September 15th marks one year since Lehman Brothers – an investment bank that I worked for in the 1990s – was allowed to crash and burn. What, if anything, has the financial sector learned since then?

Well, if President Obama’s opinions are anything to go by it’s not much.  Today he told an audience in downtown New York, where Lehman was  headquartered, that:

“Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” he was quoted as saying in the Irish Times. “So I want them to hear my words: We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis.”

Ah yes, reckless behaviour and unchecked excess. That would mean three things: the outrageous bonus structure, insufficient risk controls and lack of regulation.

Bonus bingo
Let’s start with the bonus structure. Even when I was there (working in marketing so not eligible for big money) it was normal for traders and sales people to have a relatively low base salary and a POTENTIAL bonus that was many, many multiples of that number.

For example, someone who made a 75k base salary knew that if they hit certain targets they could make up to 250k. Each year, the potential for larger bonuses multiplied. Year two it could be 350k or 500k or any “monopoly money” amount.

This was very, very seductive. As incomes rose, most people increased their spending so all those Wall Streeters have an addictive  lifestyle habit to support – private schools and ski holidays for the kids; big suburban houses, flash cars and servants for the spouse; exclusive golf club memberships, holiday homes and designer clothing, cigars and single malt Scotch for them. (Lots of my friends in New York live this lifestyle so I ain’t making it up!)

The point is that it became both very difficult for people to leave the industry - would you leave 500k sitting around for someone else to take? – and almost impossible to keep reaching the new targets. Plus, most of their friends worked at the same thing so the lifestyle – and the conflicts – seemed normal.

Playing risk roulette
When a shopkeeper runs out of things to sell, he needs to get some more. On Wall Street, they simply start to make new stuff up and call them derivatives. These financial instruments are bits of this and bits of that combined to create something new like: asset-backed securtites (See Sub-prime time or Abbatior of Debt story on this blog).

To feed the increasingly voracious market for derivatives, financial product designers went wild and created things that not even a nuclear physicist could decipher. It’s a bit like those mad outfits you see on the catwalk during London Fashion Week…entertaining and outlandish but with no tangible value in the real world.

Because these things were so darned complicated no one was able to assess their REAL risk.

Ropey regulation
Finally we come to the policemen, the gatekeepers, the regulators. They were duped but they were also incredibly lazy. If they did not understand how something was valued it was their JOB to keep asking questions. They failed us in so many ways. (See post on this blog: Toxic tips from D’Oh School of Economics)

So, if we have learned something from the collapse of Lehman Brothers we should see changes to the financial sector such as:
1. Total product transparency with clear description of risks
2. Abolition of bonus structures that reward unrealistic risk taking
3. Proper regulation of financial markets
4. Regulators who have the ability to understand – or demand explanations for – the products they are regulating

Don’t hold your breath!

Popularity: 69% [?]