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Lehman Brothers and Risk Management
This report examines the Lehman Brothers collapse and discusses issues of investment bank risk management. The report considers factors which contributed to Lehman's failure, from financial engineering as practiced by CEO Richard Fuld and other executives to lax auditing by Ernst & Young to the influence of an industry characterized by excessive risk-taking. In particular, the report focuses on the presence of inherent conflicts of interest, as well as the existence of multiple instances of moral hazards and principal-agency conflicts.
This report discusses the findings of the Lehman Brothers bankruptcy examiner and considers other analyses as well. A survey of the literature shows the investment banking industry has long been vulnerable to the risk management challenges that led to Lehman Brothers' bankruptcy. Motivated by greed and enabled by lax government regulation and ineffective corporate governance, Lehman gambled heavily on the performance of the subprime mortgage industry. The company, dominated by Fuld, condoned unacceptable levels of risk-taking and promoted questionable business practices. Like many of its competitors, Lehman operated with compensation programs that conflicted with risk management objectives of the company.
Nowhere was this conflict more evident than in the failure of investment banking powerhouse Lehman Brothers. Skewed compensation packages provided the motive, while lax accounting and government oversight created the opportunity for Lehman to self-destruct.
Discussion
"In this way, unbeknownst to the investing public, ratings agencies, Government regulators, and Lehman's Board of Directors, Lehman reverse engineered the firm's net leverage ratio for public consumption" (as quoted in Wall Street Journal, 2010). So goes the damning report issued by U.S. bankruptcy-court examiner Anton Valukas blaming Lehman Brothers senior executives and auditor Ernst & Young for their roles in precipitating the largest bankruptcy in U.S. history...
This report argues that the company's downfall was equally the result of ethical failures by CEO Richard Fuld and Lehman senior executives. Motivated by greed and arrogance, Lehman made a series of disastrous business moves into the subprime mortgage industry, gambles that were compounded by overuse of leverage.
Analysis shows that an industry-wide climate condoning excessive risk-taking existed. Lehman's approach to overuse of leverage was hardly unique among Wall Street investment banks. At the time of Lehman's failure when it scaled its leverage up from the industry standard 20 to 1 to 30 to 1, Morgan Stanley's leverage was also 30.0 times, Goldman Sachs was 24.3 times and Merrill Lynch's was 44.1 times (Hutchinson, 2008).
As its financial condition deteriorated, Lehman tried to prevent disaster by providing misleading information to the investment community. Lehman executives' financial misconduct was aided and abetted by questionable behavior on the part of auditor Ernst & Young, which issued an unqualified opinion of Lehman's financial statements.
In developments that stunned the financial world, Lehman Brothers was shown to have lied about its financial condition to cover its impending collapse. Ultimately, bankruptcy proceedings and lawsuits were the final chapter in the 158-year history of the then fourth largest U.S. investment bank. Lehman's collapse was widely seen as having intensified the 2008 financial crisis, contributing to the erosion of nearly $10 trillion in market capitalization from global markets in October 2008.
Lehman Brothers had its humble beginnings in 1850 in Montgomery, AL, founded by German immigrants Henry, Emmanuel, and Mayer Lehman. The firm prospered in the following decades, growing into an international powerhouse. Lehman…
Lehman's purpose in buying these firms was to facilitate repackaging mortgage loans into bonds and selling them, which appeared to be a sound strategy as long as the housing market continued to strengthen. The company was able to report record earnings for the years 2005 through 2007. The eventual collapse of the housing market though would reveal that Lehman's apparent success was built on wobbly mortgages that would never be repaid (Oliver and Goodwin, 2010).
As of February 2008 Lehman was worth $42 billion with total assets of $639 billion. By September 15, 2008 the company had filed for Chapter 11 bankruptcy protection, listing debts of $613 billion. The focus of blame, investigations, and lawsuits fell on Fuld, who had directed the Lehman Brothers debacle at every stage.
Fuld, at the center of controversy, was responsible for building the Lehman Brothers corporate culture. According to Lehman Brothers' London former head of corporate communications Andrew Gowers, Fuld was said to
Lehman Brothers Failure On September 15, 2008, Lehman Brothers, the fourth largest U.S. investment bank at the time, filed for bankruptcy. At the time of its collapse, Lehman Brothers had $639 billion in assets, and $619 billion in debt, making it the largest bankruptcy filing in history. Lehman's collapse also made it the largest victim of the U.S. subprime mortgage crisis. This paper examines the collapse of Lehman Brothers and the
..although these securitization trusts were based on many unaffordable and unsustainable mortgages, it didn't crumble right away because the companies were gouging so much out of the consumer, they still had a high rate of return" but then housing prices dropped and more and more homes were foreclosed upon (Rayman 2008, p.3). At first "Lehman managed to avoid the fate of Bear Stearns, the other of Wall Street's small fry, which
The reason for this is quite simple: it is more than sure that, in the case Lehman manages the buyout, the former management will no longer have a place to work in. The stockholders do not enter the equation, but do negotiate the price of their shares. The interesting aspect is the way Lehman can come up with a sum large enough to cover all of the stockholders' financial demands.
Lehman Brothers, once a global financial behemoth, collapsed in 2008, triggering a severe financial crisis. The company's downfall was largely attributed to poor leadership and decision-making (Egan, 2009). Richard Fuld: The Imperious CEO Richard Fuld, the CEO of Lehman Brothers from 1993 to 2008, was a highly ambitious and competitive executive (Grigoriadis, 2009). He was known for his autocratic management style and his tendency to ignore dissenting opinions (Egan, 2009). Fuld's obsession
Financial Analysis of Lehman Brother Lehman Brothers The history has been full of financial collapses and financial scandals and one of the biggest financial collapses that a company has ever seen was that of Lehman brother. The collapse of a firm as huge as Lehman Brother and a firm which has such great experience of over a hundred years lead the world into a shock. It created doubts in the minds of
Member of the Board of Lehman Bros. As a member of the Board of Lehman Brothers in 2008, I can attest to the fact that none of us knew what we were doing: we were of a bygone age of banking, one that existed before the world of high finance had suddenly and virtually overnight taken on a new persona -- thanks to deregulatory practices and new schemes based on