Uncontrolled Risk: Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System: the Lessons of Lehman Brothers ... Still Bring Down the World Financial System - Hardcover

WILLIAMS

Hardcover

ISBN 10: 0071638296 ISBN 13: 9780071638296

Verlag: McGraw Hill, 2010

Inhaltsangabe

How Excessive Risk Destroyed Lehman and Nearly Brought Down the Financial Industry

"Uncontrolled Risk will ruffle feathers-and for good reason-as voters and legislators learn thediffi cult lessons of Lehman's collapse and demand that we never forget them."
Dr. David C. Shimko, Board of Trustees, Global Association of Risk Professionals

"Uncontrolled Risk is a drama as gripping as any work of fiction. Williams's recommendations forchanges in the governance of financial institutions should be of interest to anyone concernedabout the welfare of global financial markets."
Geoffrey Miller, Stuyvesant Comfort Professor of Law and Director, Center for the Study ofCentral Banks and Financial Institutions, New York University

"The complex balance of free enterprise on Wall Street and the healthyregulation of its participants is the central economic issue of today.Williams's forensic study of Lehman's collapse may be the bestperspective so far on the issues that now face regulators."
Jeffrey P. Davis, CFA, Chief Investment Officer,Lee Munder Capital Group

"Provides a very perceptive analysis of the fl aws inherent in risk management systems and modernfi nancial markets. Mandatory reading for risk managers and financial industry executives."
Vincent Kaminski, Professor in the Practice of Management,Jesse H. Jones Graduate School of Business, Rice University

"Gives the reader much food for thought on the regulation of our financial system and its interplaywith corporate governance reform in the United States and around the world."
Professor Charles M. Elson, Edgar S. Woolard Jr. Chair in Corporate Governance,University of Delaware

The risk taking behind Wall Street's largest bankruptcy . . .

In this dramatic and compelling account ofLehman Brothers' spectacular rise and fall,author Mark T. Williams explains how uncontrolledrisk toppled a 158-year-old institution-and whatit says about Wall Street, Washington, D.C., and theworld financial system. A former trading floor executiveand Fed bank examiner, Williams sees Lehman's2008 collapse as a microcosm of the industry-aworst-case scenario of smart decisions, stupid mistakes,ignored warnings, and important lessons inmoney, power, and policy that affect us all.This book reveals:

• The Congressional inquisition of disgracedCEO Dick Fuld: Did he really deserve it?
• How the investment-banking money machinebroke down: Can it be fixed?
• The key drivers that caused the financialmeltdown: Can lessons be learnedfrom them?
• The wild risk taking denounced by PresidentObama: Is Washington to blame, too?
• The ongoing debate on reform andregulation: Can meaningful reform avertanother financial catastrophe?

This fascinating account traces Lehman's historyfrom its humble beginnings in 1850 to its collapsein 2008. Lehman's story exemplifies the everchangingtrends in finance-from investmentvehicles to federal policies-and exposes thedanger and infectious nature of uncontrolled risk.

Drawing upon first-person interviews with riskmanagement experts and former Lehman employees,Williams provides more than just a frontlinereport: it's a call to action for Wall Street bankers,Washington policymakers, and U.S. citizens-a livinglesson in risk management on which to build astronger fi nancial future. Williams provides a tenpointplan to implement today-so another Lehmandoesn't collapse tomorrow.

Includes aten-point plan toensure a strongfinancial future forboth Wall Street andMain Street

Über diesen Titel

Über die Autorin bzw. den Autor

Mark T. Williams is a risk management practitioner and academic with two decades of experience. He has worked as a senior executive for major energy trading companies, a trust banker, and an examiner for the Federal Reserve Bank. Williams is currently on the fi nance and economics faculty at Boston University and serves as a senior advisor at the Brattle Group. He has been a guest columnist for Reuters.com, Forbes.com, and the Boston Globe.

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UNCONTROLLED RISK

THE LESSONS OF LEHMAN BROTHERS AND HOW SYSTEMIC RISK CAN STILL BRING DOWN THE WORLD FINANCIAL SYSTEM

By MARK T. WILLIAMS

The McGraw-Hill Companies, Inc.

Copyright ©2010 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-163829-6

Contents

Acknowledgments
Chapter 1 The Inquisition
Chapter 2 From Humble Roots to Wall Street Contender
Chapter 3 From Private to Public
Chapter 4 History of Investment Banking
Chapter 5 How the Investment Banking Money Machine Works
Chapter 6 The Roller-Coaster 1980s
Chapter 7 The 1990s: Rebuilding Years
Chapter 8 Lehman's Near-Death Experience
Chapter 9 Innovation, Imitation, and Increased Risk
Chapter 10 Lehman's Risk Management
Chapter 11 The Real Estate Bet and the Race to the Bottom
Chapter 12 The Bear Mauling
Chapter 13 Time Runs Out
Chapter 14 The Death of Lehman, Regulation, and Investment Banking
Chapter 15 The Enablers and the Deciders
Epilogue: The Post-Lehman Financial Landscape
Appendix: Lehman Chronology, 1845–2010
Notes
Index

Excerpt

CHAPTER 1

The Inquisition

After a month of financial turmoil that rocked the world, it was time foranswers. October 6, 2008, signified a dramatic change in circumstances forlegendary Wall Street firm Lehman Brothers and its once lionized leader, DickFuld. Now it was time for the disgraced former CEO to face the music as he satbefore the U.S. Congress. The American people were outraged that Wall Street hadhijacked Main Street, causing a global economic collapse and financial harm tocountless individuals. President Barack Obama characterized it as "wild risktaking" on Wall Street. Now California Congressman Henry Waxman, chairman of theU.S. House Committee on Oversight and Government Reform, was charged withexacting some form of revenge. CEO thievery from the economy would no longer bepermitted.

