Uncontrolled Risk: Lessons of Lehman Brothers and How by Mark Williams

By Mark Williams

How over the top probability Destroyed Lehman and approximately introduced Down the monetary undefined “Uncontrolled probability will ruffle feathers—and for reliable reason—as electorate and legislators research the diffi cult classes of Lehman’s cave in and insist that we always remember them.” Dr. David C. Shimko, Board of Trustees, international organization of threat execs “Uncontrolled possibility is a drama as gripping as any paintings of fiction. Williams’s innovations for adjustments within the governance of economic associations may be of curiosity to a person involved concerning the welfare of worldwide monetary markets.” Geoffrey Miller, Stuyvesant convenience Professor of legislation and Director, middle for the research of relevant Banks and fiscal associations, ny collage “The complicated stability of loose company on Wall highway and the fit legislation of its members is the critical fiscal factor of this day. Williams’s forensic research of Lehman’s cave in could be the top point of view thus far at the concerns that now face regulators.” Jeffrey P. Davis, CFA, leader funding Officer, Lee Munder Capital crew “Provides a really perceptive research of the fl aws inherent in chance administration platforms and smooth fi nancial markets. necessary studying for chance managers and fiscal executives.” Vincent Kaminski, Professor within the perform of administration, Jesse H. Jones Graduate institution of commercial, Rice college “Gives the reader a lot nutrients for inspiration at the rules of our economic system and its interaction with company governance reform within the usa and round the world.” Professor Charles M. Elson, Edgar S. Woolard Jr. Chair in company Governance, collage of Delaware the danger taking at the back of Wall Street's greatest financial disaster . . . during this dramatic and compelling account of Lehman Brothers’ astounding upward push and fall, writer Mark T. Williams explains how out of control threat toppled a 158-year-old institution—and what it says approximately Wall road, Washington, D.C., and the international economic climate. A former buying and selling flooring government and Fed financial institution examiner, Williams sees Lehman’s 2008 cave in as a microcosm of the industry—a worst-case state of affairs of shrewdpermanent judgements, silly blunders, missed warnings, and significant classes in cash, strength, and coverage that have an effect on us all. This publication unearths: The Congressional inquisition of disgraced CEO Dick Fuld: Did he relatively deserve it? How the investment-banking funds desktop broke down: Can or not it's fastened? the foremost drivers that triggered the monetary meltdown: Can classes be discovered from them? The wild danger taking denounced by way of President Obama: Is Washington in charge, too? the continued debate on reform and rules: Can significant reform evade one other monetary disaster? This interesting account strains Lehman’s background from its humble beginnings in 1850 to its cave in in 2008. Lehman’s tale exemplifies the everchanging developments in finance—from funding automobiles to federal policies—and exposes the risk and infectious nature of out of control danger. Drawing upon first-person interviews with probability administration specialists and previous Lehman staff, Williams presents greater than only a frontline file: it’s a decision to motion for Wall road bankers, Washington policymakers, and U.S. citizens—a dwelling lesson in danger administration on which to construct a more advantageous fi nancial destiny. Williams presents a tenpoint plan to enforce today—so one other Lehman doesn’t cave in the following day. incorporates a ten-point plan to determine a powerful monetary destiny for either Wall highway and major highway

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But it took an outsider to understand the problems that needed to be solved. Peterson thought Lehman was resting on its laurels and needed to aggressively solicit and attract new corporate customers. The banking industry was experiencing a pronounced change in customer behavior in which corporations had begun to shift toward multiple investment banking relationships. For example, General Motors (GM) had historically used only Morgan Stanley but was now adding additional bankers to its roster. 2 Arriving at Lehman in 1973, Peterson immediately focused on expanding product development and broadening the financial services offered.

In some services, investment banking was taking on the characteristics of a commodity business where bankers made money on volume, not on pricing. Compounding this was a simultaneous compression in brokerage-related fees. On May 1, 1975, the Securities and Exchange Commission (SEC) lifted the fi xed-rate commissions and ushered in a new era of greater commission rate competition. This meant institutional clients that traded large blocks of stock could now negotiate the rate they paid. Many 26 ᭿ Uncontrolled Risk investment banks responded by increasing the types of services offered to fi nd new higher-margin sources of revenue, in addition to maintaining relationships with important clients.

6 Central to all of these new strategies was the increasingly prominent role played by trading. THE RISE OF TRADING AND CHANGING RISK PROFILE Lehman in the 1970s was one of many investment banks that decided to expand their trading activities in an effort to diversify their revenue stream. Given that investment banking revenue was so susceptible to the economic cycles, Lehman pushed to find ways to generate more predictable year-on-year revenue. Trading and putting more firm capital at risk was part of the answer.

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