RIP Lehman Brothers

Saturday, 8 November 2008 23:54 by The Lunatic


I guess I'm still in shock at how fast Lehman Brothers went down the drain.  What's most amazing to me is one of their biggest consulting service offerings was risk management.  These guys were supposed to be the BEST in the world - if you wanted some help on how to protect your company against new competition, economic changes, currency fluctuations, or how manage your growth, you would pay Lehman Brothers all sorts of money and they would help you formulate a plan.  So if they were so good, why couldn't they come up with a plan to save THEMSELVES?

Historically, merchant bankers like Lehman primarily acted as deal makers.  They would put together huge financial packages for governments and large multi-national companies, and the commissions they received fueled their growth for 150 years.  But in the early 90's the rules were changes to allow merchant bankers to trade for their own accounts - ever since that change, three major investment banks have failed. Also, commercial banks are limited to a leverage of 13:1 of investments to deposits, but no such limit is imposed on investment banking. I haven't seen an official number, but some reports have stated that Lehman was leveraged well over 30:1.  What were these guys thinking? So much for their reputation as experts in risk management.

Here's an excerpt from the Lehman Brother's history page on Wikipedia:

Just before the collapse of Lehman Brothers, executives at Neuberger Berman [a Lehman subsidiary] sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."

Lehman Brothers Investment Management Director George Herbert Walker IV, second cousin to U. S. President George Walker Bush, dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."

Wow, how greedy can you get? 

Philosophically, I strongly oppose government regulation - but the old adage takes precedence: With Freedom Comes Responsibility.  Society will always curtail your freedoms if you don't use them responsibly.  This manifests itself in gun ownership laws, digitally protected music distribution (DRM), and corporate regulation.  The free capital markets only work if everyone acts in an ethical manner, and these guys blew it.


Categories:   Economics
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