Lessons from the collapse of Lehman Brothers

With the benefit of hindsight, what lessons have we learnt from the collapse of Lehman Brothers a year ago? To be able to gain any useful insights, one has to understand the primary cause of the financial collapse. Many analysts and economists have blamed the Wall Street collapse on greed and fraud.

I believe that greed and fraud were not the primary causes. Greed has motivated our forefathers to prosper and thrive. Some even cheated to achieve their greedy desires. But they never got us into a massive global financial mess like the one confronting us now.

I blame it on dysfunctional and complacent leadership at all key levels, which started with Alan Greenspan and the US Federal Reserve. They were warned as early as 2002 that the banks needed to be regulated, that interest rates were kept too low and that a financial disaster was in the making. However, these policymakers did not want to end the party and rain on the parade as the US economy was booming.

The credit rating agencies were also not diligent enough in doing their jobs to classify those collateral debt obligations as toxic assets, in a proper manner. These rating agencies were too complacent and went along with the crowd as they chose not to become unpopular by downgrading these assets’ ratings.

The CEOs and Directors of the collapsed Lehman Brothers, Fannie Mae and Freddie Mac were all top brains and financial experts. They would have known that the collateral debt obligations were toxic assets and that a major financial meltdown was waiting to happen. Perhaps, the pressure from Wall Street to show stellar financial results every quarter deluded these honchos and made them blind to the prospect of a financial holocaust. Besides, everybody in the industry was selling toxic assets and no Board of Directors had the leadership mettle to tell the shareholders that they did not want to participate in the drunken party. Alas, now, these ex-Board of Directors are blamed for gross negligence and corporate governance law enforcers will be going after them.

The fund managers and bankers who were selling these toxic assets would have been well aware of the danger too. But they continued because they wanted to achieve their sales targets in view of collecting fat bonuses.

In future, market participants and the public in general should question aggressively and make plenty of noise about dysfunctional leadership in high places. People need to speak out loudly when there is dysfunctional leadership at the very top.

Leadership is the spine upon which the whole company, country and world depends on for progressive development and improvement. It is weak, dysfunctional and complacent leadership that got us into this financial mess and it has to be good leadership that will get us back on track again. I hope that this will be sooner than later.