Understanding how the leaders of three failed investment banks mismanaged early warning signals during the 2008 credit crisis

The frequency and scale of human-caused crises are becoming increasingly common-place with devastating consequences. The 2008 credit crisis highlighted the broad-scale global destruction that can result from crises in the financial services sector. This multi-case study explored how senior executives of three investment banks could have avoided, or mitigated the effects of the crisis through better identification and management of system-wide early warning signals, a core component of effective crisis leadership. Crisis leadership research has demonstrated if leaders identify and take action on early warning indicators, they can make a significant impact in either averting or mitigating crises. This study made use of a system's framework of crisis management developed by Pearson and Claire (1998) that examines crises from three key perspectives; psychological, social-political and technological-structural.;Managerial implications of these research findings as well as future research directions are discussed.;Research results indicated that crisis leadership was largely non-existent in the three firms. Most efforts were ad-hoc and tactical and ignored the significant interdependencies of many features of the crisis. Leader's initially focused on the technological-structural aspects of the crisis, even though social-political and psychological aspects played increasingly important roles as the crisis progressed. Leaders had difficulty in managing the social-political and psychological aspects of the crisis such as trust and fear due to the more abstruse features of those issues. In addition, leaders' historical success in their roles made them overly confident in their abilities to manage the crisis; they routinely overestimated their abilities and underestimated the harmful nature of the crisis. Finally, leaders across all three organizations were isolated from many of the complex aspects of their businesses and did not fully understand how their business models and products contributed to the vulnerability of the broader financial system. Executive decision making during the crisis was further constrained by weak leadership teams and board governance as leaders' flawed assumptions and judgment weren't fully challenged.