ehman Brothers and Risk Management
This report examines the ehman Brothers collapse and discusses issues of investment bank risk management. The report considers factors which contributed to ehman'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 ehman 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 ehman Brothers' bankruptcy. Motivated by greed and enabled by lax government regulation and ineffective corporate governance, ehman gambled heavily on the performance of the subprime mortgage industry. The…...
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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 Case Study
The author of this report is asked to answer to several case study questions related to the collapse of Lehman Brothers and what led up to it. The first question asks about Lehman Brothers' epo 105 policy and what, if any, policy Ernst and Young (its auditor) had at that point to develop the accounting policy and process as well as monitor Lehman's usage and compliance of the same after the fact. The author is then asked to answer to whether there can be agreement with the comment "intent doesn't matter" as it applies to accounting rules. The third question asks whether the auditors have a responsibility to determine whether important transactions of a client are "accounting motivated" and the author is asked to defend any response given. Finally, the author is asked to analyze Lehman's net leverage ratio as related to the fact that the figure…...
Lehman rothers Failure
On September 15, 2008, Lehman rothers, the fourth largest U.S. investment bank at the time, filed for bankruptcy. At the time of its collapse, Lehman rothers 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 rothers and the factors that led to that failure.
Lehman rothers started as an investment bank that dated back to the 1850s. During its 158-year history, the firm survived the railroad bankruptcies of the 1800s, the Great Depression and two World Wars. It did not, however, survive the subprime mortgage meltdown, or its own bad business decisions.
The subprime mortgage crisis had its beginnings in the early 2000s when fear of recession was significant. To head off recession, the Federal Reserve lowered the Federal funds…...
..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 all Street's small fry, which was bought by JP Morgan Chase at a bargain basement price under the threat of bankruptcy in March 2008. But by summer of 2008 the rollercoaster ride started to have more downs than ups. A series of write-offs was accompanied by new offerings to seek capital to bolster its finances," all of which failed (Lehman Brothers Holdings, INC, 2009, Times Topics). After the government announced its takeover of Fannie Mae and Freddie Mac. Lehman's stock plunged as the investors thought…...
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. Leverage buyout! It may use junk bonds issuing (bonds at high interest rate) and then cover up the loan from the profits made in the deal.
Negotiations with each important stockholder in part are commenced and continue at an incredible pressure. The problem for each stockholder in part is when to sell. If they sell too soon, then they will not benefit from the subsequent new offer that Lehman is most likely to come up with if it is refused. If…...
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 the securitization model invented by Lewis anieri of Salomon Brothers (Lewis, 1989). It became a world in which massive profits could be made (or looked as though they could be made) in no time at all, whereas in the past it would have taken years, decades to amass this kind of fortune. We did not understand it, but we approved it by our silence and resignation: we trusted the traders and managing directors who seemed to know this world better…...
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).
ichard Fuld: The Imperious CEO
ichard 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 with short-term profits and market share led him to take excessive risks, ultimately contributing to the company's downfall (Grigoriadis, 2009).
Lax isk Management and egulatory Oversight
Lehman Brothers had a weak risk management system, which failed to identify and mitigate potential threats (Egan, 2009). The company's executives, including Fuld, ignored warnings about the growing risks associated with subprime mortgages and high leverage (Grigoriadis, 2009). Moreover, the company's board of directors lacked independence and failed to provide adequate oversight (Egan, 2009).
Lack of Innovation…...
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References
Egan, Matt. \"The Fall of Lehman Brothers: The Inside Story of How Wall Street\'s Biggest Bank Collapsed.\" New York: Portfolio/Penguin, 2009.
Grigoriadis, Vanessa. \"The Lehman Brothers Story: The Inside Story of How Wall Street\'s Biggest Bank Collapsed.\" New York: Simon & Schuster, 2009.
Fraser, Steve. \"Wall Street: Blood in the Water.\" New York: Simon & Schuster, 2009.
The Leadership of Lehman Brothers: An Exploration of Corporate Direction and Decision-Making
Lehman Brothers' legacy has been inextricably linked to its leadership, whose decisions played a pivotal role in the prestigious financial firm's ascension as well as its catastrophic collapse in 2008. Tracing its origins back to 1844, the company had experienced numerous cycles of economic upheaval and had emerged resilient, in part, due to the strategic direction provided by its leaders. However, it was the leadership in the years leading up to 2008, especially under the tenure of CEO Richard Fuld, that has drawn intense scrutiny and criticism from both contemporaries and scholars alike (McDonald & Robinson, 2009).
