Six months ago at one of our Inspired Leaders Network sessions, a guest rightly predicted that Bear Stearns was in serious trouble and on the brink of going under.He then went on to say that Lehman Brothers were next. It was greeted with a stunned silence around the room but in both cases he proved to be exactly on the money.
So how did he predict both unlikely outcomes whilst others were oblivious to the problems of these financial powerhouses?
In truth, they were both accidents waiting to happen.
Put simply, investment banks rely solely on a strong brand and great people; meaning they have the best talent to make staggering deals and think the unthinkable.
But with these “untouchable” people seemingly bringing in a never ending and ever-increasing revenue stream, there have been no checks and no balances put in place, with the once positive risk-embracing cultures in which they thrived being allowed to get out of hand. At some point a landmine was bound to be stepped on.
Retail and commercial banks are entirely different; they have their own assets (their customers’ deposits) and as a consequence are at the other end of the spectrum and are almost totally risk-adverse.
The recent turmoil in the financial sector has meant that the retail banks are the ones that have had the security available to weather the storm and deal with the downturn. It has meant that we are now seeing the rise of the universal bank; ones in which the investment part of the business is funded by their retail arm. It is a far cry from investment banks that have been gambling other people’s assets.
It means that the face of banking is set to change forever and that the necessary risks are balanced by the need to preserve the organisation as a whole. Nobody is quite as blasé when gambling their own money.
Bank of America is one such universal bank and recently bought Merrill Lynch, with the same looking set to happen with Barclays buying out the principal assets of the beleaguered Lehman Brothers. Both are great moves that secure the future of thousands of jobs and encourage further wealth creation once confidence returns to the sector.
But the big question remains as to how the colliding cultures will combine and where the power lies. As ever, the answer lies with strong leadership.
Dick Fuld, Lehman Brothers’ chief executive, has always been regarded as one such leader. Big, strong, charismatic and nicknamed “the Gorilla” for his aggressive management style, Fuld turned a $102 million loss in 1993, the year before he took over as CEO, into a $4.2 billion profit last year.
His business felt he could walk on water; after all he didn’t just take all the spoils, he looked after his people and made them both wealthy and happy by spreading around billions of dollars in bonuses.
And yet by creating an environment where nobody challenged him, he became so bold and so brave that he considered himself invincible and emerged fixated on some of the most toxic and frothy investments around; such as high-risk mortgages.
His board failed to challenge him and despite the situation being discussed the world over, from warnings by city analysts, through to frequent media rumours of troubles ahead for the firm and even down to people at the Inspired Leaders Network mentioning it six months ago, he refused to acknowledge that Lehman Brothers was in difficulty.
He simply didn’t listen, believing the hype and thinking he was the maverick that would always prove everyone else wrong.
In order to feed his ego, he bet the farm.
Once in a while we all find ourselves in the situation where we have to bet the business, which can be fine as long as you know you’re doing it.
Fuld got to the stage where everyone made him feel invincible, so he didn’t know.
If ever there was a situation in the business world that showcased three fundamental rules of leadership then this was it; Fuld failed to surround himself with people that were better than him, could compensate for his weaknesses or even stand up to him.
A year ago Stan O’Neal was forced to resign from his post as CEO of Merrill Lynch after losing the confidence of his boardroom colleagues. The people around him WERE strong enough to stand up to him and now after their buyout, their future seems safe.
Dick Fuld should have been kicked out long ago and with it Lehman Brothers’ bankruptcy could have almost certainly been avoided if the organisation had acted sooner on the advice and warnings from all around.
Now it’s all over and once again it shows that no matter how great the leader, everyone needs to be challenged.
Unfeted power ALWAYS becomes intoxicating and dangerous.
