When megalomania meets financial leadership
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.
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