So why did this happen to Lehman and not somebody else?

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You can find lots of people arguing now that CEO Dick Fuld‘s hubris led to the collapse of Lehman Brothers. It may well have been a factor, but the flip side is that Dick Fuld’s hubris was instrumental in resurrecting Lehman in 1994 from its long dormancy as a subsidiary of American Express. As Roddy Boyd and Allan Sloan put it in the pages of Fortune back in July:

This isn’t an old-line firm molded by storied Wall Street patricians. It’s a 14-year-old firm that’s been molded by 14-year chief executive Fuld.

So why did Lehman fail? Well, start with the assumption that Wall Street as a whole is in need of a big shrink after the lending bubble of the past few years, and financial shrinkages generally don’t occur in anything like an orderly fashion. Lehman got caught out because:

1) It’s essentially a 14-year-old firm, and decidely not one of the global Big Three of Goldman Sachs, Morgan Stanley and Merrill Lynch. With Morgan and Merrill struggling a bit in recent years, the apparent smooth sailing at Lehman did begin to make it look superficially like Goldman Jr. But–like Bear Stearns–it was still a lot smaller, less diversified and thus more vulnerable than any of the Big Three. (And they in turn are more vulnerable than big universal banks like Citi, JP Morgan and BofA.)

2) As Boyd and Sloan argued in their June article, Lehman made lots of outright investments in real estate. The firm had a lot of real estate expertise and its investments may have been smarter than some of the stuff that latecomers like Citi and Merrill were doing in mortgage CDOs, but the deals were very big relative to the size of the firm and thus more damaging when they turned sour.

3) Its executives thought the crisis would be short. From Floyd Norris’s NYT column Thursday:

“Our liquidity position is stronger than ever,” said Christopher O’Meara, then the chief financial officer, just a year ago. “Looking forward, our outlook is cautiously optimistic and our stance is constructive and opportunistic. Looking at past credit corrections, the capital markets have proven to be resilient with previous dislocations lasting three months on average.”

If this mess had lasted only three months, Lehman’s stance of holding firm and not doing huge writeoffs early would have seemed smart. Of course, it seems a little dumb to have thought this would last only three months. Maybe it was …

4) … hubris. You didn’t think I was going to leave that out completely, did you?