On the last day of May, ex-Lehman CEO Richard Fuld told an audience of investors and news media that he was not to blame for the 158-year old investment bank going bankrupt and for playing a role in the financial crisis. Mr. Fuld pointed to lax U.S. regulations and oversight that allowed irresponsible consumers to qualify for high priced mortgages they could not afford when the economy tanked as the cause.
The reporting of well-regarded financial journalists like Barry Ritholtz and David Weidner took Mr. Fuld to task and poked gaping holes in his assertions and denial of responsibility.
To me, however, the golden nuggets from Mr. Fuld’s speech were not his combative style, but the leadership and decision-making issues that contributed to the demise of Lehman Brothers and led to the financial crisis that nearly brought the world to its knees.
Mr. Fuld cannot completely absolve himself of any blame, because he like other Wall Street banks, mortgage lenders and consumers were all caught up in a buying spree fueled by low interest rates and easy credit.
However, Mr. Fuld correctly argued that he should not shoulder all of the blame. In the pre-2008 period there was a frenzied financial market that created a contagious groupthink that the sky was the limit. Supporting this illusion were positive ratings of Lehman’s securitized debt products by Moody’s and Standard & Poor’s, who themselves were compromised by conflicts of interest with Lehman and other issuers who paid for these ratings. In a bizarre way, you can understand why Mr. Fuld and many others on Wall Street offered reasons that sound like “the devil-made-me-do-it”.
Did Mr. Fuld Have Other Options?
But what would a good leader do under these intoxicating circumstances? First, they need to have a mile-high view of the business climate and potential risks to the company. They would take steps to protect the company from emerging threats, even if it results in lower profits in the short-term and making board members and shareholders unhappy. The company’s long-term financial health has to be a leader’s polar star. Distinguishing what information is important from the incessant noise of today’s 24/7 global economy is a vital skill.
Mr. Fuld either ignored or didn’t want to hear growing warnings from credible sources that investments in subprime mortgages were creating a financial house of cards. He and most of Wall Street seemed to share a common and delusional belief that a market correction would save the day. As we all know, it didn’t happen.
Why didn’t anyone on Lehman’s senior leadership team question the firm’s strategic direction? Maybe they did. Mr. Fuld was known for his top-down leadership style. If contrarian views from the senior management team were discouraged, the potential is high for myopia to replace critical thinking in decision-making. Nonetheless, you have to wonder if anyone on the management team raised their voice to challenge decisions that allowed Lehman’s debt to equity ratio to reach an unbelievable 40-to-1 (Ritholz).
Mr. Fuld does not want to publicly acknowledge any responsibility for the mistakes that led to Lehman’s bankruptcy or contributed to the 2008 financial crisis. So be it. However, I hope that Wall Street and Main Street commit to memory the lessons learned from Lehman’s demise and the carnage left by the worst financial crisis since the Great Depression.
One of the biggest casualties of the 2008 financial crisis was trust. Fewer Americans have faith in the financial institutions that have fiduciary responsibility for managing their money. Gallup and other pollsters have charted this trend. Wall Street and any financial institution that ignore this growing lack of trust do so at their own risk. For all of the bankers who are trying to do the right thing, and there are many, Mr. Fuld’s public comments provided a lesson in what not to do.