Case Study On Lehmans Brothers Group 3
Case Study On Lehmans Brothers Group 3
Submitted by:
Agtarap, Rainer Irvin S. Evangelista, Briamae C.
Albiz,Vanessa R. Flores, Caitlin Joyce M.
Bernardo, Marielle Sta. Maria SM. Rabino, Mary Elizabeth C.
Buenzalida, Dante T. Raya,Ivy Grace M
Dela Cruz, John Mhiko C. Trinidad, Joyce DP.
De Leon, Diane DJ. Velasco,Marielle P.
.
Submitted to:
Laurence C. Espino, MBA
Introduction
Most of the world's top financial institutions filed for bankruptcy and liquidation during
the global financial crisis of 2008. (Mensah, 2012; Murphy, 2008).Those who were left behind
either saw their particular activities and returns fall precipitously or declared bankruptcy on their
own volition. The biggest calamity to ever affect the U.S. financial industry was the Lehman
Brothers bankruptcy scandal, which occurred in the midst of the global financial crisis (Morin
and Muax, 2011). Having the most valuable assets in the sector, Lehman Brothers was the
market leader (D’Arcy, 2009).
Lehman Brothers' fall was the largest unit financial firm to have collapsed with such
significant assets, surpassing the well-known Enron debacle in the early 2000s (Jeffers, 2011).
Within the month of September, the top US investment bank experienced significant losses.They
had lost around $3.9 billion by the middle of September 2008 in their attempt to sell the majority
of their shares in one of its subsidiaries after the stock price had plunged by 73% in the first half
of September (Mauz and Morin, 2011).
The global financial crisis forced the bank to close its top subprime lender (BNC
Mortgages) in 23 locations prior to their demise (Wilchins and DaSilva, 2010). Lehman Brothers
voluntary declared bankruptcy at the US Bankruptcy Court by September 15th 2008 as a result
of the losses occurring one after another (Murphy, 2008). The unsuccessful attempt at potential
mergers, the government bailout, and other takeover attempts by businesses like Barclays Bank
and others all contributed to the need for the voluntary bankruptcy. A number of academic and
practical arguments have been made by financial experts in an effort to identify the precise
causes of the meltdown in order to understand the potential causes of the Lehman Brothers
demise. Others have conducted deliberate studies to explain the collapse of Lehman Brothers
(Albrecht et al., 2004).
Background
History of Lehman Brothers
Henry, Emanuel, and Mayer Lehman immigrated to Montgomery, Alabama, from
Germany in the middle of the nineteenth century. There, they opened a small store in 1844 that
catered to the needs of the neighbourhood cotton growers. The brothers quickly discovered that
selling cotton was just as important to their business as selling dry items since farmers frequently
paid their debts in cotton. The brothers decided to concentrate on trading cotton, so they opened
an office in New York and helped found the New York Cotton Exchange in 1858. Along with
trading other commodities, the brothers started assisting businesses in raising finance on the
bond and equity markets. Lehman Brothers established itself in the trading of securities and laid
the groundwork for the underwriting industry when it joined the New York Stock Exchange in
1887. Lehman Brothers expanded their banking operations in the early 1900s by assisting in the
financing of the burgeoning group of retail, industrial, and transportation behemoths that were
established at this time. Emanuel Lehman's grandson Robert Lehman took over the business in
1925 and ran it until his passing. Lehman Brothers developed into a well-known investment bank
during Robert Lehman's leadership, working with top American and international businesses to
underwrite securities issues, offer financial advice, and support mergers and acquisitions.
Lehman was established as a partnership, and it remained privately owned and family-run until
Robert Lehman, the last member of the Lehman family to work at the company, passed away in
1969.
Lehman Brothers experienced a period of drift after Robert Lehman's passing. In 1973,
the partners hired former U.S. Army Colonel Peter G. Peterson, a former Bell and Howell CEO
and secretary of commerce. Peterson was well-liked by the investment bankers due to his
aristocratic style and extensive network of powerful contacts. Lehman Brothers prospered under
Peterson's direction, turning a profit and growing through acquisitions. Additionally, the
company opened branches abroad and developed into a sophisticated multinational corporation.
The financial services sector was evolving during Peterson's ten years in charge, with
businesses choosing investment banks based on individual transactions rather than long-standing
ties. This led to innovative new products and solutions like commercial paper being created by
traders, who were perceived as being raunchier than their investment banker counterparts.
Deregulation also led to a bigger involvement for mutual and pension funds in the stock market,
allowing investment firms to record enormous profits.
Lewis L. Glucksman, a highly successful trader with 20 years of experience at Lehman
Brothers, challenged Peterson, who in 1983 named him co-CEO. When given the chance,
Glucksman grasped it with speed and within a year, Peterson had announced his retirement and
Glucksman had taken over as the company's only CEO. Glucksman had a simple but engaging
manner that some bankers found naive.
