The Role of Lehman Brothers in the Global Economic Crash

¶ … Member of the Board of Lehman Bros.

As a member of the Board of Lehman Brothers in 2008, I can attest to the fact that none of us knew what we were doing: we were of a bygone age of banking, one that existed before the world of high finance had suddenly and virtually overnight taken on a new persona -- thanks to deregulatory practices and new schemes based on the securitization model invented by Lewis Ranieri of Salomon Brothers (Lewis, 1989). It became a world in which massive profits could be made (or looked as though they could be made) in no time at all, whereas in the past it would have taken years, decades to amass this kind of fortune. We did not understand it, but we approved it by our silence and resignation: we trusted the traders and managing directors who seemed to know this world better than we did. It was a world of "mass securitization, credit-default swaps, derivatives trading, and all the risks those products created" (Berman, 2008). And just like Enron's Board, which failed to truly appreciate the scope of the problems arising under Fastow and Skilling, we too failed to see that there was an abyss opening up underneath of us.

Not that any of this is an excuse. I can say that it happened overnight, but even that is stretching it a bit. Michael Lewis was writing about this sort of thing back in the 1980s and told the story in Liar's Poker and told it well. If we had been paying attention we might have checked our traders before they wrecked the company through their reckless buying of sub-prime mortgage bonds. We presumed, like so many others, that our friends in government would bail us out. Our friends, however, stabbed us in the back: we weren't to be one of the chosen few -- like Goldman or JPM -- to survive the bubble bursting.

The housing bubble as it was called was like a daisy-chain of bad decisions: the securitization behemoth had come into being and to sell credit-default swaps bankers and bond traders wanted more mortgages to bundle and pass off on to the market. This prompted more banks to offer more loans -- bad loans -- to borrowers who simply had to state their income without giving any evidence of consistency or legitimacy. We looked the other way because our traders were making money. We figured they had the game under control. We met twice a year to discuss corporate risk -- and none of us took it this seriously (Berman, 2008). At the top, you don't tend to micro-manage or stick your nose into everything. You expect those under you to do that. It was the same as at Enron with Lay simply allowing Skilling to put 2 and 2 together to make 4 million, figuring it was all sound as Skilling was a "smart"guy. We too had "smart" guys under us -- how else could we be so profitable? Except when the music stopped, we were left holding the bag and were forced to liquidate our assets in a fire sale that brought on the collapse of both the company and the global market. Of course, that is when the Fed and the Treasury Department stepped in to bail out the Too Bigs -- just not us. We were only 4th largest in the U.S. Not big enough, I guess.