28 June 2016
Lehman Brothers: A Crisis of Value
2015, Manchester University Press, 222 pages,
Reviewer: Rosemary Connell, Consultant
This is a very well researched scholarly exposition of the events before during and after the Lehman drama of 2008. It draws on an impressive and comprehensive range of sources including emails, minutes, interviews, and news items. These have been mined and analysed to show that regulation that was not fit for purpose combined with Lehman’s aggressive policies were the major contributors to Lehman’s failure.
The bankruptcy examiner concluded that valuation was central to the question of Lehman’s insolvency; but what is meant by value? This book provides an analysis of the reasons for Lehman’s collapse. It starts with a history of the bank including an outline of its chequered past and acquisitions. Overtime the CEO Dick Fuld became increasingly remote from running the business and because of the very rapid growth between 1994 and 2007 the business anyway became too big for one man to manage given the inadequate management structure.
In January 2008 net revenue was $19.3bn, net income $4.2bn, a record. However with the Bear Sterns collapse and rescue, doubts began to emerge. As markets continued to decline Lehman laid off staff and sought a bidder. Undue risks had been taken given insufficient capital. The SEC lacked the statutory power to regulate investment banks as necessary.
The author goes on to provide a very detailed analysis on an almost day to day basis of what went wrong at every stage. A buyer could not be found. Among others, Bank of America and Barclays evaluated the company. Barclays subsequently eventually bought the capital markets and investment bank operations at a fire sale price after Lehman had filed for bankruptcy. The Federal Reserve bailed out AIG, but said it was unable to bail out Lehman probably due to lack of legal powers. Then came the Fannie May and Freddie Mac difficulties; but still the disastrous consequences of allowing Lehman to failure were not fully foreseen. These worldwide repercussions are spelt out, and the amazing vagaries of the Lehman accounting are exposed here.
When Lehman collapsed the regulators found it pretty impossible to identify all exposed counter parties. The markets lacked confidence in Lehman’s valuation of its assets with good reason given the housing bubble burst and other problems. Professional standards for valuing commercial and residential estate existed but were not consistently applied by Lehman. Lehman had a very complex management structure but lacked adequate risk management controls. Fuld’s powers as a dominating CEO had not been properly challenged.
This serious book is not a light read. Given some time has elapsed since the crisis and the fact that the bankruptcy process takes time and new facts emerge over that time means that the analysis provided is very thorough. Proper asset valuation is central to minimising financial crises as is ensuring that the appropriate management structure is in place, the whole process is fully transparent and risk properly evaluated.