Remembering Lehman Brothers-Thoughts on Market #020
Lessons Re-Learned
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Every so often, I’ll check in to show items floating around Wall Street circles and blogs.
Longer term trends in the markets and economy.
Extra details on what seems underappreciated or overhyped.
Link to some great explainers on the concepts.
**Everything as of 8/21/2024
Lehman Brothers filed for bankruptcy on September 15, 2008 elevating a financial crisis of the time into the Great Financial Crisis for the history books.
Today, Lehman Brothers lives on as the fallen Goliath in every book ever written about the Great Financial Crisis and as a cheeky novelty hat you can keep in your office for some corporate levity.
Back in 2008, I witnessed the fall of Lehman through the eyes of a naïve college student still learning the basics of finance and trying to keep up with one unprecedented move after another. Now in 2024, after a decade+ of experience inside the halls of major investment banks - the narrative, the events and reactions to the crisis ring differently.
As such, I thought it would be fun to list 10 Lessons I’ve re-learned looking back at the Lehman Brothers Collapse — 16 years later.
1. The repo market is the most important but least understood market in the world
During the Lehman collapse a little known accounting trick called Repo 105 came to light as the lynchpin for Lehman’s hidden leverage and ultimate blow up. At the time, it felt like a wonky, unsexy backwater tool compared to exotic CDOs, MBS contracts, and the plummeting equity market.
Now, after 2 years working with repo desk teams, and seeing all the funding dramas of the past decade, I can say for sure repos are a wonky, unsexy backwater tool BUT they hold power over all other trading desks due to their ability to provide the trading cash needed by every other desk to function. No repos means no trading.
2. Equity price collapses are temporary
During the GFC the free fall and volatility of equities were among the worst ever -exceeding the dotcom bust and impacting a far wider scope of companies. Hoarding drinking water and gold coins in a fortified cabin in the woods was still crazy…but a little less crazy during November 2008.
Now, we’ve seen a dotcom bust, the GFC, a COVID crash, Interest rate hikes and several volatility events in between proving a buy and hold strategy for the long run isn’t just academic; it’s stress tested and proven.
3. Bankruptcy is secretly a money making machine for lawyers and competitors
Before Lehman, I understood bankruptcy to mean a company can’t pay its debts anymore and must close. Now, we know a bankrupt organization is just an exercise for lawyers to collect fees for years during arbitration & settlements and for competitors to swoop in and pay pennies on the dollar for the viable leftovers.
4. Keeping a retirement nest egg in your company’s stock is ridiculous
In 2008 retirement was not on my radar but the sob stories of Lehman employees who’d been given LEH stock bonuses for years only to lose it all were abound. Suck to be them I thought.
Now I see it did suck to be them but not because the company failed. It was their own fault for not diversifying out of a concentrated bet. You can’t both make your income from and plan your retirement around the same company succeeding.
5. Regulations and compliance is always fighting the last war
Trading curbs and circuit breakers came after 1987’s Black Monday. Sarbanes-Oxley (SOX) came after the Enron and Worldcom accounting scandals and Dodd-Frank would not arrive until after the financial crisis.
Banks love money and and when one door closes, they will always find a new way to open another door. Where are they making money today which will be a problem tomorrow?
6. Crisis actors inevitably become celebrities and cash in by writing books
Did you read Timothy Geithner’s book? How about one of Ben Bernanke’s? Hank Paulson’s maybe? How about all the other economist throwing in their 2 cents?
Never let a good crisis go to waste and never write an Op/Ed when you can publish a book about being in the right place at the right time to make the front page of the WSJ for a few months.
7. Smart people are not that smart
Bulge bracket names like Lehman Brothers loved recruiting from their elite target schools to get the best and brightest for their firms. Yet, for all those IQ points, no one saw the writing on the wall until it was too late.
Call it groupthink, mass psychosis or simple competitive greed but 95% of Wall Street had no idea what was coming despite their education, certificates and training. Warren Buffet lives away from its all out in Omaha Nebraska for a reason.
8. Asymmetric risk-reward is a feature not a bug (golden parachutes)
In an average job, if you make a mistake you’re expected to improve or you get fired.
Dick Fuld, CEO of Lehman Brothers, took home $466 million in pay between 1993 and 2007, while building up the firm’s timebomb balance sheet. While technically he did not receive a severance, he owed nothing back and stayed on for years to help oversee the dissolution of the firm and collect even more compensation for his services.
I’ve lost a job 3 times in my career and the most I ever got was a $500 thank you gift card.
9.The real business of a company is often different than you think or what they want you to think
What did Lehman Brothers actually do? In 2006 Lehman Brothers, traditionally a brokerage and advisory business, adopted a new business strategy to grow its proprietary businesses with a focus on commercial real estate, leveraged loans, and private equity.
Scope creep outside your core competency and spreading your resources too thin is a recipe for losing control of the situation.
10. Things work until they don’t. Nothing lasts forever.
Lehman Brothers started in 1844 and was a mainstay through recessions, depressions and war. Companies who push the limits of leverage and risk too far are not immune from falling off the cliff they’ve built for themselves.
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