- 'A Countdown to the Global Financial Crisis: A Story of Power and Greed' by banking and finance lecturer at the University of Wollongong, Dr Paul Mazzola.
- The book looks at the history of the US banking culture and how it contributed to the global financial crisis (GFC).
- CEO and chairman of Lehman Brothers, Richard Fuld, ran the bank to collapse but admitted few mistakes and repeatedly blamed government and regulators.
Published in June this year, A Countdown to the Global Financial Crisis: A Story of Power and Greed by Dr Paul Mazzola traces the pattern of crises that impacted the US banking industry, exploring the humble beginnings of the once-respected firm of Lehman Brothers. It is a cautionary tale that couldn’t be more poignant.
Power throughout the ages has been used to drive self-interest by those who hold the reins. This book exposes those who possessed and wielded it to drive the course of history. We are destined to have financial crises and repeat the mistakes of the past whilst greed continues to motivate human behaviour.
The US, a powerhouse of capitalism, has endured a litany of financial crises since the American War of Independence. It is no coincidence that a pattern of similar influences causing the crises has emerged. Is it possible for the US to ever avoid repeating the same mistakes? As the famous American philosopher, George Santayana, quoted in 1905, “Those who cannot remember the past are condemned to repeat it.”
Surpassing the Great Depression of 1929, the global financial crisis (GFC) originated in the US and peaked during 2008. It significantly impacted the global financial system with dire consequences for the world economy that continues more than a decade later.
The resulting social effects touched many individuals, corporations and political bodies. It also triggered the failure of several large financial institutions including large investment banks. The most prized scalp claimed by the GFC was also one of the most notorious dealers in the market – Lehman Brothers – whose history is traced in this book and who achieved the dubious title of ‘the largest bankruptcy in history to date’.
Numerous books and articles have been written about the failure of Lehman Brothers, however, what is more interesting is the backstory that begins with the American War of Independence where the US financial system had its antecedents. It is these beginnings that provided a template for the subsequent behaviours within the industry and set the benchmark for posterity.
A Countdown to the Global Financial Crisis explains an ignored cause of the GFC which is the behaviour of individuals and corporations, often described as characteristics of psychopathy.
“An ignored cause of the GFC which is the behaviour of individuals and corporations, often described as characteristics of psychopathy.”
Looking at historical figures – from Haym Salomon (1740–1785), a pioneering financial privateer to the infamous Richard Fuld, 76, the last chief executive officer (CEO) and chairman of Lehman Brothers – it is possible to trace how particular personalities are placed alongside certain historical events such as economic crises and trends.
The story is told from a particular viewpoint that is underpinned by two theories. The ‘new institutional theory’ is how institutions focus on constraining and enabling formal and informal rules that affect the behaviour of individuals and groups. The second, ‘the theory of power’ clarifies how risk-taking personalities seize opportunities that shape organisations that frequently make themselves wealthy and often gain respect in the process.
The application of a theoretical lens over historical events is aimed at generating a rich understanding of the cultural and behavioural aspects that led to Lehman Brothers’ failure rather than a mere technical analysis.
Investment banking has played an essential role in the US American War of Independence (1775–1783) up until the GFC. The 13 British colonies rose up against Great Britain to assert their political freedom. The US banking system had ties with Europe, especially France and through these connections the war was financed.
As the century rolled on, the introduction of the railroads saw entrepreneurs turn to Europe for funding. Educated individuals who had backgrounds in the military, government or banking, with connections in Europe, proved valuable when trying to access funds for these large infrastructure projects. It is at this time when the ‘revolving door’ between government and the investment banking industry becomes more overt, a behaviour that became embedded within the industry.
The book outlines a chronological history of Lehman Brothers. There are two eras. The first starts with the three founders, Bavarian brothers who emigrated from Germany and founded the global financial services firm in 1847 and ends with the anointment of Richard Fuld who took charge in 1994.
Connections and influence between the investment banking industry and the financial network that encompasses the US government and various financial industry regulators make for good bedfellows at times of convenience. There is solid evidence of how lobbying, political pressure, knowledge asymmetry and the influence exerted over the Financial Accounting Standards Board (FASB) coalesced.
The book also presents evidence of how this influence exerted over the FASB intermingled. Ascendancy exerted over the FASB succeeded in them changing their draft accounting standard for repurchase agreements. Lehman Brothers seized on this to apply a loose interpretation of the standard to window dress its financial statements.
Concealment For Lehman Brothers became the order of the day which contributed to its collapse and the GFC. The seeds of exploiting useful relationships and the exertion of undue influence were planted.
How did the fall of Lehman Brothers during the GFC happen? Its governance board seemed incapable of reigning in its director. A Countdown to the Global Financial Crisis looks at the behaviour of Fuld and his employees, and uses theory to explain why he was able to proceed unchecked in spite of maintaining a corporate governance policy that rated itself as having impeccable ethical standards.
The book concludes with a call to governments, regulators and the investment banking industry itself to consider the impact of the abuse of power, dysfunctional behavioural traits and organisational cultures that foster unethical practices. A world without ethics is bound to foster bad behaviour and malpractice to the detriment of the public good.