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.

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