This is reproduced from an article which I wrote for Rotman's student magazine in Sept 2009.

Anatomy of Colossal failure
Lehman Brothers Bankruptcy

- Sanjeev Sharma

Lehman Brothers, the fourth-largest U.S. investment bank, succumbed to the sub-prime mortgage crisis which led to the biggest bankruptcy filing in history on this day (15th September 2008) exactly one year ago. The 158-year-old firm, which survived the railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, could not survive sub-prime mortgage crisis. This incident is one of those inflection points, which will stand out as a lighthouse in oceans of financial crises. Rather than analyzing the financial, structural or political reasons for this failure, on which three books are already published (with doubtless more to come), I will try to focus on some salient learning points to help us grow into fiscally responsible managers, instead of limiting ourselves to being what we may provisionally call “Pigeonhole Experts”.

"...senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo."

A “Social Guardian” hat On Senior Management’s Head
An institution with total assets of $639 billion – more than the gross domestic product of Argentina – had gone up in smoke. Though this might seem abrupt and sudden demise of a Wall Street icon, the reality is there is no smoke without a fire. The senior management often terms early signs of failure as false-alarm. The advantage of being as big as Lehman or GM is that you often survive your mistakes. However, Lehman’s demise surely is a salutary warning to all believe that big organizations are invincible. Lehman’s fall generated a massive tremor in the global economy and countries like Latvia, Lithuania, Iceland and Hungary were caught in a frightening downward spiral which caused political unrest in these countries. Thus, managers of big organizations should understand that they are also the torch bearers for value creation. If they falter, they induce darkness all around. That’s why I believe, senior management in big organizations like GE, GM and Citigroup often have to act and think as “Social Guardians” in the global economy. Thus future managers should be made cognizant of the consequences their decisions have on society.

No to “Yes Boss” Culture
Lawrence G. McDonald, author of A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers notes that the senior management around Lehman CEO used the corporate equivalent of brass knuckles on the staff, moving people into jobs and regions that they weren’t suited for in order to weaken and intimidate them. This kind of militaristic attitude discourages analytic thought-processes and cultivates in its stead herds of sycophants, which, like parasites, infect the core of any organization as they did in the case of Lehman Brothers. Thus, senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo. This is a tough process; however it is also especially crucial in the finance industry which is especially prone to the “Black Swan” syndrome (i.e. the devastating consequences of unpredictable and unexpected risks).

These are some short but succinct learning points from a post-mortem of the Lehman Brothers corpse. While the world is still going through the trillion dollar chemotherapy treatment of bailouts, it is important to understand that a side-effect of this treatment would itself create a long-term disease with more Lehman-like casualties unless we change our business behaviour towards real innovation rather than fake speculation, and drive consumer spending with real needs rather than insatiable greed. I propose we observe 15th September as a “Leaders Learning Day” – as nothing could be more compelling than learning from historical failure as that of Lehman Brothers.