Lawrence G. McDonald, author of
“A Colossal Failure of Common Sense.”

A year ago it would have been hard to imagine a book about the Federal Reserve and Treasury Department making it onto people’s must-read summer reading lists. But the financial calamities of last autumn put the global economy on the brink of disaster and led to continuing fiscal woes. Understanding what happened has become vitally important not just for bankers and economists, but for everyone affected by the fallout, which means … well, just about everyone.

Alan Blinder, a Princeton economist and former Fed vice chairman: “People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rulebook out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not? After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.”

Although an enormous amount of recent attention has been understandably focused on why the government let Lehman Brothers go under, an equal amount of attention might understandably be focused on why Lehman — and other firms like Bear Stearns and A.I.G. — were ever allowed to engage in the sort of reckless, illogical, self-destructive gambling that turned them from Wall Street behemoths into combustible houses of cards in the first place.

Why, in an increasingly interconnected and globalized world where financial woes can spread virally like swine flu, was there so little regulation of derivatives, the complex financial instruments that the financier Felix Rohatyn once described as “financial hydrogen bombs”? Why was there so little oversight of the rating agencies that drastically underrated the risk of such flammable, infectious products? Why did the top management of these companies overleverage their firms, why did they willfully ignore the warnings of experts, and why did they fail to take quick, corrective action when the dangers their companies faced became self-evident?

Such questions are all raised and italicized by “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers” by Lawrence G. McDonald, a former vice president of that firm, with an assist from the writer Patrick Robinson. Mr. McDonald approaches the story not as a journalist but as a former employee, a member of a group of dissidents who believed that Richard S. Fuld Jr., the company’s chairman and chief executive, and its president, Joseph M. Gregory, were leading Lehman off a cliff.

Mr. Fuld and Mr. Gregory, Mr. McDonald contends, ignored the warnings of three of the company’s “cleverest financial brains”: “Mike Gelband, our global head of fixed income, Alex Kirk, global head of distressed trading research and sales, and Larry McCarthy, head of distressed-bond trading.”

“Each and every one of them laid it out, from way back in 2005,” Mr. McDonald writes, “that the real estate market was living on borrowed time and that Lehman Brothers was headed directly for the biggest subprime iceberg ever seen, and with the wrong men on the bridge. Dick and Joe turned their backs all three times. It was probably the worst triple since St. Peter denied Christ.”

Mr. McDonald depicts Mr. Fuld and Mr. Gregory as out of touch and in denial: arrogant, reckless, eager to embrace “risk, more risk, and if necessary bigger risks” in pursuit of short-term profits, willing to borrow more and more money (on the way to leveraging the firm to “44 times our value”) in order to buy commercial and residential real estate at the top of the market, even though one of his lieutenants had warned in 2005 that the housing market was on steroids and headed for serious trouble.

At times Mr. McDonald’s rage or Mr. Robinson’s penchant for melodrama leads to some hyperbolic writing. Mr. Fuld, for instance, comes across as a sort of Lord Voldemort, a “strange wraithlike presence,” an “oddball demigod who ruled everyone’s lives.”

Over all, however, Mr. McDonald’s book gives the reader a visceral sense of what it was like to work at Lehman Brothers and the fateful decisions and events that led to the company’s death spiral — decisions that turned the once-proud firm into a grim illustration, in the words of one of the author’s colleagues, of the “colossal failure of common sense.”