The Collapse of Lehman Brothers: An Inside Story

thank you all for coming today I'd like to introduce Scott so Scott is an American businessman who has experience as a new york stock exchange traded company CEO and as a board member for profit and nonprofit based institutions he has served on the most senior leadership teams across multiple industries including financial services mass merchandising brand management primary equity engineering and staffing he has served on the global executive committees of Lehman Brothers as chief administrative officer invests corporate CEO of Europe Sears Holding as chief operating officer and CDI Corporation where he served as CEO Scott has served on for-profit boards including N&W global venting echo pal GL education plans and and not-for-profit boards including the US Olympic and Paralympic star nation the Institute of International Education which administers the Fulbright scholarship program and the Spelman College Scott is a member of the Economic Club of New York and the Council on Foreign Relations Scott was named a young global leader by the World Economic Forum and has participated in many panels at the World Economic Forum in Davos Switzerland including as a rabbit or for the opening plenary session as well as inaugural new champions meeting in Dalian China and was a member of West's Global Agenda Council Scotland Oxford with his three children and his wife and he's also a knight of Malta which he'll maybe talk about later but with that I would like everyone to start a warm welcome when you preface it by saying is that Lehman did not deserve to get bailed out going saxton deserve to go fill that warrants alien deserve a buildup not as the sushi do Main Street though did and I'll talk a little bit about that that doesn't mean that anyone in management team deserve to have a job or any economic fruits of the labor had been at that institution but it means that where we are is were a place today that's worse than we were going into the crisis as it relates to our ability to have a safety net and when I think about the experience of the ten-year crisis that's not something you plan for you don't plan to go to GSB then go to Goldman Sachs and work for 17 years given up virtually everything in life and it's so easy to get sucked in and then be wiped out and be 18 months from personal bankruptcy but that's what it was so I'll talk a little bit about the crisis but a common denominator is having safety nets in life not having all of your eggs in one basket and that's not the function of spirituality but it's certainly one of the byproducts that if you have faith if you're grounded in your spirituality if you have a community that can support you in that to make it so that you're not alone it's a really powerful thing and I for one didn't have enough of that in my life as I went through a career on Wall Street and one of the things that I did immediately post Lehman Brothers in my conversations with Thomas was to figure out how I could go about building that and in the reference earlier made about on my bio I did join the Sovereign Military Order of Saint John of Jerusalem of Rhodes in Malta known as the Knights of Malta and it's been incredibly fulfilling it's been incredibly fulfilling because the center of that universe is the sick and the poor and it's about creating a slice of film in your life that is so much more important than anything else you might have done but the other thing is you and me in this instance I've surrounded by myself with scholars in faith that are incredibly knowledgeable and helpful in my own personal journey so I'll start with Lehman Brothers and I'll give you something yet and enough to make it so that you've got a basis for questions whatever you want everything's fair game and I'll try to open it up as quickly as I can some of the the go-to questions over the last 10 years have been when did you know and I can tell you that mmm the number of people that have used the crisis is a basis to improve their personal brand is just extraordinary and I find it comical that so many people stand up there and say oh I could point to the second point to that I knew it was coming and I could do the same thing with you right now January of 2008 you can you can see that I was quoted alongside Jamie Dimon and jean-claude Trichet and I said when cuz people were talking about are we in a recession or not it doesn't matter for in a recession or not we're in a credit recession and we have to deal with it that was my quote I knew however fast forward to the weekend the Sunday that Lehman Brothers filed for bankruptcy I had four press releases on my desk once said that we just been acquired by Bank of America once said we've just been acquired by Barclays cash once said that we'd restructured her balance sheet and we had federal support and once said we filed for bankruptcy I had no idea Sunday which one was gonna go out so for all those people who say I knew it was coming I knew it was coming unless they made a fortune like John Paulson did the number of people who knew it was coming was a few and far between and at the time as any other person who was an executive on Wall Street could say we were all talking with the people who were supposed to be the smartest people in finance nobody knew part of the reason nobody knew is because we at Lehman Brothers like our counterparts and we know this because we hire from each other's firm with such regularity we'd all modeled this stuff modeling is not a new concept and we have very sophisticated risk management tools and I'll tell you that we had simulated every crisis going back 50 years but that didn't suffice because it was worse than that we didn't we didn't model something that was worse