Resilience
On Monday 15 September 2008, the financial world trembled as the Lehman Brothers’ bankruptcy was announced. Five years on, this dramatic episode in the global economy has become a windfall for journalists fond of looking for good ingredients to keep readers hooked: leverage effect, financial disaster, the rise and fall of an unusual boss.
Admittedly, Richard Fuld, the harsh-featured man that managed Lehman Brothers, had a particularly surprising career path. He did not graduate from Havard and began his career in the US army. In 1967, he started out as a bond seller and 30 years later found himself at the reins of the fourth-largest US investment bank. Feared, adulated and respected until then, within the space of a few hours, powerful banker Richard Fuld became “America’s most hated man” following the Lehman Brothers’ collapse. To such an extent that the name Fuld is now synonymous with various unenviable descriptions ranging from greedy to violent or irresponsible. Tongues are wagging and the career path of the former Air Force fighter pilot is no longer a dream for anyone. Footbridges between the army and the banking sector are likely to have fewer followers.
The extraordinary temperament of the group’s CEO (1) could almost cause us to forget the extent of the disaster that the collapse of the Lehman Brothers actually was. At the time of the bankruptcy, the bank’s balance sheet totalled some $650bn while the teams handling the liquidation still need another five years to untangle all the knots. In more than one respect, the Lehman Brothers’ default will remain to the finance industry what the frigate Sémillante was to the French navy in the 19th century: a major shipwreck.
And yet, five years on, if we forget the pile of new regulations created out of the crisis, the financial realm is back to business as usual: profit levels at US banks are higher than pre-crisis levels and Wall Street has welcomed the entrance of Goldman Sachs into the Dow Jones index with no irony. Indeed, two years ago, this arrival was still highly improbable as CEO Lloyd Blankfein was defending himself in Congress to clear the name of “The Firm” for having played a damaging role in the major financial crises that have shaken the planet in recent years (subprime, Greece).
So, was it a crisis for nothing? Many consider that central bankers have been too accommodating towards banks and allowed them an overly fast recovery while leaving taxpayers and state budgets to foot a hefty bill! Pragmatic investors (including ourselves) know that without rescuing the banking system, boosting the economy would not have been possible.
Beyond the irreconcilable positions between the wild partisans of moral hazard and pragmatic investors, the impressive resilience of the global financial system cannot go unnoticed. Schumpeter(2) would surely talk of creative destruction by noting that the demise of the Lehman Brothers enabled the system to renew itself by letting Goldman Sachs throw the Bank of America out of the Dow Jones index.
Apart from this economic reading, the after-Lehman period is also a means of reminding doomsayers that the worst is never certain. Admittedly, colossal means and energy have had to be mobilised to put the shaken and still-fragile economy back on its feet, but the darkest predictions of some observers have been forgotten just as quickly as the names of those who made them.
One of the first lessons provided by the crisis (and others are sure to follow) is that we always underestimate the human ability to rebound. In difficult moments, we should remember the saying by Marc Twain “they didn’t know it was impossible so they did it…”
Didier Le Menestrel
With Marc Craquelin