So Lehman cooked its books. Who knew?
It turns out that as Lehman slid towards failure, they resorted to materially misleading accounting to hide the gravity of their problems. Even as the credit and real-estate markets imploded, the company regularly disregarded their own risk-control limits in the hope that once the situation normalized, they could do away with the gimmickry and get back to business.
Only, the situation is never normal. When things spin out of control, bad decisions mount on top of one another until, like an avalanche, a small fracture finally brings the whole slope tumbling down.
Maybe Dick Fuld’s success in bullying his way through the Russian Debt Debacle ten years earlier made him heedless of the warnings, but risk-limits are there to protects us from ourselves. It’s natural for leaders with animal spirits to want to bulldog their way through any crisis, but when the check engine light starts flashing, it’s time to stop the car and call a tow truck.
It’s possible that none of this matters, and that Lehman’s goose was cooked back in 2007 when they doubled-down on Commercial Mortgages. But chances are, if Lehman had heeded their own warnings, they’d still be around.
Douglas R. Tengdin, CFA
Chief Investment Officer
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