A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers

John Lanchester writes:

A Colossal Failure of Common Sense is by Larry McDonald, a trader at the bank, and his view of its culture is much darker than Tibman’s. McDonald’s background was in convertible bonds. These are a form of debt which under certain circumstances can switch to equity: in other words, you lend money to a company, and then if its shares go up, you can decide that you now own a piece of the company. This is a good deal for investors, when it works; as a result, in one of capitalism’s many happy paradoxes, this kind of bond is popular with companies in trouble, desperately trying to suck in cash from investors. It follows that an expert in convertible bonds is also an expert in troubled companies, and in balance sheets and trading figures that don’t tell the entire truth. That background gave McDonald, who arrived at Lehman in 2004, a very different perspective on the company. It helped that he had arrived at Wall Street the hard way, not via the Ivy League but through an education in the ways of capitalism at the raw end.

(LRB 5 November 2009)