Page last updated at 13:36 GMT, Tuesday, 15 September 2009 14:36 UK

Inside the collapse of Lehman Brothers

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Bob Diamond, CEO Barclays Capital: 'Some valuable lessons have been learned'

By Greg Wood,
BBC News, New York

Lehman's old headquarters building on Seventh Avenue in New York has undergone a makeover since that Sunday evening twelve months ago when I stood there among the crowds on the sidewalk watching employees pack their bags and leave.

There's a new name on the door, Barclays Capital, and the Lehman green carpet on the trading floor has been ripped up to be replaced by Barclays blue.

"It was very intense", says Bob Diamond, the boss of Barclays Capital, who masterminded the deal to buy the US operations of Lehman out of bankruptcy in the days following its collapse.

"In some ways it was exciting to be involved in something where the stakes were so high. I'm not sure that any of us had more than one or two hours of sleep."

'Stunned'

David DeMuro saw it from a different point of view.

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"I was absolutely stunned", says Mr DeMuro, a senior executive who'd been at Lehman Brothers for nearly 25 years.

"There was a belief that the government wouldn't let us collapse. When I got the message on the Sunday that we would be filing for bankruptcy the next day - yeah, stunned was the right word."

Mr DeMuro was the head of global compliance at Lehman, in other words he was in charge of making sure it obeyed all the market rules. He admits that he had been worried for some time about the firm's exposure to property-backed investments.

"Of course I wish I'd been more vocal. But would it have made any difference? I don't know," he says.

"Do you want to put me up against a PhD in mathematics in order to test a particular business model? I can tell you that my instincts were that something didn't feel right about it. Did I ever think it would be as catastrophic as it turned out to be? No, I did not."

Winners and losers

But some have benefited from that catastrophe.

The Lehman's deal catapulted Barclays into the top league of global investment banks, "transformational" to use Mr Diamond's description.

Lehman CEO 'was a terrific guy'

He denies that Barclays picked up Lehman on the cheap: "I think it's not OK to look back today and say - did we get too good a price? At the time most people thought it was quite bold and quite aggressive."

The failure of Lehman made it harder for all of us to get a loan and easier to lose our jobs. It forced governments to spend billions of taxpayers' money on propping up financial institutions and saving their economies from another Great Depression.

But now, many Wall Street investment banks are reporting bumper profits again and planning to pay generous bonuses at the end of this year. Have they gone back to their old ways of excessive risk taking and oversized rewards?

Bob Diamond bridles at the suggestion. "I think those are generalisations and platitudes. That doesn't mean that we're sitting here thinking that we didn't do anything wrong," he says.

"We've made mistakes. The important thing is to learn from those mistakes and change the way we do things. In future, banks will be operating with more equity, with less leverage, with bigger buffers of liquidity."

Regulation question

What about the bonuses? "Should compensation in this business be performance based?" says Bob Diamond. "Absolutely. Is it wrong that people have been or will be paid for failure as opposed to success? Absolutely."

Mr DeMuro is now an attorney for international law firm O'Melveny and Myers. He's learnt one overriding lesson from his experiences at Lehman - the need for much stricter financial rules.

"One of the problems with the investment banking industry is that it's probably truly incapable of policing itself," Mr DeMuro explains.

Lehman HQ in New York
Lehman's collapse triggered a change in the global economic landscape

"When you're in the midst of a bubble, a speculative bubble, it's difficult to be the one to walk away first from it."

"If you noticed, most of the large financial institutions stayed right at the gaming table until the very end, until they crapped out. And the reason is that if you were to walk away too early you're going to be criticised for leaving so much money on the table," he adds

Could it happen again? "Bubbles are very pernicious things," says David DeMuro. "I can't guarantee what the next bubble is going to look like, or what is going to be the next trigger for a major contraction in the markets, other than to assure you that there'll be something."

Bob Diamond is more optimistic: "I don't think you can ever say never. But I'm confident that the lessons have been learnt."

Let's hope he's right. Because our future economic prosperity may depend upon it.



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