Kevin Genirs, formerly with Lehman Bros. and now Global General Counsel, Investment Banking, Barclays Capital, was a keynote speaker at AML's LegalTech West. He was reminiscing on some lessons from the demise of Lehman Bros. Several of his comments struck me, in particular:
He set the stage by commenting on a statue that is in the lobby of the Moody's Building where he worked. It portrays a farmer and a blacksmith shaking hands with the comment, "Credit: Man's Confidence in Man." This is similar to the cowboys shaking hands on the prairie which we photographed during our 2011 trip through Oklahoma. The point is well-taken. Without the confidence that life will proceed as reasonably expected, we have chaos ... and no legal documents are strong enough to withstand such chaos. That is why the cowboys' handshake resonates so dramatically.
26,000 Lehman employees lost their jobs; $370 Billion of claims were settled for just $.20 on the dollar. Eight books have already been written on the subject. From 1930 to 1997, housing prices increased .7% per year. From 1998 to 2006, housing prices increased 8% per year. And the world thought this would continue forever. But, 25% of housing mortgages defaulted; the securitization market dried up; and there were massive writedowns of asset values.
The problem was not Lehman's alone, however, as we learned later. The problem was systemic. For example, credit was loosened; one hardly had to qualify in order to get credit. Short term credit was used for long term assets, and this created part of the problem. While some complain about too much regulation, we took the training wheels off of our financial system and chaos resulted.
This resonates for me in light of my mantra that lines of credit should not be used for partners' compensation. Partners, as equity holders, should be the last ones to be paid, not the first.
Genirs closed by quoting three favorite commentaries:
Galbraith: History counts for so little in financial affairs.
Greenspan: We swing from fear to euphoria and back very quickly.
Keynes: The market can stay irrational longer than you can stay solvent.
And, citing The Black Swan, unlikely is not the same as impossible.