New Book: How Lehman Lost Its Way
Regrets, he has a few.
Federal Reserve Chairman, Ben Bernanke told a congressional commission he feels partly to blame for leaving the wrong impressionthat the central bank could have saved Lehman Brothers from failure in 2008.
"I regret not being more straightforward there because clearly it has supported the mistaken impression that in fact we could have done something we could not have done,'' he told the the Financial Crisis Inquiry Commission.
But as one author explains in his new book and in this Guest Author Blog, there really wasn't much the Fed could do because Lehman had lost its way.
Guest Author Blog: Peter Chapman, author of The Last of the Imperious Rich: Lehman Brothers, 1844-2008
Two years on from an inglorious end, in the financial press the phrase “since the collapse of Lehman Brothers” still turns up in articles on a daily basis. It marks a key point in history, the end of a spectrum that began with the fall of the Berlin Wall nearly twenty years earlier and during which the free-market experiment was handed every chance to succeed.
So how come Lehman Brothers fell when it did?
To some extent it was unlucky and in the wrong place at the wrong time.
It was the smallest of the investment banks that were most highly exposed to the sub-prime mortgage crisis. Following the disappearance of Bear Stearns in March 2008, Lehman Brothers was the next in line.
As the threat against it grew, it was not close enough to the centres of power to have its voice heard. Dick Fuld, its chief, was banished by treasury secretary Henry Paulson from attending the weekend meeting of September 14/15 at the New York Federal Reserve that sealed Lehman Brothers’ fate on grounds that he was out of touch with reality and had nothing practical to offer.
By contrast, such as Goldman Sachs – an old partner-turned rival of Lehman Brothers from the early twentieth century – was able to attract a generous portion of the huge bail-out fund thrown together after the Lehman collapse by Paulson. Goldman Sachs had fostered its links to government by encouraging its people to take jobs in public service since the days of Sidney Weinberg’s leadership in the 1930s.
Lehman Brothers had once been close to government.
Herbert H. Lehman, former partner, as governor of New York was President Franklin D Roosevelt’s right hand man in the New Deal. Bobbie Lehman, chief of the firm for forty years, abandoned his long-term support for the Republican Party to become an ardent fan of President Lyndon B. Johnson in the 1960s.
At its end, the bank had long since lost its key political connections. This was largely thanks to the disastrous period of leadership of trader and short-term thinker Lewis Glucksman in the 1980s. He was much assisted at the time by his protégé, the young Dick Fuld.
But essentially, Lehman Brothers abandoned its historical roots.
It was founded in the best traditions of America by a humble migrant family. The Lehmans – Henry and later his brothers Emanuel and Mayer – came from Bavaria, Germany, in the 1840s and built an enterprise based on long-term investment in their new homeland and trade in material things. Initially Henry was a peddler in Alabama then moved into southern cotton. The brothers bartered, built relationships, stayed close to their clients.
Moving north after the Civil War, they financed and became identified with so many of the things that people the world over regard as quintessentially American: retail, with the firm’s backing of such companies as Sears, Roebuck, Woolworth’s and Macy’s; Hollywood with RKO and 20th Century Fox; the miracle of flight and Pan-American Airways; the freedom of the road with, from the 1950s, the likes of the Hertz Corporation. (John D Hertz was a Lehman Brothers’ partner.)
From the 1980s Lehman Brothers went “short term”. It threw out its boss of the day, Pete Peterson (and look how the founder of Blackstone has done so well since) and went on the hunt for quick turnover and profit. Once a prestigious investment bank, it never thereafter quite rose above the status of being a bond house. Come the crunch, and in spite of Fuld’s claims to the contrary, it was a one-trick pony dependent on arcane and useless products such as its sub-prime mortgage bonds which it sold to the unsuspecting.
On the bright side, its demise came with a moral and spoke for the Lehman Brothers of old: stay honest, play the long game and deal in decent things.
Peter Chapman is the author of The Last of the Imperious Rich: Lehman Brothers, 1844-2008.