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Nation & World

Ex-Insider's Book Details Lehman Brothers Collapse

Americans are still trying to understand all the repercussions of the financial crisis.

But one insider, Lawrence G. McDonald, tells NPR's Steve Inskeep that it takes just one phrase to understand the failure of Lehman Brothers: "24,992 people striving hard, making money, and about eight guys losing it."

For four years, McDonald served as vice president of distressed debt and convertible securities trading at Lehman, and he has a new book that further explores what happened, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers.

While researching the book, McDonald interviewed more than 150 people who worked for Lehman. He says that the company "was never, never rotten at the core. That's where all the beauty was. This place was rotten at the head."

The leadership of Lehman worked on the 31st floor, which McDonald characterizes as "one of the most mysterious places on Wall Street."

Richard Fuld, CEO of Lehman, had his office there, but McDonald never met him and neither did most of his colleagues — even at the highest levels of the company. Even on the company's best days, McDonald says, Fuld never appeared on the trading floor to congratulate Lehman Brothers employees.

"Mr. Fuld surrounded himself with every type of yes-man and woman you could possibly get. By the time 2007 rolled around, he had a real steamroller," McDonald says. "They increased the balance sheet between 2007 and 2008 by over $120 billion."

So as the crisis was getting worse, McDonald says, Lehman was taking on more debt to pay high-level employees. "They were using leverage to increase the bonus pool and increase the compensation flow," to the point where if you made it to the 31st floor, it was like "hitting the New York lottery."

And it wasn't just Fuld, says McDonald. "He had a team of people that were really pressing on the gas pedal."

The moment that sealed Lehman's fate, says McDonald, is when Fuld met with then-Treasury Secretary Henry Paulson in the spring of 2008.

Twist Of Fate At Treasury

Fuld came out of the meeting and "tried to put the Lehman staff at ease. He sent an e-mail that said, "We have huge brand at Treasury" — meaning that Lehman had a lot of respect there.

According to McDonald's research, the reality is that it was a tense meeting. According to those in attendance, Fuld told Paulson, "I've been in my seat a lot longer than you were at yours at Goldman Sachs. Don't tell me how to do things. I'll do things at my speed."

McDonald believes that was the start of a lot of problems. Lehman wasn't trying to sell quickly enough.

McDonald also says the U.S. should have rescued Lehman. Treasury should have replaced Fuld and his management team, and then forced another bank to shepherd it through a "controlled unwind, instead of having nasty, horrific selling of assets."

Finally, McDonald says, "The thing that really bothers me is that you allow Lehman to fail, but that hurts your bailing out Merrill and AIG." Allowing Lehman to fail, McDonald adds, cost the American taxpayers somewhere between $40 billion and $70 billion.

Copyright 2021 NPR. To see more, visit https://www.npr.org.