A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald
My rating: 5 of 5 stars
1. If you are a member of a group, that group counts as one and only one adviser. If you want many advisers, they can’t be members of the same team. It doesn’t work. You get groupthink and exile of naysayers.
2. “Post Hoc, Ergo Propter Hoc” is the eternal financial fallacy. X has never happened so we don’t need to worry about it happening. In this case, real estate has never fallen more than a small percentage so it never will. Regarding the status quo as self-explanatory is the road to perdition.
3. Wall Streeters are mostly amazing idiots. We are led and run by morons. Their decisions are driven by all sorts of personal issues (ambition, rivalries) that have nothing to do with making rational decisions.
4. Money really does make people drunk.
5. There is a twin dynamic to a bubble. The attractiveness of the “investment” and the failure to find anything else to do to make one’s money grow.
6. Greenspan is revealed as the ultimate cause with real estate and subprime mortgages just being the most convenient fire pit in which to burn all the money. Greenspan’s lowering interest rates not only attracted people to where the new money was appearing as profit, but it destroyed the incentive for conventional savings. The mattress gave as good a return as the savings account.
7. The person who destroys himself with the most hubris (Fuld of Lehman Brothers) can be a convenient scapegoat, but the lead bull in a stampede is not the source of all the damage.
8. The Fed Reserve does not create price inflation by itself. It requires the cooperation of other players in the economy–the banking system. But when the bubble pops it destroys their willingness to “do their part.” Thus Bernake’s frustration trying to make something happen with QE series and not seeing any real results.
9. We’ve had our massive inflation and now suddenly perhaps $70 trillion has vaporized. Bernanke can’t fill the black hole no matter how much QE he does. It seems much more likely that deflation is ahead.
Great stuff! I must read.