How You Can Help Prevent the Next Lehman

How You Can Help Prevent the Next Lehman

09.14.09Ron Ashkenas

Apply the lessons from Lehman to your organization

Among many other things, the Lehman bankruptcy symbolized the breakdown of an overly complex, fragmented, opaque, unwieldy and ungovernable financial system. But while it’s easy to think that these issues are systemic and beyond our individual control, perhaps there are steps that each one of us can take, in our own small way, to prevent the next Lehman from occurring?

As a starting point, let’s remember that last year at this time, many of us were shell-shocked and scared as we watched not only the collapse of Lehman, but the forced sale of Merrill Lynch, the bailout of AIG, the government takeovers of Fannie Mae and Freddie Mac, the freezing of credit markets, and the collapse of stock prices. Dramatic marathon meetings of Federal Reserve and Treasury officials dominated the front pages of the newspapers. Previously esoteric issues that only bankers talked about, like Libor rates, were suddenly part of the everyday vernacular. Was this the beginning of the next Great Depression or just a brief period of financial retrenchment?

Now a year has passed and there is a sense among economists and politicians that we will not fall into the abyss. But before we breath too big a sigh of relief, let’s also remember that over the past few decades we’ve seen recurring cycles of large-scale, high-risk economic booms followed by dramatic busts – defaulted loans to least developed countries, the collapse of the thrifts, several rounds of real estate lending crises, failed leveraged buy-outs, commodity speculation, the technology bubble, and now the continuing mortgage crisis. Freud would call it “repetition compulsion” – the unconscious need to keep repeating dysfunctional patterns. As soon as one crisis is over, we move on without fundamentally making the system any simpler or more transparent.

However, as the world has become more and more interconnected, or “flat” as Tom Friedman calls it, the impact of booms and busts are amplified and reverberate around the globe. No longer is a problem contained in a few banks, regions, industry sectors or countries. Economic issues are now as contagious as a flu pandemic, which is perhaps why the meltdown of 2008 seemed more severe and dangerous than its predecessors.

Going forward, perhaps we need to insist on simplicity and transparency, not only in the financial system, but in all of our organizations. We can’t wait for the government or a regulator to jump in and tell us that we’re getting into trouble with complex products and misunderstood risk parameters. That’s too late. We shouldn’t wait for customers to get confused and costs to get out of control. We need to take the lessons from Lehman and apply them to ourselves. Nobody at Lehman was trying to trigger a worldwide financial meltdown. But collectively, and in combination with colleagues in other institutions, they made it happen.

Unless we challenge ourselves to become simpler and more transparent, and to appreciate the global interconnections of our actions, we run the risk of contributing to another crisis down the road. None of us want to be remembered as being part of the next Lehman. What can you do in your own organization to make sure that doesn’t happen?

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