Marketing Lessons from the Collapse of Lehman Brothers

January 28, 2010
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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 Lehman Brothers, but the global economy as well.  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

 

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 Lehman Brothers, but the global economy as well.  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.

Editor’s note: Paul Barsch is an employee of Teradata. Teradata is a sponsor of The Smart Data Collective.

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 first:

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 exits.

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?

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