stock "falls out of bed" (in the parlance of the market) I get scared ... then I get snookered. Thus, I bought Red Hat (I thought I knew "open source" software) when it went from 10 to 8 and I bailed out (now it's at 31).

Scar #2 is because I didn't have a clue about what I was doing. I find from reading this book is that if you want advice from Wall Street, you have to do one thing. Be rich. All the high-priced advice from the experts at Lehman (fixed income, convertibles, distressed-debt, high-yield credit, emerging markets) you have to have the do-re-mi. Then they come to you (one of McDonald's jobs was to visit very wealthy clients across the country, tell them the latest in Lehman's in-depth research).

And the duplicity! Evidently Lehman's books were cooked right there at the end: they had off-shore accounts in the Caymans. That's where you stick your "debt instruments" that you don't want anyone to know about.

Finally, there is the matter of tears. McDonald sprang a few when he got his job, a few more when he lost it. Those other characters he worked with did some tearing up when they got fired or there at the end when the ship went down. You thought they were crying because they loved their great old company (born in 1844 or so). Nonsense.

They were weeping because as the ship went down, so did much if not most of their assets, what they call golden handcuffs, stock and options handed out to them when the company stock was trading in the 60s and 70s, stock not to be sold until a certain date down the line, too late alas, as the whole beanbag began to tumble, now their assets plummeting to zilch. I'd be crying, too.

--- Sarah Weaver
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