than every crisis in the past 50 years but we were totally fine so all the things that you heard about executives saying we don't need capital we don't in capital it wasn't that they were just talking to their own book and they were trying to prop up confidence just because they had some baseless position that was in their self-interest rather there were all kinds of sophisticated models that said everything is everything is fine because you've got the power of diversification working on the asset side of your balance sheet but the first time that we thought mmm it's coming our way was in March of 2008 and that was when Bear Stearns went down and I remember I first weekend off with my fiance and we were in Turks and Caicos and I didn't get off the phone the entire time and it was about assessing where they were and what application that had on the rest of us and by Sunday I called our chairman and CEO Dick Fuld and said dick I hate to state the obvious but were it I said what do you mean I said go back 30 years in every difficult market environment the little guy gets taken out whether it's acquired whatever the case may be the little guy gets taken out you go through all the names deal J people adding Paine Webber they all got taken out because they were the smallest in the industry at a point in time we were now the smallest so he said what do you want to do to which I said well we got a look at a halo Investor Street a strategic investor we got a look at merging the companies selling the company the whole thing now again to what actually happened a lot of people think that Dick Fuld who was notoriously true true true to his reputation to that point that he was notoriously averse to selling the company which he was he's spun on a dime at that point in time so but the words out of my mouth were we are now the smallest we have to do something and then the deck goes through who are the strategic investors who were the halo investors and you'll see and I think GSB students would appreciate that would have to be comical if you actually found a mistake in there but but we went through it all and at the conclusion of that session dick said to the executive committee what do you guys think and no one said anything because the last time we had a meeting where we had talked about having a strategic investor was probably 1996 and the one guy who raised his hand we should sell the company was fired within a month so nobody said anything that's a true story so no one said anything and dicks then said well I agree with everything and I to that point for the past ten years was responsible for M&A for the house as opposed to for clients but I had a staff of call it 25 McKinsey folks whereas our fig group our financial solutions group had close to 150 so he said skip McGee who was the then head of s of banking you're in gimmie solutions and from that point on we had talked probably a hundred institutions going through ways to try and get any one of those alternatives so living from March through the final weekend was I thought I thought being a summer associate was hard it was the same hours except you're not working on a pitch book you're you're dealing with globally reproduced storylines that you have to refute somehow without going on the record because the then CEO Alan Schwartz of Bear Stearns had just created the model that if you will out a senior executive to say we have no problem the entire world says you've got a problem so that wasn't an option and we were talking with all of the top PR folks in the world and everyone concurred so you had to do battle behind the scenes on how to refute this stuff and I've talked to a couple people recently this this felt to me like the birth of fake news on a widespread scale March 27th immediately following Bear Stearns I'll give you I'm just gonna pick one because what we did is we documented this stuff and we went to the SEC and said hey look you you can't allow naked short-selling which you're not allowed to do and then have all of this shortened distort activity and by the way I'm going through this as an anecdote not to suggest whatsoever that Lehman should not have gone under and it was the fault of people who were rumor mongering I'm not saying that at all I'm just telling you what it was like to be there on a daily basis but I picked one day for no other reason that when I was looking through it it sounded like a fun day in retrospect it was March 27th what happened there were widespread rumors on one day that we were finally for bankruptcy that Wilco via had stopped doing business with us just imagine you're a global institutional investor bank this being the rumor it's not you blew you blew a deal or you had some a rope trick no it's you're going bankrupt what Kobe had stopped doing business with us we had major positions with Icelandic banks and they were gonna fail and we were gonna suffer enormous losses that we had stopped our repurchase program that would be one of those you know what happens if you you know issue a dividend don't issue a dividend what happens the sucker so same thing with repurchase program we that we announced it that we we were stopping the reach of repurchase program and that we're borrowing heavily from the Fed every single one of those was false every single one fabricated but the pressure to defuse those was really intense and the problem with it was what happened on March 27th our stock dropped 9% it worked it was the easiest short in the world and if you go fast forward to how this was whether you want to call it a tsunami or a forest fire and how it was accelerating we held out for six months Goldman and Morgan Stanley were right there and if look at the high and lows of intraday trading what happened to