The Murder of Lehman Brothers by Joseph Tibman

I am not really sure where to start in reviewing Joseph Tibman's new book, The Murder of Lehman Brothers. Like the preceding book on Lehman's extraordinary fall (see my review of A Collosal Failure of Common Sense here), there is plenty of riveting stuff here, especially if read as a narrative. I should start my review by informing readers that we do not know who the author is. Joseph Tibman is an alias (shorthand for "The Investment Bank Man"), as the author has chosen to write anonymously so as to preserve opportunities in the investment banking world. The author writes as an "inside investment banker" at Lehman Brothers, and unfortunately, lacking an identification of the author or validation of his credentials, it is difficult to evaluate what kind of "inside" look at the self-destruction of Lehman we are getting. Lawrence McDonald was a regular bond trader at the firm who admitted to having never met CEO Richard Fuld. "Tibman" was not a trader but rather a banker, and he does provide an interesting look at the firm's post-9/11 inertia which makes for enjoyable reading. He also gratefully skips much of the personal biographical component that I believe hindered the drama of McDonald's book (no offense, but I doubt readers were buying either of these books for the childhood tales of people they have never heard of). So I commend this book in the sense that it is an interesting read on some of the events that transpired at Lehman Brothers. Unfortunately, some other elements to it require undressing.The narrative of this story, as compelling as it is on its own, is hindered by many of the ideological flaws that surround the telling of the narrative. I will address these in no particular order.(1) The incessant theme that many Lehmanites have had that "if the shoe were on Goldman's foot, the government would have bailed them out", is tired and frankly absurd. It misses the only point that needs to be made about this entire mess: It wasn't Goldman Sachs who blew themselves into smithereens. Envy of Goldman's superior performance to their competitors is certainly forgivable, for human nature has not been transcended, but rank speculation about what "woulda coulda" been based on Paulson's past relationship with Goldman Sachs is both unattractive and contrary to common sense wisdom. In the weeks after Lehman's collapse when the global crisis of confidence did land on Goldman's doorstep, the treasury department actually refused to extend to Goldman the backing of a deal with Wachovia, a decision Warren Buffett deemed "inevitable" based on the political appearance of it. So no, I do not believe the treasury department would have bailed out Goldman Sachs on September 12, but far more importantly, they didn't need to. Goldman hedged their subprime exposure; Lehman tripled down on it like an alcoholic in the midst of a bender trying to suck down the last sip he can find in the mini-bar. Goldman has reported one negative quarter in the last century; Lehman's collateral, equity, and free cash flows were not in the same stratosphere as Lehman's. I am not trying to play the grand apologist for Goldman Sachs, though I have far more complimentary things to say than I do negative. But I find Tibman's tantrum about the treatment Lehman got relative to the treatment he thinks Goldman would have received to be a real detractor to the book.(2) I am not sure what could have possibly driven Tibman to pepper the book with [very unconstructive] pot shots at George W. Bush. If these shots had been speciifc to policy errors that were relevant to the financial crisis, or Lehman in particular, I would be more sympathetic. But the shots reak to me of rank political pandering. He is an easy target, of course, but it is demeaning to the readers of the book. Does Tibman criticize Bush's housing policies? Of course not - Bush simply carried on the idiotic mandate of Carter's CRA and Clinton's Fannie-Maeism. Does he criticize Bush's spending? No. And at this point, as horrific as Bush's spending was, hasn't it been positively dwarfed by the new administration? So as far as his role in the financial crisis is concerned, I don't see where Tibman draws any lines of interest. Instead, he lets us know in a not-so-subtle way that he was opposed to the Iraq war, and he thinks Bush is really stupid. Editor, where art thou?