Lessons Learned from Lehman
Five years ago today, my phone stopped ringing. That day:
- Three of our clients rose from relative obscurity to household names as they had accurately bet the farm that this would happen.
- Another one of our clients was ecstatic that he had cashed out at the top, but was scared that he wouldn’t be able to get the money out of the bank.
- Most of our clients froze. They didn’t know what to do. This was uncharted territory for business executives.
- Our consulting business died.
In mid-2008, Lehman Brothers had become a client. They had significant joint venture land investments all over the country, and had come to the realization that they better start paying closer attention to these investments. I gave a market overview presentation in their conference room that was standing room only with MBAs from top schools – most of whom were born after I graduated from college. Their team was insanely smart, but very few of them had lived through a real estate downturn and had never envisioned that their portfolio would plunge in value. Most still believed it was temporary because that is what their joint venture partners and a few of their consultants had been telling them.
On September 15, 2008, the housing market was already in a huge downturn. The GSEs had just been taken over by the Federal government and Riverside-San Bernardino home prices were already down 29% and we were projecting they would fall a total of 55% and bottom in 2011. The last thing the housing market needed was a plunge in the stock market, but that is what it got.
Then the phone started ringing. Several of our research subscribers cancelled their subscriptions as corporations mandated huge expense cuts. Others cancelled consulting assignments as they decided they would not be buying property for the foreseeable future. Others wanted to know which banks would be disposing of land when they got taken over – an opportunity that ended up being much smaller and certainly much more delayed than all of us envisioned at the time. It was a very difficult time.
In January 2009, I finally acquiesced and laid off eight staff members. Having watched many of my home builder clients endure round after round of layoffs, I knew that I wanted to cut deep. It wasn’t fair to our best team members to let the company’s balance sheet erode while we tried to keep everyone busy. I knew we needed to focus and work hard, which is very difficult to do when you are worried about the next round of layoffs. I told them all that our layoffs were done, and we were going to focus on making the most of whatever opportunities we could identify. In retrospect, it was the right move although I should have been far more generous with severance pay (note to self: do what feels right and not what people say is the rule of thumb). At the end of the day, I hired two of them back.
Another reason it was the right move is that our skill set needed to change. I believed that our business would indeed grow again, but our clients would be different. We needed people who were not just great market researchers, but who were also financially astute. Our projects that required marketing expertise were not going to return anytime soon. Banks and distressed investors would be our new clients, and they wanted to know the bottom line numbers as quickly as possible and didn’t care what land plan or floor plan might maximize value. Also, we could no longer afford the luxury of having less experienced employees fill out our templates. We were going to have to fill them out ourselves.
The lesson for me is that collapses like Lehman Brothers come with a lot of pain, but also create a lot of opportunity. I watched smart people make a lot of money, both before and after the collapse. I was able to hire some great people whom I never could have hired otherwise. Our team learned a lot, and nothing is more satisfying at work than to start the day knowing you will learn something valuable. I learned a lot about myself as a leader, and gained some valuable lessons for the future. As for the housing market? U.S. home prices are rising, construction projects are restarting, and sales are hot in many markets, particularly Texas. There’s a smaller, more subtle, sign of the recovery, too: Our phones are ringing off the hook again.