The Brief: Law School News and Events

Gatto Offers Insider's View of Fall of Lehman Brothers
Joe Gatto L'84, WG'84 provides inside perspective on fall of Lehman Brothers.  
Joe Gatto L'84, WG'84 provides inside perspective on fall of Lehman Brothers.

In 2005, after 21 years in the consumer products and mergers & acquisitions practices of Goldman, Sachs & Co., Joseph Gatto L'84, WG'84 received a call from a headhunter at a rapidly growing financial services firm on Wall Street. Top management targeted him to help lead their investment banking division. It was an exciting opportunity, and Gatto took it.

Gatto's new employer was Lehman Brothers: the firm that would, three years later, file the largest bankruptcy in U.S. history. Soon after, Barclays PLC acquired Lehman's North American business.

His time at Lehman Brothers allowed him to "witness, from center stage, the worst financial crisis in 75 years," said Gatto, who now works at Barclays as chairman of Investment Banking for the Americas.

At the Law and Entrepreneurship Lecture sponsored by the Institute for Law and Economics last spring, Gatto described how the crisis unfolded from his perspective, and offered sobering insights into the factors that brought it about.

When he arrived at Lehman Brothers, Gatto said, the company as a whole was expanding its global network and rapidly growing in revenue, even as its workers became increasingly aware that the market and Lehman's own holdings were overheated with lower-rated asset-backed securities, such as bundles of mortgages unlikely to be paid.

In Lehman's highest ranks, Gatto recalled, executives and investment bankers "clashed over the acceptable level of risk to take," with the president of the company pushing for riskier acquisitions and the associates wary of them. The process of marking asset values had become more subjective than Lehman's board and top management realized, said Gatto.

"When the business environment feels too good to be true, you better start contingency-planning," said Gatto. "There was no contingency plan whatsoever for Lehman's bankruptcy."

Even as late as 2007, "there was no real sense of crisis at Lehman," according to Gatto. But with the demise of Bear Sterns in early 2008 which highlighted both a shoddy asset base and liquidity risks, investors began losing confidence in major financial firms. Lehman reported what Gatto called a "devastating" loss of $5 per share in the second quarter of 2008.

"By now, the world knew that Lehman had serious balance sheet problems," he said. Gatto and other managers held frequent meetings to reassure employees and investors about the firm's future and focused on closing transactions, while Lehman's executives sought a buyer for the company.

From the past few years, Gatto said, he's gleaned some difficult wisdom about navigating the "present financial era of rapid-fire turbulence and imbalance."

Teamwork and strong market intelligence are crucial, according to Gatto. Ideological bents, such as the belief that the market "basically regulates itself," are destructive. And, he warned, "there's a fine line between boldness and recklessness."