Richard Fuld, often dubbed 'The Gorilla of Wall Street,' took the helm of Lehman Brothers in 1994 and spearheaded the firm for nearly fourteen years. Under his direction, the firm expanded aggressively, particularly into the subprime mortgage market, which would, ultimately, prove to…...
Financial Analysis of Lehman rother
Lehman rothers
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 rother 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 people regarding the condition of other financial institutions. The history of Lehman rother is rich which is further discussed.
The history of Lehman rother dates back to 1844, when a boy named Henry who was a 23-year-old son of a cattle merchant who immigrated to the United States from Germany and he settled in Alabama State of the United States where he opened dry goods store. In 1847, when Henry Lehman's elder brother arrived to Alabama, the firm expanded to "H.…...
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Bibliography
1. Bebchuk, L.A., Cohen, A., & Spamann, H. (2010). The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008. Yale Journal on Regulation,27(2), 257+.
2. Blake, D. (2000). Financial Market Analysis. New York: Wiley. Cetorelli, N., Mandel, B.H., & Mollineaux, L. (2012). The Evolution of Banks and Financial Intermediation: Framing the Analysis. Federal Reserve Bank of New York Economic Policy Review, 1+.
3. Dwyer, G.P., & Tkac, P. (2009). The Financial Crisis of 2008 in Fixed Income Markets.Federal Reserve Bank of Atlanta, Working Paper Series, 2009(20), 1+.
4. Fitzpatrick, T.J., & Thomson, J.B. (2011). How Well Does Bankruptcy Work When Large Financial Firms Fail? Some Lessons from Lehman Brothers. Economic Commentary (Cleveland), (2011-23), 1+.
By re-characterizing the epo 105 dealing as a sale, Lehman detached the account from its balance sheet (Durden, 2010).
Lehman frequently augmented its utilization of epo 105 transactions in the time previous to reporting interludes to decrease its openly reported net leverage and balance sheet. Lehman's intermittent reports did not reveal the money borrowing from the epo 105 transaction, even though Lehman had in reality borrowed tens of billions of dollars in these dealings, Lehman did not reveal the acknowledged responsibility to pay back the liabilities. Lehman utilized the money from the epo 105 dealings to pay off other dangers, thus dropping both the entire debts and the entire assets accounted for on its balance sheet and decreasing its power percentages. Therefore, Lehman's epo 105 dealing was made up of a two-fold procedure: performing epo 105 dealings followed by the utilization of epo 105 cash borrowings to pay down debts,…...
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References
Durden, Tyler. (2010). The "Repo 105" Scam: How Lehman Fooled Everyone (Including
Allegedly Dick Fuld) and How Other Banks Are Likely Doing This Right Now. Retreived
According to Frank Ahrens (2010, April 20) not only did Lehmann Brothers hide this practice from the investing public, rating agencies, and government regulators, they even deceived their own board of directors. "In this way Lehmann reversed engineered the firm's leverage ratio for public consumption."
In 2008 analysts frequently asked about the means by which the company was able to achieve reduction in risk. Lehmann Brothers' company official reported reducing its leverage through the sale of less liquid asset categories claimed and simultaneously claimed they were trying to give the group a great amount of transparency on the balance sheet. (Ahrens, 2010, April 10)
Lehmann Brothers executives are currently under criminal investigation. Subpoenas in grand jury probes were issued as early as October, 2008. Andrew Clark (2010, March 12) reports the problem is that it isn't easy to prove fraud in many of these cases. A top law or accounting firm will…...
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Resources
Ahrens, F. (2010, April 20). Lehmann brothers, the evil repo 105s and the danger of off-balance-sheet deals. washingtonpost.com, Retrieved on May 13,2010, from C:UsersOwnerDesktop
epo 105Economy Watch - Lehman Brothers, the evil Repo
105s and the danger of off-balance-sheet deals.mht
Clark, a. (2010, March 12). Lehman Brothers: Repo 105 and other accounting tricks.
