Lehman Brothers—Turning a Crisis into a Catalyst
40 years ago, I started to work on Wall Street (literally—110 Wall Street) and eventually became an analyst of financial stocks—among my coverage list—Shearson, Lehman and other investment banks. 25 years ago, I became Head of Equities for Lehman in Europe—my last interview for the job was with the now infamous Dick Fuld. Ten years ago, under Fuld, the firm collapsed, nearly bringing down the global financial system with it. It was a week few will forget, but it also has personal resonance because on that week I founded ClearlySo, an “impact investment bank”. It’s ironic and somehow chilling that it was born just as a company I followed, worked at, sometimes loved and frequently loathed went into meltdown, but perhaps poetically appropriate. Impact investing is promoted by many as a saviour of this same system, but after decades of talk and billions in subsidy, it remains small (roughly 0.2% of global managed assets) and certainly has not changed the world. What is impact really? Is it good or bad? Why should we care? All companies have an impact—some good, some bad—most generate both. Economists call these externalities; what organisations generate as a by-product of what they primarily seek to do. Coca Cola does not intend for its plastic bottles to clutter our oceans. BASF would rather not pollute our air, as it manufactures chemicals. Lehman did not set out to destroy the financial system. But all three generated negative externalities, and these can be very costly. The US GAO estimates that the cost of the financial crisis was $22 trillion (by comparison, US GDP in 2016 was $18.6 trillion). Negative externalities can be expensive and society (and our descendants) bear the cost while Dick Fuld and his like nearly always keep what they earn (he was paid $484m in his 15 years as CEO). The disconnection between when money is earned and when the cost is borne, and the fact that there is no agency for the millions who suffer the consequences of these negative externalities is the crux of the problem. This issue cries out for a solution. Impact Investment hints at one. Some firms generate positive externalities—free “gifts” to society. Some past impact clients serve as useful examples. IESO provides online mental health services, reducing some of the strain on the NHS—it is expanding in the USA as well. Bulb Energy, the fast-growing renewable energy provider, helps the UK meet its climate change obligations. Justgiving helps reduce the cost to charities in many countries for fundraising and brings new money into the charitable sector. I could name hundreds more. Governments have sensed that Impact Investment may help address its gaping fiscal hole and has thrown trinkets its way—subsidies, tax credits, grants, etc. Whilst some good has been achieved, in my view much money has been wasted, the wrong people have benefitted from generous tax credits and we still have not “moved the dial”. Time is running out and the need for a more radical solution is obvious. Our proposal is called “fiscal tilting”. We tax companies generating negative externalities and simply transfer the sums generated by these taxes as credits to those generating positive externalities. In fact, we do some of the former already (and need to do more), but not the latter, which is short-sighted. To ensure the system is fiscally neutral, or even a positive contributor to the Exchequer or any country’s treasury, I propose the credits in one year are only equal to the money raised in the prior year—thus creating a one-year boost in tax revenues. These will not only generate money, but raise the cost of negative externalities, encouraging companies to do less harm to society. But critically, and this is the key, it will make those firms generating positive externalities more profitable, incentivizing them to do more good. As a result, I expect a further windfall for the government as its costs fall for both reasons. And there is more. If government signals there is more “tilting” to come, capital markets will anticipate this; driving up the cost of capital for harmful firms and reducing it for those generating positive externalities. Impact investment, and the logic behind it will certainly not solve all our problems but addressing the externalities that lie at the root of this movement will make a huge difference in improving our lives and those of our children. Hopefully the shock of Lehman and the financial crisis it precipitated can become the catalyst for positive change that addresses issues its bankruptcy exposed.
Image source: Flickr/Creative Commons
 Based on ClearlySo calculations and PwC https://www.pwc.com/gx/en/asset-management/asset-management-insights/assets/am-insights-june-2017.pdf and GIIN https://thegiin.org/assets/2018_GIIN_AnnualSurvey_ExecutiveSummary_webfile.pdf reports