Tuesday, September 17, 2013

A Colossal Failure of Common Sense

I recently read "A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers" by Lawrence G. McDonald (with Patrick Robinson).  Lawrence McDonald had a mid level job at Lehman Brothers for four years ending in 2008 (he was fired a few months before Lehman went bankrupt).  This 2009 book gives his view of the place near the end.  McDonald shares the copyright with professional writer, Patrick Robinson (who I know nothing about), but the writing is not polished.

This book is seriously flawed but it held my interest for a while (I found it dragging a bit near the end).  What value the book has is that of chronicling one person's experience and perspective, it is not good for an overall big picture view of the financial crisis or even of Lehman's collapse.  For this reason I think the complaint in the WSJ journal review that the book devotes too much space to McDonald's earlier career and background is wrongheaded.  I think it is useful to know that his parent's divorce led to a period of (at least relative) economic deprivation, that he had to make an extraordinary effort (taking a job selling pork chops just to establish that he could sell and then studying for and passing the securities exam on his own) just to get an opportunity for a Wall Street career and that he resented the rich private school kids who appeared to have an easier path.  I found McDonald's personal story of some interest and some of his anecdotes illuminating although perhaps not always in the way the author intended.  For example McDonald tells the story of a gambling trip in which one of his co-workers goes down $160,000 playing blackjack.  When McDonald sensibly suggested that perhaps it wasn't his night the co-worker gave him a "quitters never win" lecture and continued playing.  In this case his luck did turn and according to McDonald he ended up $475,000.  McDonald appears to feel this depiction of his co-worker is highly favorable but I would draw different conclusions.

The book does have numerous problems.  It is not very well written.  The explanation of some of the complex financial products Lehman dealt with is muddled at best (perhaps in part I suspect because McDonald didn't really understand them himself).  McDonald isn't very revealing about his personal finances.  At an earlier point in his career he and a friend founded a website devoted to convertible bonds which (by his account) was quite successful leading to its purchase by Morgan Stanley.  But McDonald doesn't tell us the sales price or his cut.  At Lehman he receives a bonus he is happy about but then is disappointed by his bonus the following year.  But again he does not reveal the actual amounts (perhaps he suspects many readers will be unsympathetic to complaints about a $700,000 (or whatever) bonus).  The details of his bonus are important because a large portion was in the form of Lehman stock which he was not allowed to sell for several years.  This means his opinion that the government should have bailed Lehman out is not disinterested.  In general McDonald appears to have a number of biases which I suspect color his account.  Also McDonald was not high ranking enough to have personal knowledge of top level internal conflicts and in addition he left Lehman some months before the end.  So the book's version of the key events in Lehman's collapse is third hand, poorly sourced and probably not completely reliable.  And in my view the book doesn't have much of interest to say about the larger context, the financial crisis that precipitated Lehman's collapse.

So in summary while I found this book interesting in places for the view it gives of an aspect of Wall Street I can't really recommend it.

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