A couple of months ago, I read the book, Larry McDonald's "a colossal failure of common sense", which told the story of the last days of the Wall Street investment bank, Lehman Brothers. It was an enlightening insight about the greed in the board room of this financial institution and particularly the antics of Chief Executive, Dick Fuld who presided over the collapse of the 158 year old firm in September 2008 as the house of cards created by the real estate boom came to a grinding halt. In 2007, Fuld received $22m in remuneration, as the performance of the company was flattered by the growth in CDO's (collateralised debt obligations), the parcelling of debt used to reduce the risk of mortgage defaults which went badly wrong in 2008.
This weekend my interest was peeked by stories in the press about he court-appointed examiner's findings who was mandated to examine the background and causes of Lehman's failure. Anton Valukas, concluded in his 2200 page report that there were grounds for "colorable claims" against Fuld, the bank's auditor Ernst & Young and three successive chief financial officers - Chris O'Meara, Erin Callan and Ian Lowitt - for presenting a misleading picture of Lehman's finances in its accounts. A series of temporary asset sales, using an off balance sheet trick called "repo 105" were used to artificially boost Lehman's balance sheet. By the fourth quarter of 2007, it had placed $38.6 bn of assets through repo 105, in q1 2008 $49.1 bn and over $50 bn by the second quarter of 2008. According to Valukas, Fuld, O'meara, Callan and Lowitt certified misleading financial statements.
Whether Fuld and his other cronies will ever be held accountable for his ploys is uncertain but the whole sorry story highlights the unadulterated greed of many senior Wall Street bankers prior to the financial meltdown in late 2008 and early 2009. Profit growth was the priority, without any concept of risk containment and ultimately tax payers have had to step in and save the day. If the Federal Reserve had not stepped in to pump billions into the system through TARP (toxic asset relief programme) and a series of bail outs (e.g. AIG), the whole financial system may have collapsed in early 2009, with unimaginable consequences. Will the world learn from these lessons? I guess, capitalism has its pros and cons but "light touch" regulation seems to have been pressure tested and ultimately failed. That is not to say that instruments such as derivatives or short selling should be banned, but a degree of control is needed to ensure that the financial institutions of the world are not left to their own devices because next time the outcome may be very different and very destructive.