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When megalomania meets financial leadership

Mark Gilbert
Mark Gilbert, author of Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable, is bureau chief for Bloomberg News in London, has been with Bloomberg News since 1991 and has written a regular column on global financial issues since 1998.

For $69.99, you can be the proud owner of a desktop cigar humidor stamped with the Lehman Brothers logo, courtesy of eBay.com. Not much else remains of the bulge bracket Wall Street firm that lasted about 160 years before filing the biggest bankruptcy ever seen in September 2008, with debts of more than $613 billion. In contrast, Merrill Lynch's name lives on, more than a hundred years after Charles Merrill and Edmund Lynch opened for business, albeit in second place on shiny brass plates affixed to buildings that belong to Bank of America.

Those different outcomes point to one of the key management lessons of the credit crisis -- that while power corrupts, absolute power corrupts absolutely. Having a single, dominant personality run a global financial business, especially when their tenure starts to be measured in decades rather than years, is a recipe for disaster.

By the time Richard Fuld relinquished his role as chief executive of Lehman in December 2008, he'd been with the firm for almost four decades and had been in charge for 15 years. In a sense, Fuld WAS Lehman. From his office on the 31st floor of Lehman's headquarters, surrounded by hand-picked lieutenants who owed their allegiance to him rather than the stakeholders, there was no way for Fuld to know what was happening to the foundations of the company he'd built, because there was no one with any incentive to speak truth to power.

Moreover, when presented with an opportunity to rescue Lehman by selling it to Korea's KDB Financial Group Inc., Fuld couldn't bring himself to pull the trigger at the price on offer. In his book Too Big to Fail, Andrew Ross Sorkin reports that U.S. Treasury Secretary Henry Paulson viewed Fuld as "dysfunctional," "in denial," and "in no condition to make any decisions" when the U.S. authorities were trying to broker a deal that would save the firm.

John Thain, on the other hand, only ran Merrill from December 2007, after a 25-year career at Goldman Sachs and a short stint rescuing the New York Stock Exchange. He parachuted into Merrill after Stanley O'Neal was jettisoned -- the first of at least 23 CEOs or chairmen of major financial U.S. companies to depart during two years of boardroom bloodletting inspired by the credit crisis, culminating in the exit of Jeffrey Peak from CIT Group Inc. in October 2009. So Thain wasn't in thrall to his own importance, recognized that his primary duty was to protect the company's shareholders, and was open to seduction when Bank of America came courting Merrill.

Fred Goodwin, who spent eight years turning Edinburgh-based Royal Bank of Scotland Group Plc into Europe's biggest bank by assets before the credit crunch destroyed its balance sheet, "frightens people," his mentor and predecessor George Mathewson told Bloomberg News last year. "People have not been telling him bad news." RBS had to borrow money secretly from the central bank to stay afloat at the height of the financial crisis, and is now controlled by the British government after receiving the biggest taxpayer-funded bailout of any bank.

At American International Group, Joe Cassano held dominion over a unit tucked away in London called AIG Financial Products which bought the derivatives that brought the company to its knees. In March 2009, Fed Chairman Ben Bernanke described the business, which Cassano had co-founded in 1987, as "a hedge fund basically that was attached to a large and stable insurance company." As late as August 2007, Cassano told AIG investors on a conference call that "it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing a dollar in any of those transactions." Just over a year later, the government had to take over AIG, by which point Cassano's unit had $77.5 billion of toxic derivatives on its books.

The two firms that emerged strongest from the credit crisis, Goldman Sachs Group and JPMorgan, have more collegiate cultures. Goldman, in particular, retains much of the ethos from the days when it was a partnership. Whatever one thinks of Lloyd Blankfein's claim to be doing "God's work," or the propensity of Goldman alumni to turn up at the helms of just about every important financial institution in the world, no one at the firm seems to have the kind of dictatorial power that might lead to ruin.

Most investment banks force their traders to take at least one continuous two-week vacation every year. The theory is that while anyone can hide wrongdoing on a day-to-day basis, it's much harder to conceal malfeasance when you're away from your desk for more than a week. Corporate leadership should be about the corporation, not the leaders; somehow, financial firms need to ensure that the person in charge not only listens to their deputies, but encourages them to shout a warning whenever the emperor is risking nakedness.

