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Snap, blink and bust: Gladwell, Partnoy and Lehman

by Robert Teitelman | Published July 25, 2012 at 12:24 PM

Felix Salmon jumps on an anecdote that struck me oddly as well, though for different reasons. On Monday, Andrew Sullivan picked up on a story related by Frank Partnoy about the motivation to write his new book, "Wait: The Art and Science of Delay." Partnoy recounts an episode he heard about Joe Gregory, Dick Fuld's No. 2 at Lehman Brothers, who brought in speakers to a decision-making class in fall of 2005. "For the capstone lecture, they brought in Malcom Gladwell, who had just published 'Blink,' a book that speaks to the benefits of making instantaneous decisions and that Gladwell sums up as 'a book about those first two seconds.' Lehman's president Joe Gregory embraced this notion of going with your gut and deciding quickly and passed copies of 'Blink' out on the trading floor.

"The executives took this class and then hurriedly marched back to their headquarters and proceeded to make the worst snap decisions in the history of financial markets."

Sullivan headlined his post on this little nugget, "Did Malcom Gladwell Cause the Recession?." Salmon then did a fine thing: He called Gladwell, who insisted that his talk at Lehman emphasized the difficulties of making unbiased and uncorrupted gut decisions, not the genius of the snap decision. What Gladwell or Salmon cannot say, of course, is how that talk was interpreted, or remembered, by Lehman executives. "Blink" is one of those very elusive, very popular books. Its contents are more complex than its slick packaging, including its snappy title, though whether it's correct or makes sense is another matter. Like his earlier "The Tipping Point," "Blink" quickly morphed into a cliché. In other words, vast numbers of readers and would-be readers believed they knew what it was about simply from the title. This seems to be Gladwell's fate: He writes articles and books and gives lectures that mint money, which he then spends years trying to explain.

All well and good -- but Gladwell is not the issue here. Does anyone really believe that if Gladwell had called in sick that day in 2005 that anything would have been different at Lehman? Did Fuld, for instance, sip the Gladwell elixir? And since when does a single lecture (or a single book), even by a beguiler like Gladwell, have any long-term effect on glinty-eyed bankers and traders, who presumably have a weakness for gut calls anyway? What's really striking here and worth thinking about is Partnoy's line that this gang of executives "hurriedly marched back to their headquarters and proceeded to make the worst snap decisions in the history of financial markets."

Let's unpack this a bit. The first sign that Partnoy is in book marketing mode, just as Sullivan was in writing-a-striking-headline mode, is the last phrase: the worst decisions in the history of financial markets. Does Partnoy really mean the entire history? Were the decisions at Lehman (does that include nondecisions?) worse than those made by Ivar Kreuger or Samuel Insull? How about Greece, or the architects of the euro? Angelo Mozilo or Charles Keating? Or (small but destructive) Penn Square Bank and Continental Illinois? What does that phrase even mean? Lehman was a mess and spawned a much bigger mess, with too much short-term money, too much leverage and too many mortgages. But at least part of Lehman's woes were treacherous markets, fed from many sources, that had already taken down Bear Stearns, forced the nationalization of Fannie Mae and Freddie Mac, and would sweep under AIG, which was in many ways systemically bigger and badder. Accepting that many decisions at Lehman were crappy, were they any worse than those at AIG? And doing this by adding up the damage confuses a qualitative description (better, worse) with a quantified one (twice as bad). A merely bad decision can sometimes cause greater damage than a qualitatively worse one. Maybe the really bad decision here was to let Lehman fail -- or to suggest that some form of help would be coming, only to change your (meaning Hank Paulson's) mind. This, of course, has all the ingredients of a lengthy debate over cocktails.

Still, the heart of this question is Partnoy's notion that they marched back and made "snap" decisions. Now I'm quite sure that on the Lehman trading floors and in the executive suites, some key decisions, particularly near the end, were made quickly, without serious thought. (It's also an uncomfortable fact that many of the Lehman executives in question eventually rebelled and successfully overthrew Gladwellian fan Gregory. Did they rain copies of "Blink" on him as he left?) There was a trading culture at Lehman, as there was at Bear. But the real vulnerabilities at Lehman, as at Bear, had been in place for a long period of time: the short-term financing, the relatively high leverage, the move into real estate, particularly MBS. Lehman and Bear were not alone: Most of the big Wall Street firms and some of the big banks hurtled in the very same direction. Executives may not have thought deeply enough about the rickety structures they were erecting, or about the exposure to mortgages, but they had to think about them fairly regularly, at the very least every quarter. You can think long and shallowly; I do it all the time. Besides, the circle of knowledge was even wider. The regulators also knew the broad parameters of Wall Street's structures and businesses. And perhaps the most dangerous evolution at all took place over many years and cannot be traced to any single decision -- snap or considered: the deep interconnections that had grown up globally between all these firms, including the credit default swaps.

In short, it's a little hard to imagine that Gladwell seduced nearly everyone in finance going back years before he dreamed up "Blink."

In the end, Partnoy is offering up a deceptively comfortable notion: That a single idea, a belief in snap decisions, was enough to send Lehman careening to the cliff edge, dragging the rest of us with it. That simply ignores the really profound and complex set of factors that got us to where we were that fateful weekend in September 2008 -- and where we are today. And, in a way, it takes Fuld, Gregory et al. off the hook: A snap decision is so much less incriminating than one considered more deeply. It's like manslaughter rather than murder. That said, Partnoy is a very smart guy who has done tremendous work over the years on derivatives and financial risk. In my gut, that gassy chamber full of hesitation and reconsideration, I agree with what I believe is the message of his new book. We need to wait. Delay is often good (of course, until it's not). But while we're waiting, it wouldn't hurt to think deeply about these matters. And try to rein in the glib formulations. - Robert Teitelman

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