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Marketing Lessons Learned from the Collapse of Lehman

By Paul Barsch

For one hundred and fifty eight years, the investment bank Lehman Brothers survived
multiple business cycles and even the Great Depression. However, critical
miscalculations in its last few years of life ultimately proved catastrophic for not only
itself, but the also the global economy. A post mortem examination of mistakes made by
Lehman executives provides ample lessons for marketing executives of all stripes.

Started in the 1850s by three German immigrant brothers (Henry, Emanuel and Mayer)
the Lehman’s founded the New York Cotton Exchange and eventually became huge
players in the trading of equities and debt instruments. At the time, the Lehman Brothers
probably could not have imagined the firm would become one of the largest investment
banks in the world, with over $46B of revenues in 2008. Also inconceivable was
mistakes the company made that ultimately led to its destruction.

In the book, “A Colossal Failure of Common Sense; the Inside Story of the Collapse of
Lehman Brothers,” former Lehman Brothers vice president, Larry McDonald, chronicles
the rise and fall of his company. Taking readers from the nascent beginnings of Lehman
Brothers to the eventual bankruptcy of the firm, McDonald weaves a tale of good advice
ignored, political snubs, and gross mismanagement of the world’s fourth largest
investment bank.

This bestseller has abundant lessons learned for those seeking to understand best and
worst practices in corporate governance and politics, financial management and business
strategy. There are also cautionary tales for marketing professionals. Let’s start with the

Sometimes innovation isn’t a good thing

Innovation, for the simple sake of producing something new sometimes doesn’t increase
value, and in fact may end up destroying value. A compelling example in the financial
services sphere is the exotic (and sometimes toxic) derivative products produced and sold
by Wall Street in the past decade.

Simply stated, derivatives are securities whose value is “derived” from an underlying
asset or security. A polluted medley of derivatives during McDonald’s tenure at Lehman
Brothers came to be known by names such as credit default swaps (CDS), collateralized
debt obligations (CDOs) and derivatives of derivatives (CDOs squared) among others.

Instead of selling corporate or government bonds, equities and other financial instruments
that customers could readily understand, companies like Lehman Brothers pushed
complex financial products to hedge funds, pension funds, and institutional investors that
often had higher margins.
Now, to be fair, derivatives on the whole, aren’t a bad idea, regardless if Warren Buffett
labels them “financial weapons of mass destruction” or “weeds priced as flowers.” They
can serve a purpose for savvy investors as a method to transfer, insure or hedge against
risk. And used correctly, they can offer significant returns.

Yet, many of these derivatives sold by Lehman Brothers and other investment banks were
so complex in nature; they could only be valued and priced by PhDs in physics and
mathematics. Regulators and traders often didn’t understand derivatives, much less the
customers buying them.

McDonald called these types of derivatives, “Wall Street’s neutron bomb.” And that’s
exactly what happened in the collapse of Lehman Brothers. Lehman’s role in CDOs was
to take bundles of mortgages and “slice, dice, package and ship (these mortgage backed
securities) to investors all over the world.” And it all worked out swimmingly until the
market for CDOs imploded, leaving Lehman holding a bag of several billion in risky
mortgages and CDOs that were un-saleable at almost any price.

Marketers understand the push for innovation all too well. Our products and services
must always ‘one up’ last year’s model/edition and deliver more value for the same (or
more money). Even if there’s really nothing new to announce, the next product/service
cycle often demands new features that customers may not have even asked for.

Marketers must understand and articulate the value that our products and services bring
to customers. However, sometimes products and services are so complex they defy
comprehension. Ask yourself; is the “innovation” proffered really innovative? Will my
customer see it this way? Can the value proposition be simplified? Can the marketing
messages be recited by the everyman on the street? If not, perhaps it’s back to the
drawing board.

All eggs in one basket is a recipe for disaster

Mark Twain is to have said, “Put all your eggs in one basket, and watch that basket.” And
while this is a potentially sound strategy, there are times when a singular focus, a
concentration on a “sure thing” can lead to disaster.

Under then CEO, Dick Fuld, Lehman Brothers became one of the largest players in the
mortgage backed securities business. According to McDonald, Lehman borrowed thirty
two times their worth, mostly to cover purchases of mortgages from mortgage brokers or
“body shops”. In fact, at the end of 2006, Lehman Bros was in the subprime securities
market to the tune of over fifty billion dollars.