goldman sachs stock what happened to morgan stanley stock the 8 days surrounding the Lehman event Goldman Sachs down 50% 50% in 8 days Morgan Stanley 75 percent so from my perspective unambiguously I agree with Timothy Geithner the then president of New York Fed when he said there is no major bank the would have withstood the crisis and that would have survived Hank Paulson echoed that by saying his words not mine Morgan Stanley was going down within days there was no doubt in my mind when they went to Congress and said where I can have an economy I don't know about that I haven't studied what would have happened but certainly Great Depression esque kind of ramifications so what was it like to work there was anyone doing anything to ferry us or illegal I never saw it was was everyone working enormous amounts of hours every day trying to deal with all kinds of issues absolutely and it was selling anything and everything it was firing people it was cutting non-personnel costs I think I was personally responsible for firing I don't know 10,000 people taking a quarter of a billion dollars of costs so it was a wretched time to be at a global institutional investment bank within that was there anything specific to Lehman Brothers that made it so that this was a idiosyncratic issue that related to Lehman Brothers whereas everyone else had different institutions the flavor was different at every one of these institutions but on those core attributes virtually the same we copied each other all the time I met with my counterparts all the time and we would monitor what each other did and then we would copy those that we thought were productive to our competitiveness so risk most people and I certainly would have the impression that Lehman took on an inordinate amount of risk relative to the peer group in that period of time when our fact is that we were relatively uncompetitive and covering private equity namely because we had not adopted the tools that increased risk so when Chuck Prince who I know some people here and the audience are close to said something to the effect of as long as the music's playing you have to continue to dance what he was referring to was the enormous amount of dry powder that was uninvested capital that private equity had and when private equity says we're going to buy a company and we want you to finance it what can you offer and there are lots of tools that one can offer you can reduce the number of covenants that you have you can put on more bank debt you can leverage it up to a greater degree you can forfeit your fees these were all things that were happening we hadn't adopted those others had it wasn't that we didn't have risk I'm just saying that was one that was a celebrated category of risk subprime obviously everyone knows about that one we weren't a subprime house now we had mortgages before some house we were a commercial real estate house everyone at different flavors so on risk weighted assets we were middle-of-the-pack Goldman was the proprietary house that was the risk shop and if you look at the five years before 2008 leading up to 2007 you can look at this in in public documents you're not gonna find in the press because it doesn't help the story line for Main Street Oh guess what everyone was in a disastrous position and you all could have lost your house is not just a whole bunch of you that doesn't feel very good so but our VAR Value at Risk and it's it's a measure that says to what degree you won measure goldman-sachs over the five years prior to that was more than double Lehman Brothers just under double in 2008 another one that you can look at this disclosed frequently is number of lost trading days and in the five years leading up to 2008 Goldman Sachs had five times as many as Lehman Brothers Lehman Brothers was a client flow model then you could say well well if Goldman Sachs is riskier then how come Lehman was the one that went under investment banking is a model of trust and what all of us told about the simulations how we it stimulated that but in an extreme case you're gonna be vulnerable if your level three assets and on the asset side of your balance sheet you have three categories level one which is Margaret all securities you can get in and out and you mark those you know many times during the course of day level two assets are slightly illiquid think high-yield bonds they trade a little less frequently level three assets would be it would be investments in commercial real estate a thousand acres of land that you're developing those are the things all of us had level three assets that exceeded our equity base that put us at risk if you really squeezed and got all of the people who were the short-term funders to say I'm not gonna touch this and that's what happened we had a funding crisis we didn't have a solvency crisis we had a funding crisis and what happened during the course of those days was trying to deal with this so that was a liquidity thing and all of us had and that's why it started sweeping through because by the time you got to the last weekend everyone was it wasn't wasn't a mild flight to quality it was a complete total flight to quality it was a panic so as it relates to safe that's one of the primary problems was post the Great Depression that fed the Fed put together a great foundation uh you know a term that was used for different purposes tarp breaking the glass and namely it's Section thirteen three of the Federal Reserve Act basically what it says is the Fed which regulates banks can step into a non-bank financial institution and say we're going to inject you prop you up because there is systemic risk that can hurt the whole system now I think we were blessed with extraordinarily talented people as custodian think