February 2, 2010

What Can Failure Possibly Teach Us?

By Gerhard Gschwandtner

I just finished reading A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. Authors Lawrence G. McDonald and Patrick Robinson portray Lehman’s CEO as obsessed with growth and risk taking while ignoring the warning signs of a collapsing mortgage market. The company’s aging board of directors seemed happy with the aggressive growth and did not object to leveraging the company’s assets by a factor of 40. Lehman employed whip-smart analysts who were fully aware that the company was headed toward a brick wall. In essence, the company held the keys to survival and success: the knowledge to take corrective action and ensure survival. The Lehman Brothers $660 billion bankruptcy became the biggest corporate failure in American history. More than 25,000 people lost their jobs.

Who is to blame?
When it comes to failure, we tend to assign blame to the few at the top. We blame human emotions – greed, blind ambi-tion, or hubris. The only problem is that Lehman was not the only domino to fall hard. As we zoom from the failure of one investment house back to the global economy, we know that the entire global financial system failed. What caused this immense failure that, in turn, caused a worldwide recession, and how do we move beyond this experience?

We allowed banks to start gambling
Some people say that it began when President Clinton signed into law the bill that repealed the Glass-Steagall Act. The 1933 law was written expressly to keep a wall between commercial banks and investment houses. As a result of this change, investment banks got more creative with riskier financial instruments that created a string of successes – without visible penalties. Eager to extend their success, investment banks cranked out financial instruments that offered odds that, by  comparison, made gambling houses look more conservative than the Vatican.

Success can be intoxicating
A similar phenomenon can be observed in the field of engineering. Once innovation shows early success, designers begin to stretch the technology further and further. It is only a matter of time before a new crop of emboldened engineers begins to gamble by neglecting fundamental principles.

The early space shuttles were over-engineered. Over time, a few tested quality-control principles were ignored, as in the case of the shedding tiles in the Columbia’s tank insulation. Failure tends to elicit a twinge of shame that can inhibit future action and recovery.

Don’t place blame, don’t dwell on shame; get back in the game
Barack Obama once addressed the subject of failure and recovery with this insight: “Making your mark on the world is hard. If it were easy, everybody would do it. But it’s not. It takes patience, it takes commitment, and it comes with plenty of failure along the way. The real test is not whether you avoid this failure, because you won’t. It’s whether you let it harden or shame you into inaction, or whether you learn from it; whether you choose to persevere.”

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