Lehman Brothers Holdings, Inc.
Introduction - The Rise and Fall of Lehman Brothers.
Loose regulations, deception, and greed were the root of all evil for one of the largest investment banks in the world.
Lehman Brother’s was founded in 1850. Lehman Brother’s survived the Great Depression, WWI and WWII. In 1969 Lehman Brother’s hired Richard “Dick” S. Fuld Jr. as an intern who in 1994 became CEO of the Company. During Bill Clinton’s Presidency government started to support middle and lower class people to own their own houses. During this time a XX”Fair Housing Act” was created which was supposed to stop mortgage banks from discriminating lower income people from owning their own houses. The 911 attacks from 2001 created the greatest loss in Wall Street since The Great Depression. George Bush and the government encouraged Americans to buy more property. Mortgage companies started to take advantage of all these factors and lured low income uneducated people to buy mortgages with introductory rates. They never warned these buyers that these were just introductory rates that would later increase. This in turn created a larger problem for the new uneducated homeowners. These new loans created havoc for the homeowners that were struggling to make payments, and then came the massive layoffs. The economy nearly came to a standstill, and the housing market was one of the hardest hit sectors in the global economy. With the perfect situations created by loose regulations, and the perceived opportunities to make massive profits, Lehman Bros seized the opportunity to make huge gains. The strategic moves in order to cover the perception of false profits caught up to the company. When bank of America found out that they were loaning money to the Lehman Bros, they were making loans on securities that were worthless; Bank of America wanted some liquid collateral. Lehman Bros were not able to provide alternate collateral that was suitable for Bank of America. With the news of their inability to provide collateral investors wanted to pull out the money that they had invested. This made it impossible for Lehman to pay monies in which they did not possess. Dick Fuld thought he could save his bank from bankruptcy if he sold it to Bank of America instead. While waiting for an offer from Bank of America, Lehman Brother’s received the news that Bank of America acquired Meryl Lynch instead. Lehman still had hopes that Barclays would make an offer, but the British Government did not allow Barclays to continue with this transaction. The Federal Reserve had already made it clear that they would not sacrifice tax payers money to save a company which was negligent enough to place itself in this situation. The FED believed that once they bailed out a company for this reason, many others would be as negligent because they knew that the FED would bail them out. Lehman Brothers were left with no choice but to file for Bankruptcy. On September 15, 2008 Lehman brothers filed for bankruptcy, $600 billion dollars which has been the largest bankruptcy in history. This bankruptcy created panic in the economy. Banks lost faith on other banks because they didn’t know if they had enough liquid assets to pay them back. Interest rates among banks increased to the point where banks could not borrow money and in turn could not lend money to their customers to continue with everyday transactions such as financing payroll, inventories and many other daily financial needs from business. This was the turning point to this recession. The government has attempted to bailout many businesses from going bankrupt to prevent the market from crashing. This has been the worst recession since the Great Depression. The question is what caused it and how could it have been prevented?
Lehman was one bank that was taken down by the financial crisis, and the blame must be placed on those making decisions to buy large quantities of bad bundled securities.
History
In the year 1844, Henry Lehman a twenty three year old young boy emigrated from Rimpar, Bavarua to the United States where he settled in Montgomery, Alabama. Here, he opened “H. Lehman” a dry-goods store. When his brother Emanuel Lehman arrived about three years later, the store changed its name to “H. Lehman and Bro.” Their other brother, Mayer Lehman, arrived about three years after Emanuel and the firm’s name changed one more time to “Lehman Brothers”, Lehman Brothers was then founded. During this time, cotton was one of the most significant crops in the country, for this reason, the brothers started accepting raw cotton form customers as payment for the goods they would buy at the store. They then started a second business trading in cotton; this business became the most important part of their operation. A tragedy hit the brothers when Henry died in 1855, but the brothers had to continue their operations and focused on their commodities trading/brokerage operations. The center for cottin trading moved to New York City in 1858, Lehman then opened its first branch in Manhattan and Emanuel started to run the office. The Civil War brought difficulties to Lehman and the firm decided to join with a cotton merchant by the name of John Durr and formed “Lehman, Durr & Co.” The headquarters were moved to NYC and its help helped to found the New York Cotton Exchange in the year 1870. Another change was that the firm started in the financial-advisory business. Lehman became part of the New York Stock exchange in 1887. Lehman experienced several changes. The company had to keep being strong throughout the Great Depression, by this time Robert “Bobbie” Lehman was the head of the firm. During this period it is said that “the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered”. In 1924, John M. Hancock happened to be the first non-family member to operate in the firm.