Ben Bernanke he was a student of the Great Depression one of the top academics in the field Tim Geithner is someone who had a whole series of experience understanding crises how to deal with them and whether bailing out is a good thing or bad thing but at that point in time we had pressure and that pressure was political so I've got young kids and they're dealing with pressure peer peer pressure in kindergarten and in second grade and that pressure doesn't stop so if you're a business school student you're gonna have pressure to do stuff that's outside the bounds of what you think is right and wrong and you're gonna have to make a call I don't know how many how many people watch billions so emphasis so season three episode two there was a scene where the Southern District of New York attorney says he meets with the Attorney General who tells him there was a convict you saw the thing so it was a terrible pressure moment so he's the Attorney General for the Southern District and I'm the Attorney General so there's this prisoner who killed a guard as it turns out the guard had done awful awful awful things to person who was incarcerated but for political reason the Attorney General said you're gonna prosecute it and he knows that this person was innocent and whether it was the self defense but the the atrocities that this one particular out-of-control guard were really horrifying and he said you're either gonna do it or the absolute clear implication is forget about being governor of New York and forget about your seat you're fired so what does he do you're gonna have lots of those kinds of things there was a different type of pressure at this moment in time on Timothy Geithner was the president of New York fed on Ben Bernanke and on Hank Paulson who is the Secretary of Treasury recalled the late John McCain and President Obama they were on the campaign trail they were saying enough of bailouts for wall street we gotta bail out Main Street that's nice to say and that helps get votes because who more justified to vilify than Wall Street and justifiably so in this case however that doesn't help Main Street and the problem is that there was a political decision that was made that crushed Main Street and that decision was we have to let one go because if we don't let one go then we're not gonna be able to prove that we should save the rest if you didn't touch it I think lots of people would not dispute that they were all gonna go and that was the conundrum they were in they had they had the formula it was established right after the Great Depression and they should have used it and it would have cost billions now as we've seen all of that got paid back but it would have at the time it would have been billions instead it cost Main Street trillions so it was a disastrous mistake but I don't second-guess them and the reason how the second guessed them is I can't imagine what it would be like to be the person who has to be the only one saying I think we should support him when the entire country is saying like again you're out of your mind so the political pressure was extraordinary now just because the political pressure was extraordinary and it was totally understandable in my view doesn't mean that we should set ourselves up to do the same thing again and what I've actually appreciated is over the past particularly this year the discourse has changed a little and if you listen to the words out of people's mouths it's no longer we were legally precluded to save Lehman Brothers it's more of a judgement call at this point and they're people who are talking around it very specifically but it's it's very comfortable to say that there was one bad player and you point to one bad player he's the bad guy you throw him in jail and we're done we can all sleep at night but that just wasn't the case and it's not where we are today with the digital transformation that's ripping through corporate America and when you look at FinTech and the number of Commons there will be another crisis it's gonna be under it's gonna be a different form but in terms of having a safety net we need a safety net that protects Main Street so I think there are a couple things that are important one I think we should convene as well for for those of you don't know that's the Basel Cooper Weiser II Committee in banking and it's a aggregation globally represented group of people and they establish standards not regulation that say banks should have the following limits on those things that connect most tightly to susceptibility or crisis for those particularly those who carry systemic risk risk weighting of assets leverage and liquidity those three things we've now been operating under Basel three for a number of years even though it only formally had to have been adopted by everyone more recently but everyone's been operating under that baseline okay did we dial in the right levels on each it's impossible that we dialed in exactly right so either were were too tight or we're too loose but we could not have dialed it in just right so I think that's one thing that we have to do but irrespective of where they land the plane on that if they do that we still have the possibility that risk can happen because you're gonna dial it in because you would because because Capital Markets equals jobs and equals innovation and creativity and standard of living when you look at East versus West I think it's pretty clear but I don't particular one of eight that so but where are you dialing in you're still gonna have risk so is it fair that Main Street if there's a collapse pays for the risk carried by Wall Street I don't think so so I think we need a second layer so for example can the two of us start an airline tomorrow and just start ripping