(3) I have to spend the bulk of my time in this review focused on the major flaw of this book, and that is the way Tibman handles his disgust that Lehman was not bailed out by the federal government. My treatment of this financial crisis (through the three dozen book reviews I am writing and my own subsequent treatment of the subject) will have to deal with how Uncle Sam handled Lehman Brothers. And believe it or not, even a deep free market ideologue like me believes that there is room for discussion on what the government could have done differently here. But Tibman's treatment of this subject is so off base, it warrants dramatic correction.Suffice it to say, Tibman, a paid employee of Lehman Brothers who is no longer working in investment banking (for now), believes that if Uncle Sam had simply agreed to cough up $50-65 billion on that fateful weekend in September of 2008, the entire crisis would have been averted. Lehman would have found a partner. The credit markets would not have collapsed. "Through time" (no one ever provides detail on how time would have solved the utter insolvency of a dysfunctional organization) confidence would have been restored, a new partner would have repaired the impairments, and all would be well in the world. Not only was this outcome achievable to Tibman (it was not), but it was morally imperative (and it certainly was not that either). To Tibman, the fact that Bear Stearns got the deal they got in March made it a requirement that Lehman get something similar. He also appeals to the Fannie and Freddie bailouts of the week prior, as well as the AIG bailout just two days after the Lehman bankruptcy as a basis for his claim of injustice (all prima facie acceptable claims). He holds back nothing in tearing Henry Paulson to pieces, insulting his intelligence, his character, and most bizarrely, his "strict ideology." So here I go ...Hank Paulson was no "rigid free market ideologue", and to suggest so is simply incomprehensible. Paulson was the author of the TARP bill, and perhaps the most moderate member of Bush's cabinet. It is quite ironic that the only people who criticize Paulson for his "excessive laissez-faire economics" are those that seem to think government bailouts of everyone and anyone is the desired policy of choice. The vast majority of the criticism of Paulson comes from laissez faire folks who are offended by his interventions in the market. It can't be both ways. But let's look at these bailouts, one by one.Bear Stearns was not bailed out by the Treasury Department. In fact, Paulson refused to. The Federal Reserve intervened, appealing to their "exigant circumstances" clause of the 1920's that gave them legal right to. They did so by backing the assets that JP Morgan would be buying. JP Morgan took on the first $1 billion of risk, and the Federal Reserve the next $29 billion. Time will tell how this works out for the investment bank. The reality is that this intervention appears to me to be what gave the powers that be at Lehman Brothers the false belief that they could stubbornly refuse to de-lever this bloated balance sheet, play truth-or-dare with their write-downs, and avoid taking on the outside partner they desperately needed. So yes, moral hazard did run amok. To mock the idea that moral hazard was a concern (or worse, to mock the idea that it should have been a concern is unacceptable.Fannie and Freddie are the most expensive bailouts the taxpayers have taken on, and the errors of this mess can hardly be put at the feet of Hank Paulson. For all he has done wrong, he did not charter this massive monument to failed government social policy. He did not resist the aggressive efforts of others in the Bush administration to rein in their irresponsible leverage ratios. Barney Frank and two generations of congressional leftists had deified Fannie Mae and Freddie Mac, and more specfically, told their creditors that these were "government sponsored enterprises", giving an absolutely implicit guarantee that the government was backing the debt of these bloated pigs. All Paulson did was take over these entities that the govenrnment had spent forty years saying they would back if things ever got bad enough. Well, guess what: they got bad enough. PIMCO's bond book got written up like no trading gain in American history, the equity got wiped, and if anything, Paulson was harshly criticized for letting the preferred equity get wiped that so many banks were holding on their balance sheets. A real market ideologue like me may hate the fact that Fannie Mae or Freddie Mac ever existed, but even I have to acknowledge the legal responsibility the Treasury had to these "government sponsored enterprises." Again, to Tibman, if they bailed out Fannie they should have bailed out Lehman. It is a dubious assertion.Then there is the sickening bailout of AIG. The argument at the time was that Lehman lacked sufficient collateral to extend financial help to (an incontestable claim), yet that AIG held adequate assets to back the loan (now known to be totally false). The taxpayers are going to re-claim most of the money extended to AIG at some point in time, I think. They will never be made whole. And this is unacceptable. But at the very least, I am hard-pressed to see why the conclusion is not "two wrongs do not make a right." Tibman never explains why one firm getting wrongly bailed out means that every firm who poses systemic trouble ought to be bailed out. I am not even suggesting that there is no argument for some different handling of the Lehman situation, but I certainly am arguing that just because Lehman was in trouble, Uncle Sam is not morally obliged to intervene. Tibman never, ever