Robert Lehman, died in 1969, having forty four years as the patriarch of the firm, he was the last actively involved member of the family. During the year 1972, the firm struggled and about a year later, Pete Peterson, Chairman and Chief Executive Officer of the Bell & Howell Corporation joined the firm to save it. At this time, the firm started undergoing several changes and Peterson was able to take the firm from major operating losses to five consecutive years of record profits. A power struggle overtook the company and the firm changed its CEO to Lewis Glucksman, who served as the firm’s president, COO, former trader and co-CEO. Changes started affecting the company, an interview with Private Equity International had Steve Schwarzmanm, chairman of the firm’s M&A committee reflect this, he stated: “Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional.” The disintegration was one of the changes and Glucksman felt the pressure of selling the firm. An alliance with American Express was another change that the firm experienced. During the year 1993, American Express started to separate from its banking and brokerage operations. In 1994 it spun off Lehman Brothers Kuhn Loeb during an initial public offering, as Lehman Brothers Holdings, Inc.
Rumors began about Lehman being acquired again, but the company performed quite well under the new CEO, Richard S. Fuld, Jr.

About Lehman Brothers Holding, Inc.
Lehman Brothers Holdings, Inc. was a firm founded in 1850 by two cotton brokers in the city of Montgomery, Ala. After the Civil War, they moved to New York City which was the firm’s worldwide headquarters, and started to grow until it became one of the giant investments of Wall Street.
This was a global financial services firm. It participated in business dealing with equity and fixed-income sales, private equity, private banking, investment banking, research and trading and investment management. Being a primary dealer in the U.S. Treasury securities market, Lehman Brothers Holdings, Inc. most important subsidiaries included: Lehman Brothers, Inc., SIB Mortgage Corporation, Aurora Loan Services, Inc., Neuberger Berman Inc., Lehman Brothers Bank, the Crossroads Group, Eagle Energy Partners, and FSB.
Their mission statement: “Our mission is to build unrivaled partnerships with and value for our clients, through the knowledge, creativity, and dedication of our people, leading to superior results for our shareholders”. But the firm has gone through several difficulties. On September 14 of 2008, it was announced by the investment bank that “it would file for liquidation after huge losses in the mortgage market and a loss of investor confidence crippled it and it was unable to find a buyer.”
As stated in its website, at Lehman Brothers “vision gets built.” To its customers, clients, colleagues and shareholders this was the meaning of finding the firm’s services useful to make their ideas tangible. The firm was one of the world’s best independent full-service investment banks; they had been offering services for more than 150 years. Lehman Brothers Holdings, Inc. counted with more than 28,000 employees in 50 locations throughout the world. Its regional headquarters were in London and Tokyo. The firm was one of the fastest growing international investment banks worldwide. Its revenues came mostly from Europe and Asia. Lehman Brothers would build careers and also invited its employees to build their vision by offering opportunities for entrepreneurs. They would motivate them to set their own course and create their own trail. One of the firm’s objectives was to “attract and develop talented people who share our passion for excellence”, their focus was working in teams to make every client’s vision their own.
The whole structure started falling, a London-based Lehman bond trader gives an inside view of the situation: “We knew we were in a bad situation. We’d been through a series of painful headcount reductions”. The employee states how by Monday, it was clear they were in bankruptcy since there was no boss giving directions, there was no information to be provided by them. People had to get paid in order to pay for the kids’ school or mortgage but this was something really big. The employee describes this situation as “the scale of this was frightening. It’s four times the size of Enron.”
Richard Severin “Dick” Fuld, Jr.
Born in April 26, 1946, an American banker and executive which made the spotlight for being the final Chairman and Chief Executive Officer (CEO) of Lehman Brothers since the year 1994 until its bankruptcy in 2008. He was born in New York, New York to Jewish parents named Richard Severin Fuld, Sr. and mom Elizabeth Schwab. He attended the University of Colorado at Boulder in the year 1969 where he graduated with both a B.A. and a B.S. Later on he attended the New York University’s Stern School of Business where he got his M.B.A. in the year 1973. He had participated in his school as the preideny of the school’s chapter of the Alpha Tau Omega social fraternity and also participated in the Naval Reserve Officer Training Corps.
Fuld’s first career was an Air Force pilot, his career ended since he got into a fistfight with a commanding officer. He was said to have been protecting a younger cadet that was being teased by the senior officer. After this drama, he began his career as a commercial paper trader with Lehman Brothers in the year 1969, during this year, the firm’s senior partner Robert Lehman had died. Fuld started stepping higher in the company quiet rapidly. During the almost 40 years that Fuld worked there, he was able to experience several changes such as merging with Kuhn, Loeb & Co, the firms acquisition by American Express, merging with E.F. Hutton, and the firm’s crucial spin-off from American Express in the year 1994.
