Unlocking Real Value Blog

Book Review – The Devil’s Casino (Re: Lehman Brothers)

I just finished reading The Devil’s Casino: Friendship, Betrayal, and the High Stakes Game Played Inside Lehman Brothers by Vicky Ward. I bought the book awhile ago, but frankly needed a break from reading about the financial crisis. But I’m glad that I finally read it, if only to remind myself of the lessons that I learned from the crisis and how such lessons remain relevant.

The book was enjoyable, and a quick read. Like many of the books on the crisis, it was filled with gossip and stories about the main characters involved. While this type of stuff is always fun to read, I do take the gossipy parts with a grain of salt knowing that the truth probably lies somewhere in the middle….

I always ask myself when I read books if there are lessons that I can use in my day-to-day business – and there were here.

I have three main takeaways from the book:

1. Don’t let success breed arrogance – I hadn’t realized the extent to which Lehman had successfully navigated the Long Term Capital Management (LTCM) crisis. Lehman emerged from that crisis better than most of its rivals, but this success gave them a feeling on infallibility which probably led to their ultimate demise (by over-leveraging and over-committing to real estate and other illiquid assets). Success once does not guarantee it again.

2. Always hire on merit not feelings – Though certainly not unique in this or any other industry, Lehman made countless personnel decisionsthat were seemingly not made on merit – and most of these decisions turned out poorly. We all have egos, but the more we let them interfere with rational decisions, the worse off we will be. Always try to take a step back before making important personnel decisions.

3. Thoroughly understand what you are getting yourself into before you do it – It still amazes me how companies such as Lehman amass huge exposures to instruments that they really don’t understand. The derivatives world has gotten so complicated and in the case of Lehman at least, the sophistication of its people and its ability to understand derivatives, leverage and risk did not keep up with the instruments themselves. In many senses, Lehman is the classic story of getting in over one’s head – and not realizing it until it is too late. In fact, I’m not sure if many of the Lehman principals even understand today why the firm failed. The lesson here is that you should stick to what you do well and only expand after a thorough and unbiased review.

Gossip aside, it seems apparent to me that ego and mismanagement above all else destroyed Lehman Brothers. Reading books such as this are good reminders of what not to do and how to keep yourself grounded and on track. And they provide a little entertainment as well.

Leave a Reply