Lehman Brothers: A License to Fail with Other People’s Money

33 Pages Posted: 7 Sep 2012

See all articles by Mark Denbeaux

Mark Denbeaux

Seton Hall University, School of Law

Edward Dabek

Seton Hall University - School of Law - Center for Policy & Research

John Gregorek

affiliation not provided to SSRN

Sean A. Kennedy

Seton Hall University - School of Law - Center for Policy and Research

Eric Miller

affiliation not provided to SSRN

Date Written: December 8, 2011

Abstract

The bankruptcy of Lehman Brothers Holdings, Inc. (“Lehman”) is the largest bankruptcy ever filed, with losses to investors, both small and large, totaling billions of dollars. In January 2008, Lehman Brothers, heavily invested in by pension plans such as the California Public Employees’ Retirement System and the New York State Teachers Retirement Plan, traded at a high of over $65 per share. At that time, Lehman reported record numbers of nearly $60 billion in revenue and more than $4 billion in earnings. However, a mere eight months later, Lehman’s stock was trading under $4 per share, and on September 12, 2008, Lehman filed for Chapter 11 bankruptcy.The Bankruptcy Court appointed an Examiner to investigate and report on Lehman’s business affairs, with particular regard to “any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate.” The Examiner’s findings, taken at face value, reveal that the legal system that allowed Lehman’s failure will permit similar failures in the future because, for the most part, Lehman’s actions did not violate the law.

This report explores Lehman’s risk management in a declining market and the valuation of its assets. Lehman, after recognizing the magnitude of the economic crisis, doubled-down on its risk, dramatically increasing the amount it was prepared to lose, while also disguising the declining value of its assets. These acts were not inadvertent, but rather were deliberate violations of internal risk limits and conscious overvaluations of its assets.

Keywords: bankruptcy, Lehman Brothers, Bankruptcy, risk management

Suggested Citation

Denbeaux, Mark and Dabek, Edward and Gregorek, John Walter and Kennedy, Sean A. and Miller, Eric, Lehman Brothers: A License to Fail with Other People’s Money (December 8, 2011). Seton Hall Public Law Research Paper No. 2003618. Available at SSRN: https://ssrn.com/abstract=2003618 or http://dx.doi.org/10.2139/ssrn.2003618

Mark Denbeaux (Contact Author)

Seton Hall University, School of Law ( email )

One Newark Center
Newark, NJ 07102-5210
United States

Edward Dabek

Seton Hall University - School of Law - Center for Policy & Research ( email )

One Newark Center
Newark, NJ 07102
United States

John Walter Gregorek

affiliation not provided to SSRN ( email )

Sean A. Kennedy

Seton Hall University - School of Law - Center for Policy and Research ( email )

One Newark Center
Newark, NJ 07102-5210
United States

Eric Miller

affiliation not provided to SSRN

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