Here are a few excerpts from Plender’s book review. You can find his entire commentary on FT.com.
The collapse of Lehman Brothers in 2008 was not the cause of the great financial crisis but it was a spectacular curtain raiser to one of the most chaotic episodes in financial market history.
Oonagh McDonald, a British financial regulation expert and former MP, brings a regulatory perspective to the story, exploring the multitude of flaws in the patchwork of rules that supposedly governed the way the big five US investment banks had previously been supervised. Above all she examines how, one weekend in September, Lehman went from being a bank with assets of $639bn to an insolvent wreck.
It did not require much to make Lehman go up in smoke. At the end of its last financial year, it was so highly leveraged that its assets had only to fall in value by 3.6 per cent for the bank to be wiped out. The tale of how the management reached this point under the leadership of Dick Fuld is compelling.
A strength of McDonagh’s book is that it recognises that this was really a property-based crisis. The reason that derivative instruments inflicted losses on their holders was that they derived their value from residential mortgages, commercial property and other financial assets. Those values started to collapse in 2006.
The book is, in part, a primer on these structured products and on the way they are valued. It also offers detailed discussions of the different methodologies used to value property.
But the conclusion is a broader, provocative exploration of the concept of market value, in which McDonald tilts at the efficient market hypothesis that underlay much of the thinking in finance ministries, central banks and regulatory bodies before the crisis.
Dr. Oonagh McDonald, CBE