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By Lawrence G McDonald, the hard-driving Lehman Brothers trading Vice President, and the #1 New York Times bestselling author Patrick Robinson, the man who wrote Lone Survivor for the Navy SEAL Marcus Luttrell.

Direct from the heart of Lehman Brothers, the bank that smashed the world economy, comes an incredible blow-the-lid-off account of the greed, the misjudgements, the dreadful stupidity of men who should have known better. Revealed by a man who was there, the eyewitness, Larry McDonald. Anyone, laymen or expert, can understand the crucible of a Wall Street trading floor by reading “A Colossal Failure Of Common Sense.” This is a black box of secrets. And now Larry McDonald rips the lid off.

Author’s Note 

America has two distinct groups of people; Wall Street and Main Street - the financial plumbers, and those who have only the most basic notion of the ebb and flow of economics. Wall Street, with the
collapse of Lehman Brothers in 2008, was the epicenter of the worldwide financial crisis that brought the global economy to its knees.

My objective in writing “A Colossal Failure of Common Sense” was twofold. First, to show Main Street how markets really work. Second, to provide a crystal clear explanation of why the fabled merchant bank, Lehman Brothers, met with such a swift and brutal end. The lessons are important, not just to warn of such disasters in the future. But ultimately to provide a beacon, to help us serve Main Street better.

   

A Colossal Failure Of Common Sense - Jacket Copy

They stand alone – the zillion-dollar questions of the financial crisis : What the hell happened at Lehman Brothers? And why was it allowed to fail, with aftershocks that rocked the global economy? In this news-making, often astonishing book, a former Vice-President of Lehman gives us the straight answers – right from-the-belly-of-the-beast. Larry McDonald is the first senior Wall Street trader ever to write such an exposé – revealing at last the culture and unspoken rules of the game like no book has ever achieved before.

“A Colossal Failure of Common Sense” is a human story of McDonald’s rise from a Massachusetts project, to the New York headquarters of Lehman Brothers, home to one of the toughest trading floors in the world. He posed as a pizza delivery man to get past receptionists, to score interviews at brokerage firms. He peddled frozen pork chops, door to door, to hone his sales skills, desperate to realize his dream of working on Wall Street.

We get a close-up view of the other participants in the Lehman collapse, those who saw it coming with a helpless, angry certainty. We meet the Brahmins at the top, whose reckless, pedal-to-the-floor addiction to growth finally demolished the nation’s oldest investment bank. The Wall Street we encounter is a ruthless place, where brilliance, arrogance, ambition, greed, and all the human traits, combine in a potent mix that sometimes fuels prosperity, but sometimes destroys it.

McDonald’s gripping story of the firm’s death spiral is a modern-day thriller, studded with incredible, insider revelations no one else knows, or would dare reveal.

The collapse of Lehman Brothers was no surprise and didn’t have to happen. In fact, CEO Richard Fuld and President Joe Gregory were confronted with warnings on three occasions — starting as far back as 2005 — that the property market, on which they were betting the ranch, was teetering toward collapse. Fuld and Gregory turned their backs each time.

McDonald paints a vivid picture of life inside Lehman in “A Colossal Failure Of Common Sense,” where the isolated and reclusive chief executive ‘reigned’ in his sumptuous 31st floor office, accessible only by private elevator. From this Ivory Tower so much of the firm’s brightest talent was driven out of the door. The full significance of the Lehman bankruptcy remains to be measured. But this much is certain: it was a devastating blow to both America and the world beyond. And it need not have happened. This is the story of why it did.

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By Lawrence G. McDonald
larry@thepangeafund.com

The 21st century, and the recent implosion of the world’s economy has brought the emergence of a new asset class called managed futures.

This new breed of asset has outperformed the stock market by a staggering margin in recent years, even through the economic storm that gripped the markets after Lehman Brothers went bankrupt.

A managed futures account is like a mutual fund, except your money is invested in futures contracts instead of stocks and bonds. The managed futures fund can own contracts to own stocks, or commodities or government bonds and currencies. The fund can go long or short, that’s for and against the stock market, the bond market, commodities or currencies (without the compliance to the up tick rule.)

Unlike most mutual funds, which are restricted to investing in one or two assets, managed futures are extremely flexible, and can change asset allocation on a daily or weekly basis, if the portfolio manager
chooses. Imagine having your own personal expert with many, many years of experience choosing when to invest in the four leading asset classes (stocks, bonds, commodities, or currencies.) This is the
essence of investing in a professionally managed futures fund. Having every asset at your disposal.

A closer look at managed futures funds is worth your time, because they have the ability to earn money in any economic climate. In recent years, these little-known investment shops have undergone a surge in
popularity, as savvy investors have seen the advantage of their high-liquidity, minimal volatility and crystal clear transparency.

But what exactly are these managed futures funds, and how do they work?
 They operate in a very simple way. The money is professionally managed in the futures market, and traded on government regulated
exchanges. For example, the New York Mercantile Exchange (NYMEX) or the Chicago Mercantile Exchange (CME) are some of the most liquid markets around. Professional money managers known as Commodity Trading Advisors (CTA) look after managed futures accounts, and decide on
their positions based on expected profit potential. A managed futures account typically invests in commodities, currencies, equity indices, and fixed income treasury futures.

8 Reasons to own Managed Futures

1) Daily Liquidity.

