Regulation Has To Come From Within

So, in the wake of the damning report by U.S.-appointed bankruptcy examiner Anton Valukas, Dick Fuld, the disgraced former CEO of Lehman Brothers, has been called back to testify before the House. Summoned along with Fuld are the regulators — namely the Securities and Exchange Commission and the N.Y. Federal Reserve — who were supposed to be supervising Lehman as it limped towards its end, but who failed to flag any of the dodgy accounting the firm was busy using, despite inside warnings from people who were either ignored or fired (the whistleblower Matthew Lee for starters) …

Call me cynical, but I have to wonder where all this gets us. Dick Fuld was grilled in October 2008 and delivered one of the most cringe-worthy congressional testimonies ever. “I wake up every single night, thinking what could I have done differently? What could I have said? What should I have done? … ”

In other words he hadn’t got a clue … he couldn’t see that greed had led him and his merry band of acolytes way beyond the boundaries of common sense and seduced him into thinking he could make an absurd bet on commercial real estate right as the worst housing crisis ever was about to hit. He put $4 billion of the Archstone-Smith building on the firm’s balance sheet, thereby sinking Lehman …

In the wake of the Valukas report, I asked several former senior executives about Repo 105 – the so-called accounting mechanism that enabled Lehman to shuffle $50 billion off the balance sheet. Intriguingly, some of them — especially those close to Fuld, who never liked to be hampered by details — had never heard of it. (His lawyer says neither had he.) Yet others — like David Goldfarb, the former CFO, actually reportedly pioneered it way back in the day when he was at Ernst and Young, and couldn’t understand why it hadn’t saved the firm. Such was the dysfunction at Lehman, that the CEO often did not know the day-to-day matters that were largely run until June 2008 by an equally-out-of-touch president Joe Gregory.

Gregory was not interested in risk management. He was interested in growing revenues (after all, he needed to fund several homes, planes, helicopters, and a shoe closet for his wife that was twice the size of the Jimmy Choo Store in New York). What he wanted “little Lehman” to do was take MORE risk – not less. Which is why those who disagreed with him, like Mike Gelband, the head of fixed income, and Madelyn Antoncic, the head of risk, quit.

And now, if you ask Lehman senior executives why they thought it was OK to carry out Gregory’s instructions, the answer comes back, “Look, the SEC was inside our offices ever since Bear Stearns fell in March 2008; they had access to all our books. If there was a problem, why didn’t they shout?” Well, we all know how ineffective the SEC are as investigators – just ask any of the Bernie Madoff victims …

What the Lehman collapse really demonstrates is that no matter how many rules you enforce, people will always find a way around them. My new book on Lehman, The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers, shows that the Lehman culture was based on lies. It reveals how for the past four decades, Lehman fudged its trading volatility and how as one executive put it, “It became ‘what story are we going to tell the people who work here and what story are we going to tell the market?’” But it also shows how the culture of a trading floor can change men and women.

The book focuses on four men who knew that money could corrupt them — who took an oath to never let that happen. Yet it did. Tragically so. One of them not only lost his way and his job — but also, ultimately, his life. His funeral was an event that is still remembered as being one of the most traumatic in Lehman’s recent history.

So, though I am fully behind the efforts of Congress and the Senate to reform financial regulation, I am also skeptical. My book is essentially a morality tale in that it shows how four men with the best intentions were corrupted and ruined by money. It tells how the drive that made them succeed also turned them into monsters who would knife each other if need be to get a straight passage to the corner suite.

Does more regulation stop human urges like this? I am not sure.

Look at the unfortunate Erin Callan, Lehman’s infamous first female CFO. She let the power of the job ruin her judgment. We now know that she was not, as she once told Mario Bartiromo, “peeling back Lehman’s kimono” to reveal the firm’s real figures. She was part (consciously or not) of an insidious plot to hide them. She also grew so arrogant that she refused to take advice from Goldman Sachs CFO David Viniar, who thought she needed to get off CNBC. CNBC is a place for spokespeople, not CFOs.

So how do you regulate hubris? It’s a question I’ve pondered long and hard since finishing the book and waiting for its publication. You can try, as D.C. is trying now. You must try. But in the end, the only person who can stop ambition turning into something insidious — is you.

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