Lehman Brothers Executives Let Loan Exposures Balloon in Order to Save ‘100 Bankers’

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Photo: Barclays

The court-appointed examiner’s report on Lehman Brothers is out, and it is massive. We've barely gotten into it, and let's face it, at 2,200 pages, we will probably never finish it. That's like reading Too Big to Fail times three! That said, it reads almost as well as Too Big to Fail, too. And despite the examiner's overall conclusion — which was that directors of Lehman did not breach their fiduciary duties in overseeing the firm as it acquired toxic mortgage assets that eventually sank the firm — the report does seem to be packed with some pretty damning details about the financial fudging and general, if not "gross," negligence within the firm. A quick scan turned up the following vignette, in which fixed-income chief Roger Nagioff discovers the amount of leveraged loan exposures the firm has built up under the guidance of the firm's head of investment banking and the highest-paid man on Wall Street, and noted lesbian-hater Hugh “Skip” McGee III.


Nagioff learned about the size of Lehman's leveraged loan exposures from Kirk, then Head of Global Credit Products. Lehman's leveraged loan business was "so gargantuan — the exposures jumped out at [him]." Nagioff and Kirk believed that this was "banker business, not broker business," which Lehman did not have the balance sheet to support. Nagioff also thought that the chance of a sudden market downturn was high, and that Lehman was making relatively small profits for taking increasingly large and illiquid risks. Nagioff was concerned because the tail risk of Lehman's leveraged loan business totaled billions of dollars.

Nagioff also had broader concerns about the state of the credit markets. These concerns were shared by others outside Lehman and by several of Nagioff's senior
colleagues, who believed that Lehman was operating in a "credit bubble." Months later, Antoncic, for example, reflected back on the general consensus that the markets were in trouble: "every one saw the train wreck coming. question is why didn't anyone get out of the way???"

Good question!


Although Nagioff's concerns were shared by several others, Nagioff believed that it would be difficult to curtail Lehman's leveraged loan business, because McGee's IBD, which had championed expansion of this business from the start, had to authorize the change. Moreover, Lehman had many deals in the pipeline, and those deals were supporting "100 bankers."

So Skip McGee's kid was right to stand up to his hateful lefty teacher! Skip really did do his best to save people's jobs! Even if it was only the jobs of 100 bankers. Which were saved at the expense of the world economy.

Lehman Report [Jenner and Block]

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