around Chicagoland for joyrides well no the d-o-t is gonna say well you guys can't just be flying around you you have to go through all kinds of things and all those things cost money if we want to start mass producing some kind of cupcake that I don't know if we think is really gonna be great well the FDA is gonna say timeout I want to make sure that just like say drugs that you're gonna make sure it's safe financial institutions are super complicated and Lehman Brothers we had trillion dollars of notional value of derivatives and the financials should say I'm sure they have a lot more but they're really really complicated so when you look at the talent pool in DC and you say you know how qualified and capable are they monitoring the the top people from all of these business schools who are now in this how can I make the most money environment they're in a really tough spot so I think if we had a safety net which was either the financial solutions pay into a fund so that there was industry dollars ready to go when anyone got into trouble the political pressure would be diffused because it's not coming from Main Street it's coming from Wall Street so whether you call it fund insurance mmm whatever that is and when I look back from the time when I was there - today we're largely in the same place because Wall Street doesn't have to pay for the systemic risk for which they carry they're now in a position where they can take that money that they would have had to pay like the FDA or the d-o-t or whoever and give it to the employees and compensation so I was I was pleasantly surprised right before our talk today that one of the GSB students was working at the Obama Foundation and was going to go into public policy that's pretty rare surely was rare when I was coming out of business school but if you look at the graduating classes say Harvard Business School there's no industry that has more people going into finance than that industry does not in fact they have as much as seven times the GDP of other groups in other words take take the GDP of Finance called trillion and then you take seven trillion dollars of industry they have the same number of graduates going so effectively we through the regulatory structure right now we're subsidizing talent going into finance not sure that's the right thing for the country to be doing but it's an industry that I think justifiably has lots of demands and provides a invaluable service to society but I think we're in a place that's inconsistent with where we should be particularly having lived through the crisis I'm not sure what the appetite to build that safety net is but we have to depoliticize it and even when you look at say a dodd-frank and the Federal Reserve Act we've built in measures to make it so that it's not harder for the Fed to do what it needs to do and we need to empower them because that's the best and the brightest that we have in terms of how to handling and defusing negative impacts of systemic risk so I can give you one little one up specifically what that means the Fed used to be able to execute on section 13 3 of the Federal Reserve Act to provide money to a financial institution in trouble if it thought it met those two thresholds they were exigent times and that they thought they were gonna get paid back but now they can't do it on their own they now have to get the approval of the Secretary of Treasury so today would be Steve Nugent I know him he's a good guy I went on a boating trip with him and he's a really nice guy but guess what if the current president says Steven you're not going to do it he's in one of those really weird awful moments and as a country where Main Street is in a position where they could lose billions or trillion we don't want that dynamic so we need to deep politicize it so that's one thing that I hope happens I presume I'll do one more vignette and then I'm gonna move on from Lehman Brothers I presume that someone might say well Lehman didn't qualify for a bailout because it was insolvent that weekend fortunately there's a lot more information now that suggests that's not the case but we don't even have to debate that and the reason we don't is because back in June I was on the call with a dick full or CEO Ian Lowe at our CFO tom ruse our chief legal officer Raj Cohen is the chairman of Sullivan Cromwell and we were on a call with Timothy Geithner and we said in June we want to be converted into a bank holding company and the reason we want it to be converted to a bank holding company is because no one is going to mess with the Fed and weren't a game of in a business of trust and so long as you're now regulated by the Fed then the investors are gonna say I'm not gonna short knowing that the Fed is back stopping this name so cuz mind you this didn't happen to the commercial banks like it happened to the investment banks the investment banks were not regulated by the Fed they said no now fast-forward Lehman goes bankrupt within days they converted Morgan Stanley and Goldman Sachs into a bank holding company and the problem went away because you're not going to fight the Fed so we need to make sure that we get rid of those political elements because right now the safety net isn't as good as it was before the standards are better but it's not as if it's riskless and if something happens it's going to be a political nightmare for somebody to step in because they're going to have that awful dilemma facing them but shortly after the crisis I can tell you it was a pretty dark moment when dick full put down the phone with Bob diamond who was the then CEO of Barclays Capital who said I can't do a deal with you tonight dick is imploring we can do a deal tonight I said I can't do it tonight obviously now we know