tells us why Lehman warranted special treatment. In fact, he makes the case as clear as can be (accidentally) why they did not deserve it.Pages and pages of the book (and historical annals which verify this) are dedicated to documenting how fervently Hank Paulson (and others) advised Richard Fuld to find a partner for Lehman Brothers. Treasury can hardly be faulted for spending six months telling Lehman Brothers to go learn how to fish, but then refusing to give them a fish for free six months later when they refused to go take one single lesson. Lehman did earn the wrath of Paulson's treasury, and they did so all on their own. The week after Bear Stearns went under, Lehman Brothers had ample options (highly lucrative ones) for a sale, a partnership, a capital infusion, etc. As Tibman himself pointed out, Fuld's response to the skeptics and doubters of Lehman's solvency was to buy back their own stock with their depleting capital just to spite short sellers. This is unimaginable in hindsight, but it was equally unimaginable when it was happening. It was first class insanity. And to Tibman, it does nothing to negate this alleged "obligation" of the taxpayers to come to the rescue. I beg to differ.I really could have skipped everything I have said so far, though, to make this major point. The passionate claim from Tibman that Lehman was "murdered" because they did not get taxpayer money is essentially based on the biggest misnomer of this crisis, and that is that Lehman was dealing with a mere liquidity crisis, and not an extraordinary crisis of solvency. No "bridge loan" would have pulled them through, and the history books are going to be utterly clear about this. Tibman and even myself can be as critical as we want about subsequent bills like TARP, but at the end of the day, the so-called "Wall Street bailout" was really a "depositor bailout", as Uncle Sam poured money into the system deemed necessary to keep customers of banks from losing their [highly leveraged] deposits and investments. Lehman did not fit into this category. They had blown up their own principal accounts, and done so with an arrogance and stupidity that is never going to be explained in the ash heap of history that Lehman now sits in. My own belief is that Tibman is right that Paulson and his crew did underestimate what the collateral damage would be to Lehman's failure, and the events of September and October of 2008 played those things out. However, a lack of foresight as to how something was going to play out does not negate the fact that it was going to need to play itself out. The recklessness of the 2003-2007 period on Wall Street had come to a day of reckoning, and if Uncle Sam had bailed out Lehman, it just would have been someone else, probably posing far greater systemic risk, standing in line. Do we have a precedent here? How did that General Motors deal in Detroit work out? Did $25 billion of infused capital help avert their bankruptcy? What about the next batch of $8 billion? No, in fact, it made it all worse. Insolvent companies are insolvent companies. And we can (and should) talk about inconsistency in application, but the idea that Jim Cramer and Joe Tibman and others are putting forward: that if Uncle Sam had merely floated Lehman $60 billion all would have been fine in the world, totally ignores the trillion dollar debacle we were facing. I recognize that is now incumbent upon me to have an additional conversation about their subsequent actions with Citi and Bank of America, and I intend to do so (critically). At some point, my preference is for the entire conversation to revert to what Uncle Sam did wrong from 1969-2007 that caused the situation which necessitated much of the 2008-2009 response, but I digress. My point right now is simply this: the crisis in the world credit markets brought about by the Lehman bankruptcy of 2008 could have been handled better, and arguments can be made for a different policy reaction, but to use hindsight to say that Paulson was a blind ideologue forcing a capitalist mantra down our throat is pure revisionist history, and exposes a flawed view of the government's relationship with its citizens.It is imperative that I clarify one very important thing: It does not matter how critical I am of Lehman's management, of Lehman's risk policies (or lack thereof), and how truly pathological I find the behavior of their senior management to have been from 2004-2008, the fall of Lehman Brothers was and is an unspeakable human tragedy. Mr. Tibman and others like him are victims, not culprits, in this disaster. The damage done to the capital markets was tragic enough, but what happened to the employees, shareholders, creditors, and trading partners of Lehman on a purely human level is just unfathomable. Nothing I have said herein negates this.Tibman has written an informative book that I am glad I read. Unfortunately, my disagreements with its major conclusion force me to suggest a different title. The Suicide of Lehman Brothers would be far more appropriate.