On this autumn day, Fuld found himself suddenly thrust into unfamiliar andunfriendly surroundings. No longer was he in the comfort of Lehman Brothers'clubby midtown headquarters in New York where his word was law. The officialpurpose of this hearing, which aired live on CSPAN, was to determine how Lehmanfailed. However, the real reason became readily apparent as soon as Waxmancommenced with his opening remarks. He wasted no time in putting Fuld on the hotseat, holding him singularly responsible for the fall of Lehman, the loss ofjobs, and the significant financial losses sustained by shareholders andbondholders. Justly or not, Fuld would be the fall guy, put on stage tosymbolize what was wrong with Wall Street.

In this unfriendly spotlight, Wall Street's longest sitting investment-bankingCEO now appeared confused and guilty of massive wrongdoing. His hunched posture,grim-faced expressions, and defensiveness seemed like further evidence of hisguilt. Most of the public believed he deserved his comeuppance. And why not?Conventional wisdom accused Lehman of creating toxic mortgage-backed securitiesand selling enough of them to make the entire financial system sick. Someoneneeded to be held accountable. But weren't there other firms on Wall Street thathad employed similar practices?

Proposed by a Republican senator and signed into law under a Democraticadministration, the 1999 repeal of the Glass-Steagall Act surely influenced thelevel of wild risk taking. Shouldn't the politicians and the former FederalReserve (Fed) chairman who advocated the repeal of this Depression-eralegislation be held at least partially accountable for what happened? Where werethe financial regulators charged with protecting the safety and soundness of ourbanking system? During the last two decades "regulation-light" was the mantra.Banks overdosed on risk not overnight but over time as regulators andpolicymakers watched. There were other watchdogs that did not bark. Why wasn'tLehman's accountant able to detect the firm's deteriorating financial health?The bulk of financial journalists missed this growing storm cloud as well.Lobbyists played their role by doing what they do best—turning money intoinfluence. The credit rating agencies that investors depended on to provide anindependent seal of approval failed as bond ratings that appeared to be AAAquickly sank to junk.

Then there was the House Financial Services Committee, a committee whose mainresponsibility was oversight of the banking industry. Its chairman, CongressmanBarney Frank, claimed no accountability for the Great Credit Crisis of 2008. Heargued that compensation practices contributed to excessive risk and thatcompany boards and CEOs failed at their fiduciary duties because they werecombined at the hip.

Granted, there were deficiencies in corporate governance and compensation. Butwas it really so simple, or was there also political deflection? Years ofvarious congressional policies led to the conditions that made the crisispossible. Government support of the U.S. mortgage industry pumped trillions intoa market that grew out of control from a policy of greater home ownership,artificially low interest rates, lax lending standards, and securitization.Since 1984 and the multibillion-dollar bailout of Continental Illinois Bank, theU.S. government had sporadically supported a "too big to fail" doctrine that didnothing to discourage large and interconnected firms from increasing risk. Sucha policy created "moral hazard" by encouraging financial institutions to takemore risk than they would if they were not backstopped by the government. Mostpeople undoubtedly assumed that Lehman fell into this category, yet the U.S.government made the phone call to the board telling them to file for bankruptcy.And how could Lehman be held responsible for the systemic risk unleashed afterits demise? Lehman didn't opt for bankruptcy.

Referring to the ripple effect that occurs when one institution's failurerapidly affects counterparties, systemic risk is the very concept thatunderscores the too big to fail doctrine. The overarching theory holds that thefailure of one big bank can bring down the entire financial system. At the end,by not backstopping a Lehman partnership, the U.S. Treasury and the Fed testedthis theory, with fairly disastrous results. It turned out Lehman was a centralcog in an interconnected global financial wheel. In Fuld's mind, Lehman was moreof a victim than a culprit.

"THE PERFECT STORM"

The hearing lasted for almost five hours, with Fuld responding to sharpcriticism from a hostile panel. As part of the public spectacle, Fuld wasallowed to read a prepared statement into the congressional records. Hisstatement was thirteen pages in length and could have been aptly titled "ThePerfect Storm." Using a deliberately monotone voice, Fuld indicated there was a"storm of fear" on Wall Street. He implied that Lehman had been a boat in aturbulent sea with many destabilizing factors and some navigation errors hadoccurred. But in reality this storm of storms was much larger than anyone hadpredicted. Lehman was just the unfortunate investment bank that hit the rocks.As the captain, he took "full responsibility" for the wreck...

Details zur Ausgabe

• Verlag: McGraw Hill
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0071638296
• ISBN 13: 9780071638296
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 257
• Kontakt zum Hersteller: McGraw-Hill Education; https://www.mheducation.co.in/; ; Via Verdi, 8; Assago Milano; 20090; Italien