By Mark Gilbert

 |  February 10, 2010; 12:56 PM ET |  Category:  Books Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: Confronting corporate bullies, one oath at a time | Next: Our fascination with sociopathic bosses


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Re: ctenwith: What does a 'big-time' CEO actually DO? Anyone ever witnessed one doing actual productive work? Re: AIG they lobby congress successfully (Barney, Chris, Kent, Maxine et al) to bail them out because AIG supported Goldman Sachs where congressional pensions are managed. Lehman didn't have any of congress' money (or enough of it to be of any consequence).

Posted by: BeanerECMO | February 11, 2010 8:41 AM

What does a 'big-time' CEO actually DO? Anyone ever witnessed one doing actual productive work? Squirreled away in million-dollar corner office suites on the penthouse level of fancy office towers protected from the hoi polloi by layers of sycophants--what do these old white guys really DO? Except for steering the corporate bus into the ditch causing egregious injury to thousands before floating merrily away on their multi-million $$$ golden parachute. Besides that, what do they do?

Posted by: ctenwith | February 11, 2010 5:58 AM

Anyone with lingering doubts about who owns this country's assets and would like to own its citizens need only Google 'The Strange Rise of George Soros'.
For the rest of us, there's only the tepid entertainment of watching the mildly sweaty scrabbling at the bus door to determine who's next to go 'whap thump' under the wheels of the Bilderberg express

Posted by: beowulf3 | February 11, 2010 5:42 AM

americans out to get out and march on the CIT corporate headquarters ...

CIT named Thain the former CEO of merrill that ended up going bankrupt as CIT's new CEO -- WTF????

All americans living within 20 square miles of CIT's headquarters should be outside picketing... that's right... holding signs shouting obscenities... doing a "sit in" in their waiting rooms and corporate offices...

these large finance houses need to feel the pain just like the average american feels right now...

think about all those folks who had their retirements... connected to merrill lynch and lehman brothers... or bear stearns...

even remotely connected...

americans don't be lazy ... get off your butts... go down to CIT headquarters... picket, scream and shout... host sit-ins in their waiting rooms...

invite the homeless to wash themselves their bathrooms ...

Posted by: FranknErnest | February 10, 2010 8:20 PM

You are naive. American corporations and organizations ARE about their leaders. Management is free to loot organizations for perks and freebies. The shareholder has no rights or powers to stop this. The chancery courts of Delawahere have cemented misfeasing and malfeasing managers into their positions. What are you thinking?

Posted by: ncmathsadist | February 10, 2010 7:50 PM

How come he's not in jail where he belongs.

Try stealing a Snickers from a Plaid Pantry or another of those foreign owned stores and you be getting fingerprinted and photographed faster than you can say embezzlement but this bum can walk away with a half a $BILLION?????

Posted by: rcubedkc | February 10, 2010 7:42 PM

Jonathancribbs: Someone has to speak up in defense of BabeintheWoods, and it might as well be me. I have many questions; perhaps you can shed a little light?

Example: Goldman held AIG investments (mostly sub-prime mortgage based), and starting in 2006, continually demanded CASH from AIG to cover their declining value, in fact by 2009, AIG assets on Goldman’s’ books were only valued at 67% of their original value. SO, why (other than it was Other People’s Money) did Goldman alums Geithner, Bernanke and Paulson pay Goldman 12.9 Billion (that’s 100 cents to the dollar ORIGINAL COST) instead of their 8.6 Billion book value? Goldman CLAIMED it had hedged the AIG asset value – but I guess it was faster and easier to accept taxpayer money. That’s only one of the questions I have.

Anyway, if BabeintheWoods has the same concerns, considering part of her (and MY) taxes went to pay Goldman, you should have more sympathy.

Posted by: shadowmagician | February 10, 2010 7:37 PM

Richard Fuld exemplifies the following as no one ever has or ever will: The Ignorance of Arrogance and the Arrogance of Ignorance.