it was because the UK regulators won't allow it which was too bad but that's where it was dick put down the phone he put his head down and he said I think I'm gonna throw up and he looked like it right then is when you know in so many moments whether you're in Business School working on a case study whether you're in your summer associate or a full-time job and you're working on a model whatever it is I stopped I stopped being on autopilot and that was the first time that I started to think what's gonna what now I knew I was out of the job that was an obvious one I did the mental math I knew that I was going to be personally bankrupt in 18 months I was the youngest guy in the executive committee and I had one of those I was at a point in time in my career where we had five-year vesting and sales restrictions on the stock we got so while I felt very comfortable going into this and I was one of those guys being paid more than ten million dollars a year and it felt really good what was 90 percent of it was stock that's a zero so after tax I wasn't in the top 5,000 so I was I had just in essence given up virtually everything in life because I had no diversification on my personal PI there was no spirituality there was no extracurricular there's no athletics there was de minimis time for family I remember sometimes on occasion I'd go to dinner with my or lunch with my dad I'd skate out of work and he had to have ordered my entree for me to come in whoop it down and leave that was my life I hadn't I had nothing outside of leaving all of a sudden I just got zeroed out when you think of and there are a whole bunch of Kuantan allergies that you know something you might like but it's decision trees as contingency planning it's all that kind of stuff you never think it's gonna be tails tails tails tails tails it can and I in my personal life was the sucker who walked into the Vegas casino and you see the roulette tables and it has 10 Reds in a row and I got an A and probably in statistics now I know it's easier at Northwestern than here but I still got an A if there are 10 Reds in a row I don't care that it's 50/50 it's not it's got to be better than that so same thing here so that was it was about that time wasn't it was shortly after that that I talked to one of the most restore researched studied academics of Catholicism that I've ever met and Thomas and we went through a whole universe of stuff and he was the one who embarked me on a path to thinking about some of these orders and one of them was the Knights of Malta and I built that into my life and now I'm surrounded by people who are a hundred times more study in faith than I am so whenever I have one of my 50 doubting Thomas kinds of questions I get a wicked cool answer that's grounded in a ton of fact and history so there are lots of different ways that you can build safety nets in life whether it's professionally in networks you build for those of you who go into a company I would suggest do not make the mistake that I met I was the most connected guy within Lehman but I had nothing outside of Lehman so when Lehman went I was in deplorable shape relative to being able to leverage those networks so if there's something that I'd leave with you it's think about as you apply that decision tree in life and portfolio theory use it for your personal life so that you will have a safety net that's about as close as I could get to an analogy to the global crisis and connect those dots I'm not going to do what Lloyd Blankfein probably regretfully did when he said we do God's work not so sure about that one so with that why don't we open up for questions and feel free to ask anything I just wanted to give you enough of a peek into what it was like at that time working at Lehman but everything is fair game [Applause] you my parents raised us Catholic I went to church every day as an inducement we every Sunday would go to a pastry shop whatever we want right out of church my son's get to do the same thing now it's really effective but I you know I was a Easter and Christmas attendee and at the time you justify a rationale for ending up in that spot just like I did the same thing with my family and friends a lot of stuff so I pray every night and in that moment in time I didn't have I didn't have anything to ask for and I asked for a lot I know I didn't know what to do so that was the first time in prayer I just surrendered myself said I have no idea what you have store for me but bring it on whatever it is I really didn't know what to ask for you a few things thank you for that a few a few things in there's a lot in there the only thing that I would challenge was the bad decision piece in retrospect it's really easy to second-guess the decisions that were made but none of the decisions were not grounded in a plethora of analytics history the like there was nothing when you were in that moment in time there was it's implausible to me that with all the talent at goldman sachs all the talent at morgan stanley all the talent at Lehman Brothers at Bear Stearns and Merrill they were all idiots and they all made a bad decision just implausible to me and when I I threw out the vignettes about compensation for a handful of reasons but if you you were part of a team making that kind of money you're in preservation mode you not want that to stop there I can't think of many people who've been in those kinds of seats who said you know I think I'm just gonna leave now that's what the press release says I want to spend more time with my mother whatever it is but that's not reality so the bad decision piece I'll put over here I think there is there are enormous checks and balances however the front end of what you said I completely agree with which is that's