A Colossal Failure of Common Sense
Encyclopedia
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers is a 2009 non-fiction
book written by Lawrence G. McDonald
and Patrick Robinson which chronicles the events surrounding the bankruptcy of Lehman Brothers
in the context of the financial crisis of 2007–2010 and the subprime mortgage crisis
. The work is divided into a prologue
, an epilogue
, and twelve chapters.
, and the Gramm–Leach–Bliley Act, a 1999 act of Congress signed by former United States President Bill Clinton
that repealed portions of the Glass–Steagall Act of 1933.
The book contains an account of how McDonald, after attending the University of Massachusetts
, selling pork chops, and self-teaching himself the material required to pass the General Securities Representative Exam
, went on to develop the website ConvertBond.com, which was later purchased by Morgan Stanley
.
The author's stated expertise, in the convertible bond
market, was what allowed him to create the website ConvertBond.com during the dot-com bubble
, and successfully sell it to Morgan Stanley before the Internet bubble burst. It was while he was working at Morgan Stanley that McDonald was offered a job as vice-president at Lehman Brothers
. The book characterizes Richard Fuld as being out of touch, smug, and a ruthless CEO with a short temper and a penchant for rage. The book sarcastically refers to Fuld as "his majesty," "god-like," and a "spiritual leader."
McDonald believes that the United States government should have saved Lehman Brothers, and that Dick Fuld falsely believed that the United States government would save the company after having a meeting with Henry Paulson
in the spring of 2008, which led him to engage in unnecessarily risky behavior and reject an offer of $18 per share from the Korea Development Bank
as late as August 2008.
, wrote that the biographical portion of the book, which describes McDonald's life, how his mother was a fashion model and how his father spent most of his time working and playing golf was "fascinating, no doubt, to people named McDonald, but less so for the rest of us". He also questions the details which provide a critical characterization of Richard Fuld, saying that "sources for such details are often left unclear, though, and little wonder".
Arthur Doyle, a managing director at Lehman Brothers until the summer of 2008, wrote that McDonald's position, "that Lehman’s collapse was an unfortunate and totally preventable disaster caused by a failure of leadership" is questionable because "given the combination of the credit bubble and the availability of cheap, plentiful leverage, along with an asymmetric reward structure (which paid out huge bonuses to managers from profits generated from that leverage but had no mechanism to punish those managers for taking risks that led to bad outcomes)," Lehman’s outcome may have been inevitable. Doyle believe that the fact that "Lehman’s close peers—Bear Stearns
, Merrill Lynch
, Citigroup
, Bank of America
—either collapsed along with it or were saved through quasi-nationalization" supports his contention that Fuld was not the "lone gunman in the Lehman homicide".
Non-fiction
Non-fiction is the form of any narrative, account, or other communicative work whose assertions and descriptions are understood to be fact...
book written by Lawrence G. McDonald
Lawrence G. McDonald
Lawrence G. McDonald is a former vice-president at Lehman Brothers and is currently managing director of Pangea Capital Management LP.-Financial crisis:...
and Patrick Robinson which chronicles the events surrounding the bankruptcy of Lehman Brothers
Bankruptcy of Lehman Brothers
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...
in the context of the financial crisis of 2007–2010 and the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
. The work is divided into a prologue
Prologue
A prologue is an opening to a story that establishes the setting and gives background details, often some earlier story that ties into the main one, and other miscellaneous information. The Greek prologos included the modern meaning of prologue, but was of wider significance...
, an epilogue
Epilogue
An epilogue, epilog or afterword is a piece of writing at the end of a work of literature or drama, usually used to bring closure to the work...
, and twelve chapters.
Summary
The book is highly critical of Richard Fuld, Henry PaulsonHenry Paulson
Henry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
, and the Gramm–Leach–Bliley Act, a 1999 act of Congress signed by former United States President Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
that repealed portions of the Glass–Steagall Act of 1933.
The book contains an account of how McDonald, after attending the University of Massachusetts
University of Massachusetts
This article relates to the statewide university system. For the flagship campus often referred to as "UMass", see University of Massachusetts Amherst...
, selling pork chops, and self-teaching himself the material required to pass the General Securities Representative Exam
General Securities Representative Exam
The General Securities Representative Exam, commonly referred to as the Series 7 Exam, is a required exam to become a Registered Representative of a broker-dealer in the United States....
, went on to develop the website ConvertBond.com, which was later purchased by Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
.
The author's stated expertise, in the convertible bond
Convertible bond
In finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...
market, was what allowed him to create the website ConvertBond.com during the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
, and successfully sell it to Morgan Stanley before the Internet bubble burst. It was while he was working at Morgan Stanley that McDonald was offered a job as vice-president at Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
. The book characterizes Richard Fuld as being out of touch, smug, and a ruthless CEO with a short temper and a penchant for rage. The book sarcastically refers to Fuld as "his majesty," "god-like," and a "spiritual leader."
McDonald believes that the United States government should have saved Lehman Brothers, and that Dick Fuld falsely believed that the United States government would save the company after having a meeting with Henry Paulson
Henry Paulson
Henry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
in the spring of 2008, which led him to engage in unnecessarily risky behavior and reject an offer of $18 per share from the Korea Development Bank
Korea Development Bank
Korea Development Bank is a wholly state-owned policy bank in South Korea It was founded in 1954 in accordance with The Korea Development Bank Act to finance and manage major industrial projects to expedite industrial development and enhance the national economy. As Korea’s representative...
as late as August 2008.
Chapters
- A Rocky Road to Wall Street
- Scaring Morgan Stanley to Death
- Only the Bears Smiled
- The Man in the Ivory Tower
- A Miracle on the Waterway
- The Day Delta Air Lines Went Bust
- The Tragedy of General Motors
- The Mortgage Bonanza Blows Out
- King Richard Thunders Forward
- A $100 Million Crash for Subprime's Biggest Beast
- Wall Street Stunned as Kirk Quits
- Fuld, Defiant to the End
Reception
James Freeman, writing for The Wall Street JournalThe Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
, wrote that the biographical portion of the book, which describes McDonald's life, how his mother was a fashion model and how his father spent most of his time working and playing golf was "fascinating, no doubt, to people named McDonald, but less so for the rest of us". He also questions the details which provide a critical characterization of Richard Fuld, saying that "sources for such details are often left unclear, though, and little wonder".
Arthur Doyle, a managing director at Lehman Brothers until the summer of 2008, wrote that McDonald's position, "that Lehman’s collapse was an unfortunate and totally preventable disaster caused by a failure of leadership" is questionable because "given the combination of the credit bubble and the availability of cheap, plentiful leverage, along with an asymmetric reward structure (which paid out huge bonuses to managers from profits generated from that leverage but had no mechanism to punish those managers for taking risks that led to bad outcomes)," Lehman’s outcome may have been inevitable. Doyle believe that the fact that "Lehman’s close peers—Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
, Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
, Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
—either collapsed along with it or were saved through quasi-nationalization" supports his contention that Fuld was not the "lone gunman in the Lehman homicide".
See also
- List of entities involved in 2007–2008 financial crises
- Subprime crisis impact timelineSubprime crisis impact timelineThe subprime crisis impact timeline lists dates relevant to the creation of a United States housing bubble and the 2005 housing bubble burst and the subprime mortgage crisis which developed during 2007 and 2008...