Now $50B is a lot of eggs in one basket! And sadly, this money was leveraged –or
borrowed. Thus, when the CDO market slowed down, McDonald relays that, “(Lehman)
had a growing mountain of these things piling up, not yet sold…potential liabilities.”
Stuck with securities Lehman could not sell, any financial losses would crush their capital
cushion. Lehman went neck deep into the subprime market and when this market caught
fire, Lehman was running for the theatre exits and getting trampled along the way.

A key responsibility of a well-rounded marketing executive—whether in industry,

product, market communications, or the like—is to provide direction to business leaders
regarding trends, white space, and best areas in which to compete or avoid. Marketers
need to constantly examine the landscape and have a keen understanding of the
competitive, social, governmental, and economic forces that drive new market entrants or

The goal for a marketer, then, is to anticipate key obstacles to achieving a company's
objectives and identify means to circumvent them. Don’t make the mistake of Lehman
Brothers. Take a look at your overall product portfolio. How are your revenues weighted?
Where have you placed your bets today and tomorrow? Are all your eggs in one basket?

Perform intense analysis or someone else will

The world’s largest financial institutions have a critical advantage not usually available to
most companies; armies of research staff. In order to discern whether they should
accumulate a “position” on particular company, research staff deep dive into income,
free-cash flow and balance sheet statements.

However, this analysis is periphery, and in fact there’s something much deeper going on.
In addition to potential interviews of senior management and/or possibly sending teams
on site to delve into operations, some analyst firms also review quantitative measures
they believe will correlate and/or predict future performance. And this deep analysis
often leads to some pretty confident decisions.

In his book, McDonald tells the story of one particular analyst at Lehman Brothers
responsible for research on a major US airline. McDonald takes pains to note the decision
to purchase the debt (bonds) of this airline was based on a level of analysis that most
companies don’t bother to attempt. “Jane can tell you what (this airline) is serving for
lunch on their flight from JFK to Berlin and what it cost them,” he says. “There is
nothing she doesn’t know about that company.”

And this fanatical level of analysis pays off in spades as Lehman buys bonds of this
particular airline from frenzied sellers for sixteen to eighteen cents on the dollar.
Meanwhile, “Jane knew exactly what the bonds were worth; .52 cents on the dollar,”
McDonald writes. And while Lehman traders had to hold this airline’s debt for an entire
year waiting for the right opportunity, Lehman was able to eventually sell the bonds and
make a $250 million profit in one day!

Bringing this back to the marketing discipline, it seems that competitive and market
analysis is often an after thought for many companies. And it shouldn’t be.
Deep competitive intelligence is getting to the heart of the matter. It’s synthesizing all the
learnings found in the annual reports, 10-K’s and other information sources and coming
to solid and verifiable conclusions about your where your competition is strong and
where/if they have a weak underbelly.

Going a step further, deep intelligence gathering is also about using the assembled
information to get such a compelling picture of the competition that one can predict
competitive intent with a high degree of confidence.

Extreme analysis was important in many of Lehman’s decision making processes. Are
you investing enough in competitive and market analysis? Is your marketing team
providing this “insight” into senior management decision making?

Listen to your best people and seek contrarian opinions

Employees from the top to the bottom of the corporate ladder often bring unique
perspectives and experience to the table—if only someone would bother listening.

McDonald cites an example of one senior manager at Lehman Brothers—Mike

Gelband—going against the grain and warning about the potential of a housing bubble.
And while there is nothing intrinsically wrong with riding an asset bubble, one needs a
solid exit strategy to get out before the bubble implodes.

Mike Gelband saw the writing on the wall and warned Lehman Brothers CEO Dick Fuld,
and COO Joe Gregory to get out of the housing market while there was still an

However, Lehman senior management didn’t listen. In fact, McDonald writes, “The
general drift upstairs was that Mike Gelband had developed some kind of attitude
problem and it needed to be changed real fast.”

Some contrarian views rub us the wrong way. We know what we know, and we like our
positions. And sometimes we think that anyone who sees differently is a trouble maker
with an attitude problem.

Do you have a “Mike Gelband” in your company right now? On your marketing team?
Does he or she have a reasoned position on a competitor, market trend, or even a critique
of your marketing campaign? Is his/her opinion worth another look—just as a sanity

You can ride a market bubble, but have an exit strategy

When “the next big thing” is identified—whether it is tulip bulbs, internet technologies,
real estate or financial derivatives, market mania is not far behind. And while riding and
making a mint from a bubble of “irrational exuberance” is possible, it’s also beneficial to
know when to exit the moving train before it explodes. Just ask the former executives of
Lehman Brothers.