an industry that provides a very important role in society being the capital markets and the conduit that facilitates efficient transactions and global capital flows and it makes it so that irrespective of what business someone in this room owns or runs or as an entrepreneur capital will find that person efficient and we'll be able to feed him because he's got a great business and then he'll be able to invest more behind creativity of derivative products or whatever and they'll be able to hire people that kind of stuff so however Wall Street is about making money and the more money you make the more capital you can attract the better the people you can hire who come up with better ways to make a better return on invested capital which makes it so you then make more money and so there's this circular relationship you're absolutely right they are best positioned to come up with what inputs should be part of the regulatory framework but it's moving so quickly technology that it's hard even if you have from time to time one that transplants to DC to keep up with it and if you're suggesting there should be a much tighter partnership between industry and government I completely concur it's inadequate I think there's a reasonable amount of cooperation as it relates to security and government and industry for financial services but as it relates for everything that we're talking about know do I think that you and I could as newly anointed representatives of the United States government sit down with Jamie Dimon and his peer groups his peers in the group and say hey you know what you still carry systemic risk I think you know you'd agree that we should have you contribute into a fund to make it so that we have an industry of fun that conversation will go particularly well because they're they're there they're stuck in this industry that has that kind of circular relationship between talent capital and ability to make money so I think it's a really hard nut to crack and I think as someone close to me said yeah that partnership is something that should be created but the first task would be to say okay what's the purpose of the group so I think you're right if we could pull that off that would really help because everyone else is flying blind and quoting from cherry pick data that either is off the mark or doesn't include all of those elements the amount of time that goes into HR was one of the positions that report it to me the amount of time that goes into structuring compensation programs is extraordinary so that someone in DC can keep up with this they can so if you're suggesting that partnership I think absolutely should have it that's I think that's different and what what I think would be me we have basil and basil is their their most important body of work has been Basel 3 which set those the three pillars of contributors to systemic risk and how to calibrate it and have a standard for the industry but I think the the more pressing issue relates to technology and where technology's going because DC is in the position of trying to play catch-up with many of the smartest people and that's a tough tough spot to be the initial coin offerings that was a reasonable example that you saw a handful of an coin offerings and the SEC retroactive we said okay timeout we're gonna take a look at this it's not like there's some joint collaborative effort on new products for example another thing that the industry would just completely reject but you certainly see it with drug companies you don't get to just launch a drug into the marketplace it has to go through the FDA so that's not the way it worked on Wall Street companies were established there many companies companies are established based on a foundation of an environmental foundation at a given point on the technology of day the standards of the day so I've always been sensitive to trying to pivot the the firm's culturally to whatever that is acknowledging that it was placed on a lazy bum ation so examples diversity inclusion is something that people talk about and it's like okay okay we all agree that diversity inclusion is a good thing well I really inclusive that each firm starting with Lehman that I joined there were not organizations for different segments of the population to congregate and be supported to give a voice so I created that in each one of those things I've tried to I've tried to each one of them say well that's not good enough that sort of feels like I check the box how do you make honey make material change I'll give you one example and this is one of the reasons why I was most personally upset that Lehman Brothers fail and it's because for the five prior years I had gone meeting of the Roma Economic Forum in Davos and I saw that these CEOs of major corporations had wielded immense power and if they wanted to get something done they could get it done and what I saw on Wall Street was a whole bunch of having grown up in Brazil in France I saw a whole bunch of white guys who grew up in the tri-state area and I thought what segment of the population is least representative african-american women so what I said myself is okay how do I try and make a difference on that dimension and then the wrists will sort of fill in but that was the hardest one nail one so yeah so many books but so examples of that those are easy policies you know that you can work from home so it's CGI reverses that yo there was a policy that was implemented by the prior CEO that said you have to be in the office so I have rid of that said you don't have to be in the office on care you ever going to the office like you're attending so stay at home I think you're less so that's an example of that but to me to crack to crack a lot of these cultural norms you have