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Monday, 14 September 2009

Lehman's collapse -- an insider's view

WASHINGTON (AFP) - - A chill runs down the spine of Lawrence McDonald every time he drives past the Wall Street building of collapsed investment bank Lehman Brothers, where he was one of the most profitable bond traders.

"The big takeaway is that the fate of 20,000 souls was determined in that building, especially on the 31st floor," McDonald, 43, told AFP in an interview ahead of the first anniversary Tuesday of Lehman's collapse.

The 158-year-old Lehman filed for bankruptcy protection on September 15, 2008, in the largest US bankruptcy filing in history, leaving the future of 25,000 staff in jeopardy and sending a financial tsunami across the globe that continues to reverberate today.

But McDonald thinks Lehman, which collapsed under the weight of hundreds of billions of dollars in risky mortgage-backed securities, could have been saved if the bosses would have heeded a number of clear early warnings.

The top Lehman leadership, housed on the bank building's 31st floor, "drove us a 162 miles (261 kilometers) an hour... right into the biggest subprime iceberg ever seen."

Bank chief executive Richard Fuld and president Joe Gregory heard warnings beginning in 2005 that the property market, on which they were "betting the ranch," was on the verge of collapse but turned their backs each time, McDonald charged.

"It was 24,992 people making money and eight guys losing it," said the man who rose from a humble pork chop salesman to top-notch Wall Street trader -- once his team made 250 million dollars in a single day.

Lehman was heavily overleveraged at the top of the market in 2007 -- its net tangible equity was 17 billion dollars but its total investment was 750 billion dollars -- a good chunk of it in mortgage-backed securities that turned "toxic."

"Inside Lehman, some really weird things were going on... the 31st floor was one of those mysterious places on Wall Street because we had incredibly talented risk takers that were politically outmaneuvered and squashed like grapes," said a fuming McDonald.

"They didn't just rule with an iron first, they wore brass knuckles."

Asked if he had personally raised the issue with the top brass, McDonald said he had no access to them, but his immediate bosses had raised the alarm. "It would be complete suicide if I were to go to" the top management, he said.

McDonald is now managing director of Pangea Capital Management and has co-authored a top-selling book, "A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers."

The book, published in July, squarely points the finger of blame at Fuld and his board, accusing them of taking dangerous risks in pursuit of short-term profits.

"I spoke to 150 people, 45 managing directors, members of the risk committee who were my best friends, and members of the executive committee. This is incredible access," he said.

Fuld was so perturbed about McDonald's book that he angrily phoned a pair of former Lehman traders he believed secretly had helped to contribute to the account of the bank's stunning collapse, the New York Post reported last week.

The former chief executive said he felt "horrible" over the bank's demise when he testified to the US Congress in October 2008, one month after the bank's collapse, to explain the events leading to the disaster.

"What has happened is an absolute tragedy," Fuld said. "I take full responsibility for the decisions I made and for the actions I took."

Fuld also told lawmakers that if he could turn back the clock, he would do many things differently but lawmakers took turns to castigate him.

One of them held up a chart suggesting that Fuld's personal remuneration totaled 480 million dollars over eight years but Fuld said the figure was exaggerated and that the majority of the compensation came in stock, most of which had not been paid to him at the point of Lehman's bankruptcy.

McDonald said the lessons from Lehman's collapse were important -- "not just to warn of such disasters in the future but ultimately to provide a beacon to help us serve Main Street better."

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