The Devil's Deal

Laying all the economists end to end262

and decisively repaired, depositors will withdraw their money. A

bank without depositors is like a shop without inventory. No one

wants to stick around.

Born to run

During a banking crisis the value of a bank’s assets plummets. It

might be that their loans will not be repaid, or the bonds they’ve

bought have been downgraded by the rating agencies, or their

principal investments have gone bust. Often it’s all of these

events at exactly the same time.

A run on the bank happens when depositors realise these

disasters. They’ll rush to Bank A to withdraw their savings. Media

images of people queuing up outside Bank A, smoking nervously

and looking harried, appear on our screens. The queue outside

Bank A is replicated at Banks B, C and D.

Bank E is now incredibly reluctant to lend to anyone else

because the risks are too high. In this way banks actually accel-

erate the impact of the banking crisis. You now see contagion.

People shun even safe banks because the system is rotten. No

one wants to entrust their money to a bank that might go bust

the next day.

Dick the Gorilla

Dick Fuld was CEO during the collapse of Lehman Brothers. Even

his nickname – ‘the Gorilla of Wall Street’ – was rubbish.

Money came easily to Lehman Brothers in the boom years after the

dot-com crash. Profit after tax was $4.2 billion in 2007, compared

to $113 million thirteen years earlier. Big profits came from CDOs.

Proprietary trading was relatively easy when the prices of all assets

were booming. Indeed, Fuld expressed his distaste for mid-decade

pessimists in characteristically colourful language: ‘When I find a

case study

263Crash

Day 6, 1.00pm HKT – Hong Kong

I watched the people scurrying into the Man Mo Temple and

rushing out, two minutes later, with the same worried look on

their faces. Even prayer was fast in HK. Inside the cavernous

temple incense coils lled the darkness with clouds of white

smoke. I stood next to a tiny, grey-haired Chinese man dressed in

a black business suit who held a caged bird in his hand.

He turned towards me and, without prompting, told me, ‘Both

the police and the gangsters worship the same deity here. They

short-seller, I want to tear his heart out and eat it before his eyes

while he’s still alive.’

Fuld’s bullying leadership style pushed the firm forward but meant

that he was surrounded by yes-men. His judgements were rarely

challenged by directors who were either too loyal or too frightened

to ask the difficult questions. He made them all rich, which

helped, but not as rich as he made himself. Analysis of the notes

to Lehman’s accounts show that Fuld earned $300 million in the

eight years before the bank’s crash.

Lehman’s stock price dropped 48 per cent in a single trading

session. Yet Fuld still believed he was right. Like a silly Canute,

Fuld tried to hold back the market. He believed that the US

government would not lose face and allow a major financial

institution to fail. But contagion spread. The bank’s lenders

refused to stump up more cash and creditors clamoured for

payment. No one would trade with Lehman because of the

risk of non-payment. Fuld and his firm found themselves at the

centre of the death spiral.

Lehman filed for bankruptcy protection on 15 September 2008.

It had 26,000 staff and a brand established over 158 years of

banking. Fuld had presided over the biggest corporate disaster in

history. Under his hubristic leadership, a business with a market

cap of $42 billion was worth precisely nothing.