Posted by: LouisianaVirginian | February 10, 2010 6:30 PM

Leadership to most of these CEOs is matter of being able to dish it out without ever having to take it. The prima donna CEOs come to see the perquisites and outlandish compensation their right and their due owing to their godlike brilliance. They don't want to hear bad news. They behave badly when they hear bad news. So those around them arrange to never deliver bad news. Meanwhile, the owners (shareholders) get fed a continuing story of how wonderfully well the business is being run. Then the business fails. Nobody's fault mind you. Just the normal boom and bust in finance. Dick Fuld is doing just fine. His billions keep the lights on and the kitchen heated in each of his several palatial estates. Meanwhile throngs have been thrown out of work. His towering ego was served.

Posted by: BlueTwo1 | February 10, 2010 6:03 PM

Is "megalomania" the new word for unbridled greed and unabashed contempt for widespread suffering?

Posted by: drjillshackford1 | February 10, 2010 5:04 PM

what America's trailer trash tea-baggers and trailer trash republicans(most of the party following) need to ask themselves is....what is the part affiliation of most of these CEOs....republican i betcha!...why side with the party of the rich if you are uneducated,dirt poor and out of work?

Posted by: kiler616 | February 10, 2010 4:52 PM

BABEINTHEWOODS, please, let's stop it with these boring Goldman Sachs conspiracy theories. It's a bunch of B.S. Yes, that company has bred a stunning number of financial types with an enormous amount of power, but read a little written by people with inside knowledge, particularly "Too Big Too Fail." Anyone will Goldman roots in government worked hard to avoid anything that would even invite the appearance of a conflict of interest. It's all a bunch of hogwash.

Posted by: jonathancribbs | February 10, 2010 4:18 PM

Hank Paulson did not bail out Lehman because Lehman was Goldman Sachs' major rival and competitor. With the federal government and financial system populated with Goldman Sachs alumni of course they were going to come out of the credit crisis smelling like a rose. The government bailed out AIG and tried to keep secret that it was really a backdoor bailout for Goldman and other large pet banks. And this does not include miscellaneous infusions such as letting GS borrow from the Fed's discount window. If you want to say that Lehman was a failure of leadership then it was neglecting to have their alumni infiltrate the government.

Posted by: BabeintheWoods | February 10, 2010 3:37 PM

What Mr. Sorkin misses in his book of very valuable insight is that the decisions to make the changes incurred in the corporations and in the Paulson led plan were well into fruition long before LEH and Fuld were catapulted into infamy. Stories of a new aggressive SEC enforcement arm are as truthful as the insiders conviction to trust his adversary for a revolving door job. Ain't gonna happen. And if it did it would be the end of Wall Street. Promise me you won't discuss this with your financial adviser. He may approve.

Posted by: KraftPaper | February 10, 2010 3:37 PM

granting that Mr. Fuld is a megalomaniac (I'm reading Lawrence McDonald's book right now) one thing that impresses me was the assertion that Mr. Fuld got into a foulmouthed altercation with Henry Paulson. The impression I am left with is that Mr. Paulson, in a fit of pique, basically told Fuld off and let him swing in the wind. This left a huge bunch of stakeholders, and investors on the outside hanging, too. Mr. Paulson had no business acting so irresponsibly. He needs to be held to account for his own reckless behavior.

Posted by: agrossman1 | February 10, 2010 3:32 PM

I thought the only difference between companies was that Fuld was stupid enough to insult Paulson when Uncle Sugar arrived with his check book, so Paulson stood by and let Lehman fail. Otherwise Lehman would be handing out million dollar bonuses to its top execs and conducting business as usual, just like all the "investment" banks.

Posted by: DesertLeap | February 10, 2010 2:53 PM

all of this hindsight ignores the fact that during the salad days of derivatives, CDOs, etc. these firms were not at all concerned about managment structure, transparency or accountability. the entire industry was fixated on participating in an orgy of excess; excess speculation, excessive personal behavior and profits for executives and shareholders.

When awash in cash none of these companies questioned the Emperors running the business; not the boards, not the top executives and, surely, not the regulators supposedly in charge of oversight.

When you make half a billion dollars as CEO of a company as Fuld did, you begin to believe the party will never end and you are bullet proof; and if the people you work for are happy with the money you are making for them, who is left to question?

Dick Fuld said he cried when his company died; Maybe, but a half a billion in personal wealth is a lot of salve.

Posted by: bobfbell | February 10, 2010 2:05 PM

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