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The buck stops here or not

GB Geo-Blog

The buck stops here or not

Earlier this week, Richard Fuld, the last CEO of Lehman, appeared before the Financial Crisis Inquiry Commission in Washington. (Sounds like the Inquisition.)

Fuld blamed the federal government for the demise of Lehman. He claimed that his firm’s downfall was directly linked to choices made by the US Government and he stressed that “Lehman was the only firm that was mandated by government regulators to file for bankruptcy.”

While he blamed “uncontrollable market forces” and “incorrect perceptions” for pushing Lehman to the brink, and the US Treasury for not propping up the company, he did accept a modicum of responsibility for the failure of his company.

He admitted: “I myself did not see the depth and violence of the crisis. I did not see the contagion. I believe we made poor judgments in timing for the assets we bought and for the businesses we supported.” Ah, hindsight!

Wasn’t he paid a lot of money to anticipate these problems and be prepared to act if any or all materialized? His mea culpa lacked real sincerity. Whatever happened to the “buck stops here”?

Fuld had no problem reaping the enormous profits from packaging and peddling mortgage-backed securities – Lehman was the biggest player in this field. Obviously, he did not bother to do much due diligence on what the company was doing as long as the profits kept rolling in. Fuld also had no problem relying on massive amounts of leverage to spike the company’s profits, and playing the yield curve – borrowing short term at very low rates of interest to invest in longer-term assets yielding higher returns. The borrow short and invest long strategy has one serious flaw: when market sentiment and confidence change, and they can change on a dime, access to money to re-finance maturing short-term loans can shut down quickly, which is in fact what happened to Lehman in September 2008. You play with fire; you can get destroyed by fire.

And corporate governance was a joke at Lehman. The board consisted largely of friends of Fuld, who had little interest in overseeing his strategies and second guessing what he was doing.

Yes, with hindsight and failure one begins to recognize some mistakes. But very few CEOs can ever admit that they were solely or primarily responsible. Their egos cannot allow for such admissions and the acceptance of responsibility for failure.

The US Treasury had been aware of Lehman’s deteriorating financial position for many months prior to its collapse, and had tried to orchestrate a buy-out of the company. The attempts failed because Fuld’s asking price was always too high. I guess he didn’t expect the ultimate price of $0.

At the end, when a deal could not be reached without massive government financial assistance – another bailout – the US Government succumbed to the bloodthirsty critics who warned of increasing moral hazard if the government continued to bail out Wall Street. Critics wanted a scapegoat, and Treasury had to deliver one – Lehman.

The moral hazard arguments were ridiculous. The shareholders of the financial institutions that received assistance lost most of their investments, and many of the senior officers lost their jobs. Failure and bailouts imposed a huge cost on most of the stakeholders. The bailouts were not going to encourage risky behavior in the future.

The government also did not understand the degree of inter-dependence among the big financial players around the world, and did not anticipate the extent of the panic that would ensue when Lehman filed for bankruptcy. The government was just as badly prepared for the crisis as was Wall Street.

Fuld correctly pointed out that, following Lehman’s filing for bankruptcy, “The government was forced to intervene to protect those other firms and the entire financial system.” To this day, the main players in the US Government at tat time have not admitted their mistakes either. Obviously, the buck stops elsewhere.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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