“It was like 24,992 people making dough and 8 losing it.”

On September 15 2008, Lehman Brothers filed for bankruptcy. It was the largest bankruptcy in American history at the time.

Larry McDonald had a front row seat. In the book A Colossal Failure of Common Sense, the former Lehman trader gives us the inside story of how the 158 year old bank collapsed.

Number One at Any Cost

When McDonald joined Lehman in 2004, it was a dream come true.

He had grown up in a housing project. For years, McDonald dreamed about being a Wall Street trader.

Working on the Lehman trading floor was exciting, electric. But soon, McDonald began to see signs of trouble.

Chairman & CEO Dick Fuld desperately wanted Lehman to be the number one bank on Wall Street. But Lehman was smaller than rivals like Goldman and didn’t have the deposit base of a bank like JP Morgan.

Nonetheless, Fuld went on a buying spree.

Lehman bought trophy commercial properties all over the world. It also bought scads of securities backed by subprime mortgages.

Fuld did any business available, whether it was profitable or not.
Second tier banks often make this mistake. Credit Suisse collapsed last year under similar circumstances.

Disconnected Management

Fuld ruled the bank with an iron fist. But many Lehman employees had never even seen him.

He used a special elevator and seldom left the executive floor. Even many Managing Directors had never met Fuld.

Fuld didn’t have much time for his people. He was busy pursuing a lavish lifestyle.

Fuld owned mansions all over America. He left early for the weekend and spent much of his time away from New York.

The Lehman CEO reminds me a lot of Jimmy Cayne, former CEO of Bear Stearns. Cayne too was disconnected from the day-to-day, favoring long weekends at his various homes.

Compare Fuld to Elon Musk. Musk has 5 minute one-on-one meetings with every single employee at xAI.

The great CEO’s are deeply involved in the details. The rotten ones behave more like monarchs.

Falling Apart

Many of Lehman’s best traders and bankers tried to sound the alarm. Time and again, they warned Fuld and his executive team that the firm was taking on too much risk.

Fuld ignored them.

By the end of 2007, Lehman was leveraged 44:1. A 2.3% loss would wipe them out.

And sure enough, the losses started coming.

As subprime borrowers began to default, the value of mortgage backed securities fell hard. Lehman had tons of them on its books. Now, there was no buyer.

Lehman began to take one huge loss after another. Mortgage backed securities, commercial real estate, credit default swaps — the losses just kept coming.

Lehman began to look risky. Counterparties demanded more collateral, eager to protect themselves.

As summer turned to fall in 2008, JP Morgan began to demand billions in cash. Lehman didn’t have it.

Without that money, JP Morgan wouldn’t extend any further credit to Lehman. This meant Lehman could no longer operate.

The 158 year old bank filed for bankruptcy.

Wrap Up

Mismanagement is what killed Lehman Brothers. Reading this book, I couldn’t believe what I was hearing.

A 2.3% loss would wipe them out. How could you think you’d never take a 2.3% loss?

Fuld is the worst case of Manager Mode I’ve ever seen.

He had no idea what was going on in his company. He pushed for growth at all costs, and the cost was Lehman’s existence.

To add insult to injury, Fuld turned down repeated, firm offers from Korean Development Bank to acquire Lehman throughout 2008. The bank could’ve been saved, but Fuld blew it.

Reading this book makes me appreciate founders who are deeply involved in their companies. My job is to find the Elons and avoid the Fulds.

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