Margin Call
The movie Margin Call recounts a fictionalized version of the fall of Lehman Brothers in the autumn of 2008. The story centers around the trading floor, the company's exposure to toxic mortgage-backed securities and its responses to these challenges. The movie discusses and provides a framework for analyzing a number of financial concepts. This report will use Margin Call to discuss a number of different microeconomic concepts that are seen in the movie.
Market Failure
Lehman Brothers is ultimately a story of market failure, so this is a natural starting point for this analysis. Marker failure occurs when the "quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers" (Investopedia, 2013). Market failure is evident in a number of ways, based on the story of the movie. For example, the traders are instructed to unload their positions in the toxic assets, but they fear that…...
Improvements in Integrity, Financial Accountability, Ethical Conduct and Corporate Responsibilities under the Sarbanes-Oxley Act of 2002
e passed Sarbanes-Oxley in the wake of the Enron scandal to try to root out financial and accounting irregularities. How could similar irregularities occur at Lehman Brothers? History has a way of constantly repeating itself. -- Joseph Grant 2010
The high-profile corporate shenanigans by Enron and Lehman Brothers have made it clear that tough legislation was needed to compel Americans businesses to clean up their financial acts. Indeed, in response to Enron's late 2001 bankruptcy, Congress enacted the Sarbanes-Oxley Act of 2002 but the Lehman Brothers' bankruptcy in late 2008 made it clear that there was still a problem in some sectors of American business. This paper provides a review of the relevant literature to determine how the integrity of corporate finance, ethics, and other responsibilities have improved, what the corporate finance industry culture has learned…...
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Works Cited
Bierstaker, James, Marshall, Kenneth K. And Greenwald, Jonathan. (2010, December).
"Strengthen Your Core: Are You Getting the Most from Your Compliance, Operations,
Risk, and Enterprise Support Functions?" Strategic Finance 92(6): 35-39.
Carter, Charles C. (2011, May 1). "Freefall: America, Free Markets, and the Sinking of the World Economy." Journal of Real Estate Literature 9(2): 492-499.
But amid the celebration, crucial opportunities have been lost: In September 2009, the "inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to all Street, policy makers undermined their own credibility -- and put the broader economy at risk" (Krugman 2009). Many banks have given back their TARP funds, in exchange for the ability to once again engage in risky activities, to pay traders the bonuses they desire, and to pay executives what seems to be overinflated compensation. In June ten of the largest recipients of aid,…...
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Works Cited
Cohan, William. "A tsunami of greed." The New York Times. March 11, 2009.
As Taibbi shows, it is not easy: "I'm going to say something radical about the Tea Partiers. They're not all crazy. They're not even always wrong. hat they are, and they don't realize it, is an anachronism. They're fighting a 1960s battle in a world run by twenty-first-century crooks" (Griftopia 16-17). Taibbi makes clear that the Tea Party is not even homogenous: it is made up of a broad spectrum of individuals (some of whom do not even want to be called Tea Partiers) who are angry and looking for someway to focus their anger.
In conclusion, recouping the losses is not an easy thing to do. hen a company like Lehman Brothers can be allowed to collapse while their competition (Goldman Sachs) can be bailed out by tax payer dollars, citizens are going to start wondering how their country got to such a point in the first place. Taibbi…...
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Works Cited
AP/HuffPost. Charles Ferguson's Oscar Speech Rips Wall Street: 'Inside Job' Director
Levels Criticism During Acceptance. HuffPost Business. Web. 8 Apr 2011.
Campbell, Andrea Louise. "Is the Economic Crisis Driving Wedges Between Young and Old? Rich and Poor?" Generations 33.3, Fall 2009: 47-53. Print.
The Profound Impact of the 2008 Financial Crisis on Global Economies and Banking Systems
The 2008 financial crisis, widely acknowledged as the most severe financial upheaval since the Great Depression, left an indelible mark on global economies and banking systems. The crisis's origins can be traced to various factors, including the subprime mortgage debacle, excessive risk-taking by financial institutions, and inadequate regulatory oversight. Its effects, however, reverberated far beyond the financial sector, affecting businesses, households, and governments worldwide.
Impact on Global Economies
The crisis triggered a deep and prolonged recession across the globe. Economic growth plummeted, unemployment soared to alarming levels, and international....
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