In the early 1990s, the new company acquired a number of companies, including
Neuberger Bremen and Lincoln Capital, to diversify its business operations into banking and
brokerage. In 1993, the company's brand name was ultimately changed back to Lehman
Brothers. Lehman Brothers grew steadily, reportedly growing their revenue base, and saw an
expansion in their personnel from 8,500 to roughly 28,000 in 1994 due to the new line of
business and arrangement. Lehman Brothers incurred severe losses as a result of the terrorist
attack on its World Trade Center building in September 2001, just a year after celebrating its
150th anniversary. In response to this catastrophic calamity, Lehman Brothers relocated to a new
headquarters in Manhattan's midtown in 2002. Lehman Brothers' 158-year existence came to an
end in September 2008 when they filed chapter 11 bankruptcy petitions in the federal court,
which resulted in the distribution of the company's assets to several businesses.
Discussion/Recommendation
The relationship between rules and action management systems is amply illustrated by
the failure of Lehman Brothers. Failures revealed regulatory system flaws, necessitating
immediate stringent oversight of certain performance measures like solvency, liquidity position,
and profitability. To address the Lehman catastrophe and avoid a repeat, rigorous laws must be
implemented by policy makers such the International Financial Reporting Standards, SEC, etc.
To regain the trust of investors, companies must also be forced to follow sound corporate
governance practices. Every organization needs to uphold and emulate sound ethical standards
and practices.
Important lessons can be learned from Lehman's failure. First and foremost, those in
charge of overseeing financial institutions should close the loopholes in their system of financial
regulation that let Lehman and other intricate, big, interconnected businesses run unchecked. No
government agency had the necessary power to order Lehman to conduct its business in a way
that was safe, sound, and did not endanger the entire financial system in September 2008. There
is also a need for a new resolution framework, similar to the one already established for failing
banks, to prevent having to decide in the future whether to save a failing, systemically important
corporation or allow its disorderly bankruptcy. Many worldwide banking industry professionals
believe that such a system would guarantee that the failing company's creditors and shareholders
suffer losses and that its management is changed, protecting the economy while also enhancing
market discipline.Lehman managed its financial statements using financial instruments, as was
already mentioned. The collapse of Lehman Brothers, however, demonstrates how corporate
governance can be improved across many industries and is not just relevant to the financial
services sector. Additionally, failures should teach us a lot of lessons, especially when they affect
a significant institution in US history (Azadinamin, 2013). Both macroeconomic and
microeconomic lessons could be characterized as lessons learned. From a macro perspective, it
demonstrates the potentially disastrous consequences for the rest of the financial system of an
institution that is too big and too unified, while from a micro one, numerous lessons that revolve
around the moral hazard problem need to be taught (Latifi, 2012). If financial system
breakdowns are to be prevented in the future, the following tactics might prove useful.
Be proactive and adhere to logical business strategies Lehman made a crucial choice to
pursue a higher-growth company strategy in 2006. It struggled to establish a monopolistic
position in the mortgage industry and changed their business model from a capital-intensive
banking model to a low-risk brokerage model. According to Azadinamin (2013), there were two
ways to continue this high growth trend: either aim for high revenue growth or even quicker
growth in the company's balance sheet and overall capital base. Enforce regulatory measures One
of the key lessons from the Lehman case study is the necessity for stringent measures to ensure
that investment banks will operate in accordance with their true financial capabilities, rather than
allowing them to deceive people in order to obtain money (McKibbin & Stoeckel, 2009).
Especially when it's the biggest institution failure in US history, there are numerous
lessons to be learned from failure. Two lessons that stand out are the need to change accounting
procedures and incorporate new catastrophe prediction techniques. A few suggestions for the
future were made by Caplan et al. (2010) after studying the Lehman Brothers catastrophe.
Lehman's top managers made the decision to utilize questionable or maybe dishonest
accounting procedures to achieve the goal as it became clear that implementing the intended
strategy of high growth would be impossible.One of the many unethical tactics employed by
Lehman to present better financial results was the unusual use of Repo 105. Despite the fact that
the Repo 105 procedure is legal—as was already mentioned—Lehman utilized it in an
unorthodox and immoral manner to secure fresh loans by making assertions that were more
optimistic than they actually were. Accounting standards give unethical managers the
opportunity to abuse them and put them into effect in a way that supports their unethical actions.
To prevent unethical and illegal acts that can endanger people's wealth, accounting standards
must be changed.According to Caplan et al. (2010), substance should take precedence over form,
and the fairness and viability of an organization should be assessed using the statements' content
rather than just the ratios that may be deduced from it.According to auditing standards, the
auditor's decision should take into account, among other things, whether (1) the accounting
principles chosen and applied have general acceptance, (2) the accounting principles are
appropriate given the circumstances, and (3) the financial statements, including the related notes,
are informative about matters that may affect their use, understanding, and interpretation.
Conclusion
This failure can be attributed to a variety of factors,subprime mortgage crisis, repeal of
the glass-steagall act, unethical management practices, liquidity crisis, collateralized debt
obligation and derivative crisis, leveraging, complex capital structure, unsuccessful bail-out and
takeover attempts, poor risk and asset management, complex structure and managerial issues,
low ethical standards.External auditors also played a large part in this failure by failing to
uncover these accounting irregularities by Lehman's managers. The main signs of fraud seem to
have been found in the annual accounts. External auditors are not able to identify this activity.
