williams - uncontrolled risk; the lessons of lehman brothers and how systemic risk can still bring down the world financial system (2010)

[...]... making them probably as ‘general’ as merchants could be.”2 Many of their regular customers made their living by planting, harvesting, and selling cotton As the prosperity of these customers grew, so did the prosperity of H Lehman 9 10 ᭿ Uncontrolled Risk The arrival of Mayer reunited all the brothers In acknowledgment of Mayer’s arrival in 1850, the name of the family business was changed to Lehman Brothers, ... capital intersection in the world and was well positioned to become a contender in the investment banking community SECOND GENERATION OF LEHMANS With the death of Mayer (the risk taker) in 1897 and Emanuel (the risk manager) in 1907, the day-to-day responsibilities of running Lehman of cially passed to the next generation, Emanuel’s son, Philip With the passing of the torch, the From Humble Roots to... permanent The trading center of cotton had moved from the South to the commission houses of New York City By 1868, the New York Lehman of ce was busy enough that Mayer joined Emanuel, and they decided to make New York their permanent base of operation Lehman also expanded to other commodities, including coffee, sugar, grains, and petroleum.14 In 1870, Lehman became one of the founding members of the New... of Lehman s history, the investment banking industry, its changing regulation, the evolving landscape of financial markets, and what decisions Lehman made as it defi ned its risk- taking culture under Dick Fuld Only an understanding of all of these events will provide a clear view of what happened to bring down the House of Lehman The pages that follow are devoted to exploring the facts that led up to and. .. including Alabama soon followed The Lehman brothers had prospered in the South and were partisans of the Confederacy, even acquiring their own slave in 1854.9 At the start of the war in April 1861, President Abraham Lincoln imposed the fi rst of many economic blockades that would impact the Southern cotton trade beholden to Northern mills and ships Pre-war, as much as 95 percent of Southern cotton was exported... responsible for the systemic risk unleashed after its demise? Lehman didn’t opt for bankruptcy Referring to the ripple effect that occurs when one institution’s failure rapidly affects counterparties, systemic risk is the very concept that underscores the too big to fail doctrine The overarching theory holds that the failure of one big bank can bring down the entire financial system At the end, by not... personalities, risk tolerance is directly linked to those who run the company At H Lehman the most conservative of the three brothers in terms of risk taking was Emanuel, while Mayer was a polar opposite—a risk taker It was a symbiotic relationship that worked well Mayer made money, and Emanuel made sure it wasn’t lost The modern equivalent is the relationship between the risk- taking CEO and the risk- adverse... compensate the level of risk taking Firm capital also needs to be adequate to support the level of risk activities Although few financial records are available from H Lehman s early years, what is clear is that an appropriate amount of risk was taken, and store profits grew at a rate high enough to expand the size of the original store while supporting the salaries of all three brothers WHY MONTGOMERY? The Lehmans’... Bobbie Lehman, family patriarch and leader of the fourth largest investment bank on Wall Street, died in 1969 When the bull market of the 1920s came to an abrupt end with the crash of 1929, the ensuing Great Depression tested whether the third generation of Lehmans had the leadership skills to navigate a crippled banking system and a stock market that would not rebound until the 1950s Under the steady hand... Salomon Brothers had amassed sizable capital that allowed it to take such bets It was an early advocate of bringing in mathematicians and physicists from schools such as Massachusetts Institute of Technology and training them to become bond traders By the 1980s the domestic fi xed-income arbitrage group of Salomon Brothers, headed by famed trader John Meriwether, was bringing in the majority of the firm’s . Sydney Toronto UNCONTROLLED RISK THE LESSONS OF LEHMAN BROTHERS AND HOW SYSTEMIC RISK CAN STILL BRING DOWN THE WORLD FINANCIAL SYSTEM MARK T. WILLIAMS Copyright © 2010 by The McGraw-Hill Companies,. permission of the publisher. ISBN: 97 8-0 -0 7-1 7490 4-6 MHID: 0-0 7-1 7490 4-7 The material in this eBook also appears in the print version of this title: ISBN: 97 8-0 -0 7-1 6382 9-6 , MHID: 0-0 7-1 6382 9-6 . All. grew, so did the prosperity of H. Lehman. 10 ᭿ Uncontrolled Risk The arrival of Mayer reunited all the brothers. In acknowledgment of May- er’s arrival in 1850, the name of the family business