Ex-Insider's Book Details Lehman Brothers Collapse

  • Playlist
  • Download
  • Embed
    <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Cover of "Colossal Failure"
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

By Lawrence G. McDonald

Hardcover, 368 pages

Crown Business

List price: $27

Read An Excerpt

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.

Excerpt: 'A Colossal Failure of Common Sense'

Lehman Brothers, like the great city beyond the massive glass windows, never slept. When the trading bell sounded on the New York Stock Exchange at four o'clock in the afternoon, a lot of equity guys packed up because there was nothing more for them to do. Bank debt and high-yield debt often went till seven o'clock or later. And there were always people waiting for late calls, often from the West Coast.

Those guys were there for dinner, working until ten o'clock. But the key moment in the trading day came around 6:00 p.m., when all the traders had to present their profit/loss numbers to the pit bosses — in my case to Larry and Richard Gatward. Most days the traders had normal-looking balance sheets, not too drastic one way or the other. But losses were not loved at Lehman. And if you turned in a sheet with a drop of $500,000 on the day, that was trouble. The Lehman hotshots would be aware of that in a New York minute.

In a way, Lehman was run by a junta of platoon officers. They'd all learned the basics, but they'd also spent a lot of time in combat. I think of them as battle-hardened, iron-souled regulars, guys like Larry and Alex Kirk, Mike Gelband, Peter Schellbach, Richard Gatward, and Christine Daley. My new commanding general was missing, however. Not missing in action, you understand. Just plain old-fashioned missing, locked in some rarefied war room on the thirty-first floor, an unseen but apparently malevolent presence. His name was Richard S. Fuld Jr. As one of his new troop commanders, I looked forward to meeting this famous CEO. When I mentioned this possibility to Larry McCarthy, I recall him laughing, a touch sardonically, which was not all that unusual for him.

"That probably is not going to happen, buddy," he said. "I've never met him myself."

Huh? A managing director, the head of distressed-debt trading, had never met the CEO? Beat the hell out of me. But slowly in the coming weeks I learned about several unorthodox aspects of Fuld's character. I spoke to a few people who met him a couple of times a year. But there were a few guys who had never even seen him.

When Lehman's CEO arrived by limousine in the morning at a VIP entrance at the back of the building, his driver had already called ahead alerting the front desk in the lobby of his majesty's imminent arrival. The front-desk attendant then hit a button programming one of the elevators in the rear bank to go directly to the thirty-first floor. A security guard would then hold the elevator until Fuld's arrival. This was Fuld's private transport to the heavens, the one that preserved his godlike existence. Into this rarefied capsule he slipped silently, and was, in a way, beamed up to his somber mahogany-paneled office, far from the madding crowd. He left the building the same way, which was not, I thought naively, much of a way to keep your finger on the pulse.

"I hear he's a very defensive guy," said Larry.

"You mean he's paranoid?"

"Paranoid? Hell, no. He just thinks everyone's out to get him."

Which was, in case you hadn't noticed, vintage McCarthy.

There was, it seemed, no doubt that our spiritual leader and battlefield commander was an extremely remote and watchful character, surrounded by a close coterie of cronies, with almost no contact with anyone else. And I suppose that was fine so long as the place was chugging along without civil war or mutiny breaking out, and continuing to coin money, which is after all the prime objective of the merchant bank.

But I sensed there was something deeply disquieting about his strange wraith-like presence, this oddball demigod who ruled everyone's lives. Quite simply, people were afraid of him, even though they couldn't see him. And this was a fear based upon reputation, because through the years Fuld had fired many, many people, for a thousand different reasons. Popular local intelligence, however, suggested that the most prevalent way of incurring his rank displeasure was to be so clever that you threatened his power base. He worked within a tight palace guard, protected from the lower ranks, communicating only through his handpicked lieutenants. And as the years went by, Dick Fuld had tightened his circle, shutting out more and more key people from the downstairs floors where the daily action seethed, where the trading battles ebbed and flowed, where more critical information flew around than anywhere else in the city. That was the place from which he had, to all intents and purposes, removed himself. In the process, he had become separated from the most modern technology and the ultramodern trading of credit derivatives — CDO (collateralized debt obligations), RMBS (residential mortgage-backed securities), CLO (collateralized loan obligations), CDS (credit default swaps), and CMBS (commercial mortgage-backed securities).

Stories about long-departed commanders were legion. There were mind-blowing tales of the Fuld temper, secondhand accounts of his rages, threats, and vengeance. It was like hearing the life story of some caged lion. Tell the truth, I ended up feeling pretty darn glad I wasn't meeting him. There was something of the night about this guy, and it all dated back to the early part of the 1980s, when he and his chief cohort had not quite covered themselves in glory. In fact, he had been instrumental in one of the biggest screw-ups in Lehman's long history, and not surprisingly, there was a touch of Prince Machiavelli about the whole episode.

Excerpted from A Colossal Failure of Common Sense by Lawrence G. McDonald. Copyright © 2009 by Lawrence G. McDonald. Excerpted by permission of Crown Business. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Books Featured In This Story

A Colossal Failure of Common Sense

The Inside Story of the Collapse of Lehman Brothers

by Lawrence G. Mcdonald and Patrick Robinson

Hardcover, 351 pages |


Purchase Featured Book

A Colossal Failure of Common Sense
The Inside Story of the Collapse of Lehman Brothers
Lawrence G. Mcdonald and Patrick Robinson

Your purchase helps support NPR Programming. How?



Please keep your community civil. All comments must follow the Community rules and Terms of Use. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

NPR thanks our sponsors

Become an NPR sponsor

Support comes from