However, it should be noted that the Lehman shock affected not only the U.S. economy, but the
world as a whole. Firms should avoid unnecessary business strategies, closely monitor existing
regulations, change reporting standards to prevent questionable accounting practices, and
implement practical and alternative regulations to anticipate financial failures and derivatives
market models. must be formulated.
With regard to Lehman's response to the subprime crisis and other economic events,
some of Lehman's management's previous decisions, while falling under business judgment
rules, were questionable. Most of the valuation techniques used by Lehman were inadequate for
the purposes of bankruptcy solvency analysis. Lehman's inability to report the use of repo 105
accounting techniques was sufficient proof that their accounting system was questionable. Full
disclosure must be ensured by an external auditor regarding allegations of fraud in accounts
maintained by Lehman's management. While examining financial information, external auditors
must show an outstanding degree of independence and objectivity statements. There should be
guarantee that external auditors would fully disclose the accused financial statement fraud
committed by Lehman's management. Regulators of financial institutions must address the flaws
in financial regulatory structures that allow complex and large affiliates like Lehman's to thrive
without strong centralized oversight. But to restore investor confidence, Lehman must also strive
to maintain sound corporate governance practices. Sound ethical standards and procedures must
be adhered to and reproduced.
Again, Ernst & Young's failure to fulfill professional standards in relation to the inability
to disclose financial and accounting statement breaches or frauds was strongly charged. The
Lehman's Lenders' requests for collateral seemed to have a significant effect on the liquidity pool
at Lehman. Various people were questioning whether Lehman's dealings with the government
bodies that governed and oversaw Lehman contributed to the bankruptcy, even though the
majority of Lehman's mistakes came from within the company's own operations. Several analysts
anticipated that the bankruptcy of Lehman Brothers had caused a fear that would ultimately
damage not just the U.S. financial system as well as the entire global financial system. Several
questions about what caused the bankruptcy of Lehman Brothers, historically the top business
finance company in the United States, were addressed in the aftermath of the company's fall
down. The real thing is that these issues are challenging to address right now for a variety of
reasons, including the lack of accurate evidence and information about what supposedly
happened after Lehman went bankrupt.
References
Caesar K. Simpson (2016). What Caused the Failure of Lehman Brothers? Could it have been
prevented? How? Recommendations for going forward.
https://www.ijrrjournal.com/IJRR_Vol.3_Issue.11_Nov2016/IJRR003.pdf?
fbclid=IwAR0y6qupUrQasgSywY7NEZ-0Dch4H1m7aMcBCjVI-
k1TYPax2aFMqJA3Eec
D’Arcy, C. (2009). Why Lehman Brothers collapsed. Retrieved May 11, 2012 from
http://www.lovemoney.com/news/the-economy-politics-and-your-job/the-economy/
3909/why-lehman-brothers-collapsed
Freifeld, K. (2015). Ernst & Young settles with N.Y. for $10 million over Lehman auditing.
https://www.reuters.com/article/us-ernst-lehman-bros-idUSKBN0N61SM20150415
Kimberly, S. (2011). Misconceptions about Lehman Brothers' Bankruptcy and the role of
derivatives played. Retrieved from
http://www.stanfordlawreview.org/online/misconceptions-about-lehman-brothers-
bankruptcy
Lartey, R. (2012). What part did derivative instrument play in the financial crisis of 2007-2008?
Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444270
Mensah, K., M., J. (2012). Appraisal and improvement of organizations' performance: A case
study of Accra University of Business. Retrieved from: http://ssrn.com/author-1761405
Murphy, A. (2008). An analysis of the financial crisis of 2008: Causes and solution:
Retrieved from: http://ssrn.com/abstract-1295344
Mensah, K., M., J. (2014). The Failure of Lehman Brothers: Causes, Preventive Measures and
Recommendations https://www.studocu.com/row/document/botswana-accountancy-
college/association-of-chartered-certified-accountants/the-failure-of-lehman-brothers-
causes-pr/40081066
Swedberg, R. (2010). The structure of confidence and the collapse of Lehman Brothers.Retrieved
June 2, 2012 from
http://www.soc.cornell.edu/faculty/swedberg/2010%20The%20Structure%20of
%20Confidence%20and%20the%20Collapse%20of%20Lehman%20Brothers.pdf.
Republic of the Philippines
Bulacan State University
Bustos Campus
Poblacion, Bustos, Bulacan
CASE STUDY:
LEHMAN BROTHERS
Submitted by:
BSBA FM-3E
Submitted to:
Mr. Laurence C. Espino, MBA
Professor
General Documentation
The first thing we did was set up a group conversation using the Messenger app to make
communication easier. The group leader assigned each member a task that they are all
responsible for completing. Each participant reported the results of their investigation
into the difficulties that were raised and which required analysis.
For the references these are the problems that the members need to analysed:
1) Introduction (Dante/Miko)
7) Documentation (Rainer)
The assigned members in their designated topics shared their research about the Lehman
• Based on the data gathered, the group members deliberate and decide how they would
After we finish all the assigned task, we conducted a quick dry-run for us to be aware of
the flow of our presentation.