Lehman in Context: A Historical Perspective

Though it was a year ago this week that Lehman Brothers went down, the challenge to leadership sparked by the company’s fall lives on today.

Remember those long autumn days of 2008? We were glued to the Internet, checking the markets and reading the news flashes, and so we watched as banks collapsed, stock markets plummeted, and around kitchen tables all over the world, families stood helpless as their retirement accounts, house values, and hopes for the future evaporated. It was an astounding moment, rife with great danger and great possibility.

To see that possibility, we need only to look to our past. Widespread recessions are not new, of course. The United States, like most other industrial countries, has been buffeted by business cycles in different forms and to different degrees since the late 18th century. The last 30 years have witnessed at least four recessions, one of which, in the early 1980s, was as severe as the current downturn. And as powerful as the events of the past twelve months have been, they are not the first time that we have confronted mind-boggling, high-stakes change. The end of the Civil War, the onset of the Great Depression, the close of World War II — in each of these moments, a great crisis presented not only big challenges, but also opportunities to make the existing system better, economically, politically, and morally. And individual men and women did just that, coming forward with courageous, innovative solutions. That opportunity exists today for our leadership.

Because as it stands now, there is no shortage of people and institutions to look to in trying to understand what caused this crisis: banking executives, ratings agencies, mortgage brokers, boards of directors, and government officials — including those in power who unraveled longstanding regulations that had served to stabilize the financial capitalism. In the years to come, as they look to explain the events of 2008, historians will look to a singular failure of leadership on the part of a range of actors who, over and over again, abdicated their fiduciary responsibility. For example, in the months leading to the financial crisis, many banking managers, including those at Lehman, approved their firms’ balance sheets, effectively giving their word to shareholders, employees, and countless investors that their respective companies’ risk profiles were sound and that their strategies were in the best interests of those whose assets they held in trust. At the same time, these executives awarded themselves — and their boards approved — large increases in compensation.

In past crises, individual leaders from different sectors stepped up to the plate to seize this opportunity before the window for such change closed. Remember Abraham Lincoln in the waning days of the Civil War; he used that pivot point to abolish slavery and guarantee citizenship and the right to vote to African-Americans. Recall Franklin Roosevelt’s administration using the banking crisis of the early 1930s to pass a host of landmark legislation to create the SEC and regulate securities markets — legislation that served the world’s financial system remarkably well for fifty years. In the last years of World War II, Roosevelt and later Harry Truman worked to create a stable, prosperous postwar order, an order that included the Bretton Woods agreements and the creation of the Council of Economic Advisors.

Leaders from all walks of life today must learn from history and seize the possibilities for creating lasting, positive change that benefits us all. In the autumn of 2008, not long after the fall of Lehman, the American people elected Barack Obama on a wave of collective idealism that yearned for precisely this kind of responsibility and accountability. The 44th president understands the importance of this moment. Aspects of the financial reform package his administration has put before Congress attempt to create more transparency and stability in the capital markets, echoing the objectives of Roosevelt’s legislation in 1934 and 1935. But the proposed reforms still leave many important stones unturned, such as complex derivatives, which would not be subject to exchange trading under Obama’s plan. And even what the president and his team have proposed is stalled on Capitol Hill — it is still up to other leaders to turn his plans into legislation.

Can political officials, business leaders, and individual citizens learn from our past and find the perspective and will to make something good out of the crisis that Lehman’s bankruptcy precipitated?

Twelve months later, the clock is ticking.

Nancy Koehn is an authority on entrepreneurial history and is the James E. Robison Professor of Business Administration at Harvard Business School, where her research focuses on entrepreneurship and leadership. She is the editor of the forthcoming book The Story of American Business: From the Pages of the New York Times, to be published by Harvard Business Press in October 2009.