Lessons From Lehman :: Video
CEO of Lehman Holdings Bryan Marsal, BBA '73/MBA '75, shares inside perspective on 2008 financial meltdown.
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ANN ARBOR, Mich. — On Sunday nights during football season, Bryan Marsal locks himself in his den to watch the game. For the co-CEO of high-profile turnaround advisory firm Alvarez & Marsal, Sunday Night Football brings welcome solitude from the week's frenzy.
But on Sunday, Sept. 14, 2008, Marsal's phone just kept ringing and he could not ignore it. History, it turns out, was on the other end of the line.
The board of Lehman Bros., one of Wall Street's most storied institutions, was asking him to oversee the bankruptcy and likely liquidation of the firm.
Marsal turned away from the game and launched into professional mode: "How much planning has gone into this decision to file bankruptcy?"
"This phone call is the extent of our planning to date."
"All right. How much cash and liquidity do you have?"
"And how much time do we have?"
"We're going to file in two hours, before Europe opens."
That's how Marsal, BBA '73/MBA '75, became CEO of Lehman Holdings. He shared the experience of his front-row seat to the financial meltdown and its aftermath with the Ross community on Feb. 10 in Blau Auditorium. During his presentation, titled "Lessons from Lehman" Marsal also shared his outlook for the near future and his disappointment in the regulatory response to the crisis.
Give Me a Good Fight
Despite the mess he knew lay ahead, Marsal didn't shy away from the job. He is no stranger to big messes, having worked with Arthur Andersen after the Enron scandal and on the turnaround at HealthSouth.
"Give me a good fight," he said when asked how he deals with that kind of stress. "I love the fight. Give me a good problem to solve. I want to solve it."
That first week was a roller-coaster, he recalled. The consequences of allowing Lehman to slide into an uncontrolled Chapter 11 – and not backstopping a soft landing as in the case of Bear Stearns – were worse than anticipated. Panic was growing fast, along with the fear that other big banks would suffer Lehman's fate.
"The situation was deteriorating rapidly," Marsal said. "It became clear to everyone that a severe miscalculation had occurred in allowing Lehman to go into a freefall bankruptcy."
But that was offset by what Marsal called a courageous decision by then-Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke to do whatever was necessary, including pushing the boundaries of the law, to stabilize the other banks.
Lehman sank under the weight of too much debt, poor liquidity management, too much concentration in real estate, and management that didn't understand what its traders were doing. Marsal said if management couldn't understand what was happening, “the regulators had no chance.”
Some Looming Problems Remain
But fast forward to now, and things look a bit better. The Dow Jones Industrial Average is up in the low 12,000s, recovering from a bottom of around 6,500. The corporate bond default rate is low.
"So why don't people feel more secure?" he asked.
There are a few reasons. Unemployment is still at 9.5-10 percent, with “apparently no solution to the problem,” Marsal said. Corporations have taken necessary measures in the past two years, cutting debt and building cash reserves. But that meant hiring was anemic.
The spending cuts proposed by some in Congress, particularly those affiliated with the Tea Party movement, may be necessary in the long term to rein in federal spending and improve the credit rating of the United States, but they can cause some short-term pain with unemployment.
The bank profits posted in the past year are unsustainable, since they're built on cheap money lent to them by the government under TARP, Marsal said. Banks are making few new loans and once the cheap money runs out, so will the profits. They also face the prospect of rising interest rates.
"The optimism you might feel in the financial community might be short-lived," Marsal warned.
He also predicted the next crisis might be right around the corner – in the form of municipal bonds. States and cities are having a hard time covering their retiree obligations and providing public services. This is pressuring their bonds and, unlike corporations, states cannot file bankruptcy.
"It's a freight train coming down the track," Marsal said. The federal government also hasn't shown the discipline that consumers and corporate America did during the financial crisis – cutting debt and conserving cash.
He doesn't think the Federal Reserve should engage in more quantitative easing. He does think interest rates should rise to an appropriate level, with more discipline in Washington and responsible spending at the state and local level.
In time, "we'll get this ship righted." In fact, Marsal said he believes we'll see a more positive economic picture in about two years.
Reforms Are Ineffective
What Marsal has found most disheartening since 2008 is the response to the financial crisis. He doesn't think the reforms enacted so far are effective. Plus, he sees signs of uncontrolled greed returning to the market.
"There's no reason why Lehman won't happen in the future," he said.
He sees no streamlining of the financial regulatory system: the Federal Reserve is dominated by economists, the Securities and Exchange Commission is dominated by lawyers, the FDIC is dominated by civil servants, and the Treasury department is led by business people with a noble spirit.
That created turf battles and confusion over who does what and Marsal doesn't see how anything has changed since the financial meltdown. He'd prefer one central leader who oversees the regulatory agencies and can speak with one voice to the corporate world.
A more fundamental problem is that civil servants who are paid an average salary simply cannot keep up with the financial innovation of fund managers making millions or billions. That's why the government should consider outsourcing some of the work to people who have deeper experience in the market.
"Regulators are outgunned," Marsal said.
As for derivatives, Marsal said the key problem was that some firms went beyond their intermediary role. They were taking big, proprietary bets themselves. That some of those bets were placed on synthetic derivatives made it even worse.
"That kind of game is appropriate for a hedge fund, but a financial intermediary has to have counterparty action," he said.
Marsal thinks banks should be discouraged from proprietary investing, as they were after the Great Depression with the enactment of the Glass-Steagall Act, which was repealed in 1999.
"What we're finding today is the people who put Glass-Steagall in place may not have been so dumb after all," Marsal said.
Marsal thinks the government also has missed the mark on how to reform one of the areas that got us in trouble – the subprime mortgage meltdown. That crisis was "politically created" because the government wanted people to buy homes and too many of them really couldn't afford it.
The solution should be simple, he said. Require a certain amount of cash down for people who take a mortgage and enact stiff penalties for those who lie on loan forms. That should go for both people seeking loans and the banks or loan officers making them.
Wrapping Up Lehman
Marsal is about two-and-a-half years into the Lehman job and hopes to file a reorganization plan and a detailed disclosure statement by April or May. Hopefully, the plan will be voted on and confirmed by the court in the fourth quarter of this year.
He still seems surprised that Lehman didn't enjoy the same treatment as Bear Stearns. Not that Lehman didn't deserve to fail. But Marsal notes that capitalism works because of greed and fear. Greed supports risk-taking and innovation and fear tempers that risk.
"Everyone should be allowed to fail," he said, adding, "Lehman probably deserved to die. But it deserved a better death."
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