Could the Failure of Lehman Brothers Have Been Prevented?
affiliation not provided to SSRN
July 13, 2012
On Monday 15th September 2008, a 158-year old wall street institution filed for Chapter 11 bankruptcy protection, rendered some 25,000 employees jobless ('Lehman Brothers Files', 2008, para 2; Valukas, 2010) and triggered a chain reaction that almost resulted in a global financial meltdown ('Lehman Brothers: Repo 105', 2010, para 1; Lounsbury & Hirsch, 2010, p71). Referred to as the ‘firm with nine lives’ (Greenfield, 2010), Lehman Brothers Holdings Inc, collapsed due to inter alia; poor corporate culture, an over exposure in derivatives trading, extremely high leverage, a lack of cash and holding assets that could not be liquidated easily (Christopoulos, Mylonakis & Diktapandis, 2011).
In addition to above, the improper use of derivatives contributed to the fall of Lehman Brothers because the fallen financial conglomerate fraudulently employed derivatives in Repo 105 and Repo 108 transactions, which it did not disclose in Security and Exchange Commission (SEC) filings (Knapp, 2012, p28; Valukas, 2010).
On the 31st May 2008, Lehman Brothers determined its net derivatives position as USD$ 21 Billion on Statement of Financial Accounting Standards (SFAS) 157 level 2 quality (Valukas, 2010). However, this was a 100% increase from the stated value of USD$ 12.9 Billion in November 2007, which was only a nine month interval and while Lehman Brothers traded derivatives for itself and on behalf of its clients; the largest derivatives positions were held by Lehman Brothers (Valukas, 2010).
Furthermore, the bankruptcy court examiner found that valuations of Lehman’s real estate assets for the second and third quarters of 2008 were ‘unreasonable’ (Valukas, 2010).
This paper has investigated whether, the downfall of Lehman Brothers could have been prevented and concludes that, it could most definitely have been prevented ('Richard Fuld', 2008, para 2; Valukas, 2010). The absence of low risk tolerance, high leverage (Greenfield, 2010) and a CEO labelled ‘delusional’ by several Wall Street executives ('In Former', 2011, para 7; Brinkinshaw, 2010, p 2), would definitely have prevented Lehman’s demise (Davidoff, 2009, p253).'
The conclusion is based upon the fact that, taking on greater risk and more leverage generated heavy losses for the fallen banking conglomerate – and caused a modern day bank run (Benassy-Quere, Coeure, Jacquet, Pisani-Ferry, 2010, p302; Johnson & Kwak, 2009) - as well as the fact the its CEO Dick Fuld, did not only discount warnings from his management team (Brinkinshaw, 2010, p 2; 'Richard Fuld', 2008, para 2), but also continued down the path of ‘self-destruction’ when business strategies were obviously failing (Valukas, 2010).
Consequently, this paper recommends that businesses, especially ‘too big to fail’ banks, must not take on more leverage and more risk with the sole objective of competing (McConnell, 2012) and risk must always be hedged to prevent financial exposure (Sudacevschi, 2010).
Additionally, business strategy must be ‘tried and tested’ before it is fully implemented (Valukas, 2010). Furthermore, modern academically revered corporate culture should be taken very seriously (Greenfield, 2010; Flamholtz & Randle, 2011, p29; Weihmann, 2007, p3).
Number of Pages in PDF File: 30
Keywords: Lehman, bankruptcy, derivatives, corporate cultureworking papers series
Date posted: July 16, 2012
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