to do other kinds of things so in that one case of saying Lehman Brothers what I did is I met with a bunch of university presidents why I thought I had the best African American Studies programs so Princeton oh really someone had a Princeton happy here of colors the other one was what's that nice okay yeah there you go so go Tigers anyway so remember this staff that I told you about Harvard okay and the concentration of people from Harvard who go to finance Princeton in the service of the nation okay the stats are worse so with so what I did is I became good friends with dr. Beverly Tatum who was the president of Spelman College which is the black University all women and I couldn't deal with her to create the Lehman Brothers Center for finance and economic development which I particularly care about that just gave me juice to have a relationship with Spelman College what I did is to set up a mentorship room and I then got all of the VPS of Lehman Brothers in a room like this and I said okay here's this to happen every one of you is gonna have a mentee who's gonna be a woman at Spelman College and we have with a video conference room and you can talk to her every day if you want you can never talk to her I don't care however I'm taking away 10% of everybody's compensation he just lost it not if she goes to the Goldman Sachs McKinsey BCG you're gonna get multiples of that number if she drops out of school and there were probably 20 percent who for non-academic reasons dropped out of school and you can't problem-solve on how to get her the money your and lose it all so that we did the groundbreaking in late 2007 so when Lehman went under this is one of the things that really really upset me why I've set me because having met with it for my counterparts is everyone was gonna copy it didn't happen not that Lehman Brothers is some altruistic institution however when you're in any of those seats of leadership if you put a little bit of time thinking about these kinds of things you can make a big difference but work-life balance and leg people work from home and having a concrete scorecard with metrics on performance and if you really believe they have to be in the office fine drag it in for one weekly video one weekly meeting something like that you can build it in so it's not every day but they don't have to be locked up in the office and Wall Street is particularly bad as it relates to face time you hindsight's 20/20 I don't know I haven't talked to him I've talked to him before the crisis not after and just smiling because my brother sponsors a forum with the Council on Foreign Relations so a couple two weeks ago there's the Stephen c39 forum with Geithner Paulson and branchy with my brother in the front row I don't know if you read my article in the FT I did an op-ed talking about the salient parts that we talked about tonight as it relates to a safety net and how not not trying not to be someone who says that I suppose he said we didn't deserve it I went through it was a mistake we shouldn't do it again my brother did it everything possible to dissuade me from publishing this piece as you can imagine with him in the front row of his three buddies I think even in retrospect while his intentions were probably good he may have been he was certainly the most experienced person as it related to capital markets and Investment Banking so as I look at what he did he had every good intention I do not subscribe to any of these theories that whatever the relationship he had that they fold which I obviously am privy to but whatever that was I do not think that that influenced his decision making I think he was trying to do was right for the country I do think that he put himself in front of the Fed which he should not have done I think he did it for the right reasons but I don't know if it would have mattered because I don't know that Bernanke or Geithner had the stomach maybe they would have without him fronting there is no government money there was a series of challenges did Lehman have collateral that would justify a Fed position that they weren't lending into a hole is that weekend they came up with that determination by asking the peer groups that weekend now if you recall and you could look at the Sorkin's book not once did any of the government fish officials say we could not lend they said they wouldn't but it was that weekend by going to Morgan Stanley and Goldman rippled wood and other large institutions and saying is what's the collateral level okay guys nur before that process started said there will be no Fed money that was a Proform exercise and something that I didn't talk about tonight which is very relevant right after Bear Stearns fell I was one of the executives who welcomed the Fed into our offices they hotel in our offices for the next six months they had access to everything we met with them on a regular basis and at every point in time they said we're middle-of-the-pack so to spin on that dime the only way I can resolve that is the intensity of that political pressure so would have helped I don't know because I was on the phone with Timothy Geithner in June and it was enough do I think without Paulson having front-run him by having his staff leak he says there's no money which wasn't his jurisdiction that was the jurisdiction of the Fed and it that point in time section 13 3 did not stipulate you needed the approval of the secretary Treasury so it exists it exacerbated the political pressure but I don't know that it would have made a difference

Channel: Lumen Christi Institute

Views: 31,991

Keywords: Lumen Christi, Lumen Christi Institute, Scott Friedheim, Lehman Bros, Financial Collapse

Id: EAN1yVuww9A

Length: 62min 21sec (3741 seconds)

Published: Tue Dec 04 2018