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Every financial point of inflection be it a recession or a boom has its signature event. The internet boom was marked by the IPO of Netscape and the merger of AOL with media company Time Warner. The internet bust was marked by Worldcom and Enron’s collapse. The current subprime implosion in the US was marked by the collapse of Lehman Brothers which is what A Colossal Failure of Common Sense is about.
Lawrence McDonald is a former vice president at Lehman Brothers got his story out in A Colossal Failure of Common Sense. Unlike similar books like Barbarians at the Gate, A Colossal Failure of Common Sense was written too close to the event as the author’s recollection is very emotionally charged, McDonald sets up the story with his own story front-and-centre.
I found it interesting that McDonald discussed the kind of derivatives employed by Lehman Brothers as a radical new low. To this relatively unsophisticated reader these seemed not that dissimilar to financial instruments involved in previous scandals. In his writings McDonald referenced Michael Lewis’ Liar’s Poker which illustrated the dark side of bonds and derivatives some two decades previously as a book that he knew well. Liars Poker covers how derivatives were sold and then blew up, causing the US savings and loans scandal. Porter had a ringside seat as he talked about his experience as an employee of Salomon Smith Barney (now part of Citigroup). I found the parallels between McDonald and Lewis quite spookily similar in their observations, yet decades apart.
McDonald talks about the efforts that his department made to try and balance out the carnage that collateralised mortgage debt caused at Lehman Brothers. Ultimately it reads like a litany of stupidity and missed opportunities. It’s like as if two decades after Liars Poker and F.I.A.S.C.O. that no one learned any lesson at all. More book reviews here.