It’s been said the phrase, “this time is different” is one of the most dangerous sentences in
business. That’s because executives keep making the same mistakes again and again say
economists Carmen Reinhart and Kenneth Rogoff; “We gullible humans (believe) that
the laws of financial physics have been repealed for us.”

Why do humans keep making the same mistakes? Perhaps it’s because over optimism—
and resulting speculation—is very much a part of the human psyche. We like to believe
those who have previously failed just didn’t have the right information, or that a new
paradigm has emerged. And sometimes changes are so fundamental and drastic that they
do create new markets. But more often than not, we’ve exchanged our money, time and
hope for worthless swamp land.

Now what does any of this have to do with marketing?

An important role for marketing executives is to provide direction to our business leaders
regarding trends, white space, and best areas in which to compete or avoid. We do this
via a thorough understanding of competitive, social, governmental, and economic forces
within a market.

In adding a potential new product or service to our portfolios, we need to ask ourselves, is
this market sustainable —or does it depend on unstable factors? How long will this
market exist? At what stage of the lifecycle is the market? Does my company have the
capabilities to compete? Can my company make a profitable impact?

And this is where diagnosis of a market bubble comes into place.

Now let’s be clear. Not everyone believes in economic market bubbles. Some
economists are convinced that people have all the information they need and therefore
always make rational decisions. Efficient and rational market theorists from the Chicago
School of Business, in particular Eugene Fama, don’t believe in unstable and wild market
inflations. “I don’t know what a bubble means,” Fama recently declared to writer John

However, since there’s an abundance of evidence for market euphoria, let’s assume
economic bubbles do in fact exist. The next step is identifying whether the market in
which you plan to participate is in fact prone to speculative behavior (even mania), and if
so, should your company compete or walk away from the opportunity?

These are a few questions that could have been asked by senior management at Lehman
Brothers as they jumped headfirst into frenzied markets.

In the book, “A Colossal Failure of Common Sense; the Inside Story of the Collapse of
Lehman Brothers,” former Lehman Brothers vice president, Larry McDonald cites how
then CEO Dick Fuld and his second in command Joe Gregory made bet after bet, first in
derivatives such as collateralized debt obligations (CDOs) and credit default swaps
(CDS) and then grandiose real estate purchases.

These purchases—with borrowed money—were made with the following inherent

assumptions: 1) the market would keep rising indefinitely, 2) there would always be a
market for securitized debt and 3) what’s profitable for competitors must also be the same
for Lehman Brothers.

Sadly, we know how the story ends. McDonald relates, “When a high rolling market goes
wrong, history tells us that it happens with lightning speed, as everyone stampedes for the
door at the same time.”

Indeed, as the market for derivatives self destructed, Lehman was stuck with a bag full of
product than nobody wanted, to the tune of sixty billion dollars. Senior management
failed to ask themselves, “how long can this market sustain itself?” or even “what’s our
current position and what happens if this bubble pops?”

It seems that it’s quite easy to get caught up in the euphoria of a new market, especially
when everyone appears to be making boatloads of money. An ebullient market looks like
it will never end.

However, it’s very possible to enter at the very top of the market and not know it,
effectively joining the party just as the host removes the punchbowl. And this is where
very careful analysis from the marketing function can come into play.

While a frothy market may be pretty easy to identify, it’s difficult to know when it’s
going to end. Participating in a market bubble is a risky proposition and timing (getting
in and out) is everything. And for those analytical types, even if deep market analysis is
performed, it’s possible your timing may be off by just a bit, leaving you short or long.
After all, as John Maynard Keynes once said, “The market can stay irrational longer than
you can stay solvent.”

One thing is for certain, history repeats, or as others have said, it rhymes. Lehman
Brothers stood for 158 years but participation in one of the largest asset bubbles in
history brought this noteworthy firm to the steps of bankruptcy court. Lehman rode the
bubble and didn’t “get out”. The musical chairs stopped with nary a seat.

It really wasn’t different this time.

Fortune 500 marketer Paul Barsch writes about the intersections of technology,
marketing, mathematics and globalization. Subscribe to his feeds at