Your money is never trapped. The major advantage to investing in managed futures this way is the daily liquidity that some funds provide. Manhattan based Pangea Capital Management LLC, gives their
clients daily liquidity. You can have the portfolio manager unwind your account and give you the cash in 24 hours.

You can pull your money out on your timetable, which is a massive advantage over most hedge funds and many mutual funds in today’s volatile markets. It could take a month to unwind a billion dollar
leveraged loan fund or a private equity fund, but even a $1 billion managed futures account can be liquidated in a day!

So many professionally managed accounts these days have come to represent the roach motel. Investors check in but it’s difficult to check out. Private equity funds, leveraged loan funds, credit
derivative funds, mortgage backed securities funds, municipal bond funds and even some long / short equity hedge funds have trapped thousands of investors.

Beware of high “gates.” Countless money-losing hedge funds curtailed investor withdrawals at the beginning of 2009 as redemption requests piled up. But “raising the gates,” as it’s known in the industry, can cost investors serious money. In a normal hedge fund or private equity fund, fire-sales can drive prices down wildly because the market isn’t as deep as the futures market. That market is deeper than a bottomless pit, because the position doesn’t have to be sold to anyone. This makes the futures exchanges the deepest and most liquid in the world.

2) Profit in any political or economic environment.

The beauty of managed futures is that portfolio managers have the flexibility to position assets for profit, independent of the direction of the economy. They can take advantage of price trends, by purchasing futures positions in anticipation of a rising market, or by selling futures positions if they anticipate a falling market. During inflationary trends, futures provide an opportunity to profit by
buying commodity futures or selling dollar futures.

This potential to profit from a variety of economic environments makes an investment in managed futures particularly attractive to some investors.

There are dozens of developed countries worldwide. Some economies are weaker than others at any given point in time. If one currency is strong, another will be weak. If one commodity tanks, another will
rise. The whole push-and-pull nature always gives the beady-eyed fund manager an opportunity to score base hits. Inning after inning.

Yet, more than ever, politics is on the minds of most investors today. The United States is clearly making a sharp left turn, and some investors are running for cover. The House, Senate and the Obama
administration may pass legislation which may be harmful to certain industries and to stocks as a whole. With your money in managed futures you can sleep at night and not care about any political
implications.

3) The futures market is not correlated to the stock market.

This is perhaps the most attractive quality. With the current stock market up some 60% from the lows of the year it makes more sense than ever to allocate investable funds to managed futures. During a stock
market crash, the risk reward from a long perspective is terrible. The lower tide brings down all ships. Even in a relatively flat zone with low volatility, equities can bring in small returns, if any. But
futures pull against each other. It is almost an independent force, a market unto itself. Again, with the four main asset classes at their disposal, (commodities, government bonds, stocks and currencies) fund
managers can constantly trade something that is rising in price. A bull always lurks in the futures market.

4) Technical’s, Not Fundamentals, Dictate Returns.

A portfolio manager in a managed futures fund is like a soldier of fortune, quite literally. He looks for established trends, and this trend becomes his guiding light. He doesn’t have to worry about
company specific fraud like an Enron or a Lehman Brothers. He relies on quantitative models and his market experience. That’s all. Many mutual funds and hedge funds are exposed to company specific risks.

All the research in the world can’t uncover a well constructed fraud scheme. Just look at Bill Miller, the highly respected manager of the Legg Mason Value Trust, the only mutual fund to outperform the S&P 500 for 15 consecutive years—plunged 55 percent in 2008 after investing in a graveyard of financials, all with questionable accounting practices, including Bear Stearns, AIG, Countrywide and Freddie Mac. This type of investment disaster does not effect the futures markets.

5) No counter-party or credit risk

Numerous hedge funds got caught with billions of dollars trapped at Lehman Brothers when they did the unthinkable and filed bankruptcy. Over $35 billion has been trapped since September 2008. It will be
years before they see that money again. Client accounts at Lehman Brothers were only protected up to $500,000 under SIPC insurance. AIG almost brought down Goldman Sachs. Our financial world today is more interconnected than ever and counterparty risks never greater.

Remember, a managed futures portfolio manager (CTA) buys and sells futures contracts on the NYMEX or CME. He doesn’t own stocks, bonds or mortgaged backed securities that have to be stored by a prime
broker. There is little, if any, counterparty risk in owning managed futures. I’ve never heard of a stock or commodity exchange going out of business, have you?

6) Opportunity to balance portfolio volatility risk.

This balancing of the portfolio is possible because of the low to slightly negative correlation of managed futures with equities and bonds. A major tenet of Modern Portfolio Theory, developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset categories with low to negative correlations. In other words, adding a managed futures fund to your portfolio of funds and investments will most likely lower volatility. In 2008, while stocks slumped 37%, managed futures funds gained an average of 10.3%, according to the
Credit Suisse/Tremont Index.

7) Participation in global market investments.

Managed futures accounts can participate in over 50 different markets worldwide, including agricultural and tropical products, stock indices, precious and nonferrous metals, currencies, and energy products. Portfolio managers have many opportunities for profit potential and risk reduction among a broad array of non-correlated markets.

Daily Transparency

Ever since news of Bernie Madoff hit the global newswires, investors have been more cautious and diligent in choosing asset managers. More questions than ever are being asked to money managers at hedge funds and mutual funds. But with managed futures funds, clients are offered daily transparency and daily liquidity, with some funds posting their net asset values on Bloomberg, making sure investors are never in the dark, and never locked in behind the high gates of Wall Street.

Investing in managed futures is becoming the future of investing.