Lehman Feb 15

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Book - Lehman Brothers: A Crisis of Value

1. ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald

   Feb 14, 2016 | Financial Times

   By John Plender
   
   
   The collapse of Lehman Brothers in 2008 was not the cause of the great financial crisis but it was a spectacular curtain raiser to one of the most chaotic episodes in financial market history. Almost eight years on Oonagh McDonald, a British financial regulation expert and former MP, brings a regulatory perspective to the story...

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Book - Lehman Brothers: A Crisis of Value

1. ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald

   Feb 14, 2016 | Financial Times

   By John Plender

   The collapse of Lehman Brothers in 2008 was not the cause of the great financial crisis but it was a spectacular curtain raiser to one of the most chaotic episodes in financial market history. Almost eight years on Oonagh McDonald, a British financial regulation expert and former MP, brings a regulatory perspective to the story, exploring the multitude of flaws in the patchwork of rules that supposedly governed the way the big five US investment banks had previously been supervised. Above all she examines how, one weekend in September, Lehman went from being valued by the stock market at $639bn to being worth nothing at all.

   It did not require much to make Lehman go up in smoke. At the end of its last financial year, it was so highly leveraged that its assets had only to fall in value by 3.6 per cent for the bank to be wiped out. The tale of how the management reached this point under the leadership of Dick Fuld is compelling.
   
   The response of these Wall Street wizards to the credit crunch that began in mid-2007 was pure hubris. Having survived episodes of financial turmoil when many expected the bank to fail, Mr Fuld and his colleagues decided to take on more risk. Meanwhile, they neglected to inform the board that they were exceeding their self-imposed risk limits and excluding more racy assets from internal stress tests. The board, conspicuously short of expertise in risk management and financial plumbing, enthusiastically endorsed the policy. The chief risk officer who questioned this dash for growth was removed from her post.

   Many have seen the dynamics of the crisis in terms of the toxic nature of complex derivative instruments and structured products such as collateralised debt obligations, credit defaults swaps and the rest. A strength of McDonagh’s book is that it recognises that this was really a property-based crisis. The reason that derivative instruments inflicted losses on their holders was that they derived their value from residential mortgages, commercial property and other financial assets. Those values started to collapse in 2006.

   Much of the decline in the value of Lehman’s assets came from direct exposure to property. It invested heavily in both property equity and in loans to SunCal, a Californian developer, and in Archstone-Smith, a property investment trust with upmarket apartment buildings across the country. Because Lehman brought other banks into these transactions, word about the deterioration in the quality of its assets quickly spread.

   ...A risk in a book of this kind is harshness based on hindsight. Yet the brickbats McDonald aims at regulatory behaviour before the crisis are amply justified. More questionable is her critique of crisis management by the US Treasury and the US Federal Reserve. She thinks Lehman could and should have been bailed out in the interests of systemic stability, but does not address the question of how the troubled asset relief programme would have found its way through a hostile Congress without the extreme shock of Lehman’s collapse.

   But this is to quibble over hypotheticals. It does not detract from the many merits of a book that raises important questions about our ability to manage future crises.

   For full story: http://www.ft.com/intl/cms/s/0/d6099910-b3c2-11e5-b147-e5e5bba42e51.html
   

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