The Market for Lehmans: The Report of the Bankruptcy Examiner for Lehman Brothers Holdings Inc.

Abstract

The collapse of Lehman Brothers was a pivotal event in the financial crisis that began in the U.S. subprime mortgage market. On January 19, 2009, Judge James Peck of the U.S. Bankruptcy Court issued an order directing the United States Trustee to appoint an Examiner pursuant to section 1104(c)(2) of the U.S. Bankruptcy Code. The U.S. Trustee appointed as Examiner Mr Anton Valukas. Mr Valukas’s nine volume report, containing over 2200 pages, was released publicly in March 2010. The collapse of Lehman Brothers, as seen through the bankruptcy Examiner’s eyes, provides an extraordinary look into the inner workings of a large financial services firm at the center of the financial crisis, and offers a few poignant lessons. Among other things, the pursuit of accounting earnings through financial legerdemain, rather than genuine value creation, continues to threaten the economic well-being of major corporations and the financial systems of countries in which they operate. External auditors and other professionals must have not only the tools but also the incentive to assist corporate directors both to understand the increasingly complex financial structures used by their firms and, confidently and competently, to challenge the managers and employees who may seek to use them inappropriately. Yet it is also clear that regulatory and supervisory oversight of the financial sector cannot be relied upon to avert financial crisis. Perhaps the principal shortcoming of attempting to divine many more specific lessons from the careful analysis of Lehman’s failure, however, is that we lack any similar dissection of the actions of financial firms that did not fail during the crisis. Was Lehman outlaw, outlier or merely out of luck? In short, we now know a great deal about how Lehman operated. It would be a great mistake, however, to presume that Lehman’s mistakes were the necessary cause, rather than symptoms, of the firm’s decline.