Seems it was dodgy property lending that killed Lehman Brothers too

I’m reading “Too Big to Fail“, Andrew Ross Sorkin’s colourful mega-narrative on the collapse and bail-out of the US financial system in 2008. Naturally the excessive pay packets of the main actors is luridly fascinating, and leaves one in no surprise that they lost touch with reality, and also lost the ability to countenance failure, before it was too late.

John Lanchester, in his new book “Whoops!: Why Everyone Owes Everyone and No One Can Pay” postulates that people who work with money, and thereby make lots of money, are “proved right in the most inhumanly pure way”, to the extent that they come to see themselves as paragons of rationality, free of the self-doubts that restrain mere mortals. Incidentally, his book has a wonderfully concise and witty description of the ultimate result of the development of the credit derivatives market: “It’s as if people used the invention of seat belts as an opportunity to take up drunk driving.”

But another revelation from Andrew Ross Sorkin’s book (to me at least) was just as interesting.  It seems that, when it came to the crunch, it was the appalling state of Lehman Brothers’ commercial property loan and investment portfolio that torpedoed the prospects of a merger with (i.e. rescue by) another financial institution and, in the absense of a government bailout, precipitated its bankruptcy. My (mis-)understanding had been that Lehman Brothers, in business for 150 years, had been brought down principally by its exposure to sub-prime mortgage securities.

….there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets.  While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everone knew it was worth far less.   But how much less?   One set of estimates….cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse.  A handwritten sheet with more estimations making the rounds had the numbers “17-20” – less than half the estimated value.

This has a familiar ring to it, in an Irish context.  How comforting to know that Anglo-Irish, AIB and Bank of Ireland were in good company.   Further demonstration that ridiculously large pay packages did not mean that banks were run by smart and prudent managers, but by weak, greedy and short-sighted fools.