The Financial Crisis of 2008

The financial crisis of 2008 brought to light several shortcomings of our financial system and the interdependence of global economies. The sub-prime mortgage bubble was fueled by both, unrealistic return expectations of investors and unchecked assumptions by investment banks regarding the real estate upswing. It also brought to attention serious fallacies of human judgement and the grave implications of overconfidence bred by success.

In this paper, I shall attempt to evaluate and contrast the poor display of leadership that punctuated the collapse of Bear Stearns followed by Lehman Brothers and the exemplary leadership that defined the subsequent rescue mission. I shall be focusing on Richard “Dick” Fuld (Lehman Brothers CEO, 1994-2008), John Thain, (Merrill Lynch CEO, 2004-2009) and Henry Paulson (United States Secretary of Treasury, 2006-2009).

Richard Fuld: The pre-2008 period was often characterized by a buying spree among Wall Street Banks, mortgage lenders and consumers and one could argue that Richard Fuld was the product of a frenzied financial market that believed sky was the limit. Mr. Fuld, who at the time was the longest tenured CEO of Wall Street, had successfully navigated Lehman through the 1997 Asian Financial Crisis, and this perhaps was a source of optimism and undue assumptions, as he tackled the crisis of 2008. However, a good leader needs to stay ahead of the curve and take a mile-high view of the business climate and potential risks to the company. Richard Fuld was known for his top-down leadership style which discouraged any contrarian views from his senior management team. A company’s long-term financial health must be a leader’s tipping scale for most decisions and Mr. Fuld, led on by the delusional belief that a market correction or government intervention would save the day, leaned towards a more myopic view of the business, and chose to ignore credible warnings that investments in subprime mortgages had created a precarious financial situation for Lehman. His aggressive style, which had long been touted as an asset to Lehman Brothers, gave way to arrogance and recklessness when he did not pursue a deal with Warren Buffet that could have saved Lehman Brothers. His tendency to stick to his decision, unless proved wrong, was exactly why he was nicknamed “Gorilla” in Wall Street and this Gorilla-like stubbornness led to his firm’s extinction. Ultimately, I feel the financial system created Mr. Fuld’s successes and failures, through a Darwinian process that rewarded people who could complete ruthlessly, get results, and deliver numbers but were lacking in risk management, integrity, and ethical decision-making.

John Thain: Mr. Thain had been hired by Merrill Lynch to save the company from the mountain of subprime-mortgage-related assets stockpiled by his predecessor, Stan O’ Neal. Coming in with a reputation for Wall Street turnarounds, he showed courage in taking