“Grabbing and greed can go on for just so long, but the breaking point is bound to come sometime.” Opening with this quote of Herbert Lehman is The Last of the Imperious Rich by Peter Chapman ( > www.landmarkonthenet.com ), a tale about Lehman Brothers (1844-2008).
In fact, not one tale, but two, clarifies the intro. “The Lehman Brothers of the early days built and invested and developed the wealth that it had enjoyed. It dealt in solid things, materials that could be seen and touched. You could not fault it as far as risk taking was concerned; its founders crossed half the world under treacherous conditions to get where they were.”
Adding that Lehman Brothers was built with consistency and flair, the author notes that its imagination rarely wandered from a calm assessment of the realities and the people it was dealing with. He reminds that Lehman Brothers of this era spent its own money, not that of other people; and that it developed a high reputation for public service and was at the forefront of America's growing prosperity and reputation around the world.
Sadly, from around one of the high points of the US history – the moon landing of 1969 – Lehman Brothers entered its second phase, and one of decline, the book chronicles. “Short-term thinkers seized control. It moved from productive enterprises and businesses of substance and did not much care who it exploited as it developed a talent for fast talk and deceit. Lehman Brothers took excessive risks and betrayed all principles of financial good sense. Fatefully, it moved into bogus products like toxic mortgage bonds.”
A chapter titled ‘Sad in some respects' narrates how the twenty-first-century mortgage salesmen – who worked 84-hour weeks and made six-figure incomes – had far more snazzy products than Henry Lehman's pots and pans. The newer products included ‘Ninja' loans – short for ‘no income, no job, and no assets' loans that went to people with particularly restricted means and little chance of repaying. “The Hispanic community had ‘fecha y firma' loans, so named because to get one they required only a ‘date and signature.' Some loans came with a premium: If someone wanted a mortgage for a house costing three hundred thousand dollars, he might get thirty thousand dollars added to the loan for other spending.”
Among the newer ‘pots and pans' were CDOs, collateralised debt obligations, created out of mortgages bought from many companies and then sliced up to be sold to investors around the world. Banks and pension funds were keen buyers, because the rates of interest on the CDOs were far higher than those of the US Treasury bonds and a lot of other investments, one learns. “Lehman Brothers added a nice percentage fee to each slice sold.”
As the author explains, the assumption was that the CDOs could not fail. He clarifies that though inevitably some people would be unable to repay their mortgages, the probability of many people doing so at the same time was extremely low, and the risk to investors, therefore, would be dissipated. Or, at least that was the expectation, because “the analysts and rocket scientists within the issuing banks devised some high-technology mathematics to prove this. In some cases, their explanations spread to hundreds of pages of formulae.”
The book recounts how, as the business became so good, more and more complex investments were invented, with CDOs of CDOs, or CDO squareds, as they were known, coming into existence. Chapman observes that it was similar to the period building up to the crash of 1929, when investment trusts of investment trusts, and holding companies of holding companies, provided people with new things to put their money into without their having much understanding of where they were putting it.
Sombre account of an unforgettable phase of the world's financial history.