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Robinson and McDonald's 'A Colossal Failure of Common Sense'

by Robert Teitelman | Published August 1, 2010 at 3:37 AM

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
by Lawrence McDonald and and Patrick Robinson

I've officially finished Lawrence McDonald and Patrick Robinson's "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers." The title is accurate: It is an inside story in that it's told almost completely, in almost memoir-like fashion, from the perspective of McDonald, a distressed-debt trader and four-year Lehman vice president. McDonald mixes with a number of more senior executives, and he's an occasional eyewitness to what he believes are key events, but nearly everything involving the 31st floor, where CEO Dick Fuld lurks in his vast overstuffed lair, comes second-, third- or fourthhand. McDonald is thus least convincing on some of his most controversial charges, such as that Treasury's Henry Paulson walked away from Lehman because Fuld had "disrespected" him.

There are really two books here. The first, the longest, is the wandering tale of McDonald, from his youth to what he views as the absolute pinnacle, Lehman, with any number of stops on the way. In fact, the book picks up only when he arrives at Lehman and finds himself in a tight-knit trading desk led by men he desperately admires. But even then, the narrative includes a vast amount of material that's less about book No. 2, the fall of Lehman, and more about the adventures of McDonald and his colleagues, whom he describes with every sports and military cliché available. He engages in some odd digressions. McDonald tells us in great detail a campaign to short beleaguered utility Calpine. He launches into a long tale about one evening of gambling by his mentor Larry McCarthy at Mohegan Sun, which basically tells you that McCarthy has real guts. And in the midst of an "investigative" foray to California's mortgage mills, McDonald veers off to elaborate on a particularly satisfying round of golf at a course outside Chicago.

As a reader, you have to accept the broad outline of McDonald's picture of the situation inside the firm, mostly because it's backed by other reportage and, most importantly, events. The firm revved up the mortgage securitization engines for far too long. Fuld and his No. 2, Joseph Gregory, clearly did try to foolishly grow their way out of the disaster, pumping up leverage, piling on debt and continuing to try to play in big buyouts and, even more disastrously, in commercial real estate. Anecdotally, I can accept that McDonald's immediate bosses -- McCarthy, Alex Kirk and Mike Gelband -- recognized the dangers early and tried, and failed, to warn the 31st floor. In fact, McDonald recounts several meetings in 2006 that he actually attended where warnings were aired. Almost everything else that he learns about the high-level struggle seems to come from one of those three executives, although he never bothers to suggest what is mere hallway gossip or a real inside source. It's a little jarring when one moment he's complaining bitterly that he's never met Fuld, and the next minute he's recounting verbatim dialogue in the CEO's office and telling us what he's thinking.

McDonald argues time after time that his little group was the only ones that really knew what was going on; that seems a stretch. His colleagues may well have been highly skilled professionals, but he presents them as "legendary," "pure," "brainy" (that's a common term he uses for someone he thinks is very smart, usually followed by their advanced degrees). They are the best in the firm, the best on Wall Street, even the best in all of history. Likewise, folks he dislikes -- no one more so than the dreaded Fuld and the diversity-addled Gregory -- are stupid, greedy, unable to understand modern finance, haunted by "the little green god of envy," perhaps clinically out of their minds. This creates some strange inconsistencies. At one point, McDonald argues that huge swaths of the firm are engaging in predatory, overly leveraged, barely legal and ethically challenged financial tricks: This includes the mortgage securitization folks, of course, but also the private equity group (he seems convinced that all buyouts stem from hostile raids) and the credit-default-swap traders. You can raise questions about every one of these practices, particularly at the top of the market, but to accuse the PE group, for instance, of not making anything and acting in a predatory fashion while you're shorting the hell out of a California utility seems either self-absorbed or hypocritical.

Later, however, all is forgiven. With his guns trained on Fuld, McDonald is willing to let nearly every one of the 25,000 Lehman employees off the hook. There were 24,992 good people, he says. The total blame lies with Fuld's band of eight executives on the 31st floor. How do you go from predatory to blameless so quickly?

Fuld clearly failed abysmally as a manager and as a leader. He did not see the meteor approaching, even as it was about to strike. He was never known as a man of the people and had a long reputation for ruthlessness. But you never get any attempt to see the world from Fuld's perspective. Everything he does, which McDonald presents as unrelieved stupidity, stems, in his telling, from his "lug-head" commercial-paper background, his raging jealousy of former Lehmanites Pete Peterson and Steve Schwarzman, his insatiable greed and love of luxury. The "failure of common sense" rises from the argument that everything would be better if Fuld had just listened to men smarter and better than him. Everything comes down to elementary basics: love, hate, respect, disrespect, smart, stupid.

The climax of that simple equation is the anecdote McDonald recounts of a key dinner with Paulson as pressure is building. Fuld comes away from that dinner telling senior execs that Paulson would support the firm. But Paulson left the dinner "enraged," writes McDonald, who clearly talked to someone at the table (or someone who knew someone at the table) and who interpreted a sharp exchange between Fuld and the Treasury secretary. Paulson was urging Lehman to take a buyout offer from Korea Development Bank seriously. Fuld snapped back: "I've been in my seat a lot longer than you were ever in yours at Goldman. Don't tell me how to run my company. I'll play ball, at my speed." McDonald then concludes that Paulson "plainly did not consider Dick Fuld the right man to be at the helm." And a few pages later, when Paulson let Lehman fail, McDonald adds, "The fact was, he disliked the man, and he believed that Lehman had arrogantly foisted most of the troubles on themselves and should just go away."

In November, Paulson has his own book coming out, so perhaps we'll find out. Perhaps he really did dislike, even hate, Fuld. But it's a little hard to imagine that his dislike for the man was a major factor in letting Lehman go and putting the world financial order in peril (and even then, McDonald doesn't really blame Paulson, whom he admires, for making such an emotional decision; it was Fuld's fault). There were a myriad of complex considerations at play, from moral hazard to geopolitics. Besides, while Paulson might have been the loudest voice in the room when the decision to walk was made, he wasn't alone. Such crude motivations might be the way the world appears from a trading desk, or the way it looks through the fog of legitimate anger and unhappiness, but it's simply not common sense to believe that everything that occurred at Lehman was that simple, elemental and fixable.

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