Fuld became the longest-tenured CEO on Wall Street at the point of the economic crisis in the year 2008. He had helped Lehman go through the 1997 Asian Financial Crisis. During this crisis, Lehman’s share price went down to $22 USD by 1998. Lehman’s CEO started to gain recognition in the society. In the year 2006, a magazine called “Institutional Investor” named him “America’s top chief executive in the private sector”. One year later, in 2007, he had arrived at the peak of success, in the year 1993 there was a loss of $102 million and he turned it into a profit of $4.2 billion in 2007. Fuld competitiveness earned him the nickname the “Gorilla” on Wall Street, he stated: “As long s I am alive this firm will never be sold.” But it does not stop there, his name appeared on Barron’s list of the best 30 CEOs and was named “Mr. Wall St.” Unfortunately Fuld started collapsing. On the month of October of the year 2008, Fuld became part of the twelve Lehman Brothers executives who obtained grand jury subpoenas in associated to three criminal investigations done by the United States Attorney’s offices in two districts that included the Eastern and Southern one in New York and the other one, the District of New Jersey, conducted in relation to the securities fraud dealing with the fall down of Lehman Brothers. After Lehman's failure, the longtime leader of the brokerage firm became the focal point of the fury over the Wall Street meltdown and $700 billion federal bailout fund formed to deal with it.
Fuld talked about the crisis in his statement before The United States House of Representatives Committee on Financial Services. Fuld stated that since September 2008, he had been thinking about the financial crisis and the chaos of events that led Lehman Brothers into bankruptcy. His belief is that everyone’s focus is as of right now on how to avoid another event like this crisis. He states “The key is how regulation and governance should be deployed going forward to better protect the financial markets and the entire system”. Fuld believes that the idea of a “super regulator” that supervises the financial markets for systematic threat is a good one and thinks that in order for this idea to be successful, it should have genuine experience and a good understanding of the business related to the financial institutions as well as the capital markets, and risk management. Having the adequate resources to achieve its mission is also important according to Fuld.
Fuld has been investigated in relation to whether Lehman Brothers executives misinformed investors about the company’s situation. He was interrogated by lawmakers on October of 2008 at a Congressional hearing. Here, Fuld stated that he took complete responsibility of this tragedy and also that he believed that every decision he took was “prudent and appropriate” given the data he was counting with at the time.
The set-up for the perfect storm
A consequence of bad bets in the mortgage markets during the housing boom, which we have previously discussed, this chaos affected the world big time, it is said that “Lehman's failure brought the world financial system to the brink of failure, and was later seen as a critical point in the transformation of a Wall Street crisis into a global economic slowdown” (nytimes).
The economic crisis started more than two decades ago. It started with the appointment of Alan Greenspan in 1987 as the Federal Reserve chairman by Ronald Regan. This was seen as a wise decision at the time, and would turn out to have some negative consequences to it. Alan Greenspan was a little known economist that was hopeful in bringing the economy out of its slump, and would become one of the most dominant figures in the global financial crisis. In the beginning Alan Greenspan sparked the economic growth in the U.S. economy. He began with stabilizing the economy in the most turbulent times. The ideas held by Alan Greenspan sparked economic growth and along with that a flourishing economy. The nature of these dealings was by avoiding inflation and decreasing the unemployment rate. Alan Greenspan was unique because he would rely on his gut feelings over data and statistics. Alan Greenspan was also right most of the time, although he admits that even he is not perfect.
In 1987 there was a stock crash in the UK and the stocks fell an approximate 25%. The Prime Minister Sir John Major was positive of the future of the UK economy. Throughout the next years the Prime Minister worked hard to bring back the economy from the state of panic it was at. The economy was going to get a push forward. The UK was positively affected by the rise in the economic growth in the United States and therefore slowly began to recover. The rise in home sales in the United States, the UK followed closely and became a market that would buy and sell property in order to make a profit. During the 1990’s to the 2000’s the market changed course in creating both jobs and creating enormous wealth. This was due to the stock market as well as the economy as a whole jobs rose as well as wealth during these booming times. The UK enjoyed this flourishing economy and began to invest in securities in search of high returns. The UK had its eyes on making itself one of the main dominant forces in the world.
In 1977 Jimmy Carter passed The Community Reinvestment Act. This act addressed the discrimination in loans in minorities in low to mid income neighborhoods. It also made it mandatory for banks to have FDIC and these banks were audited by federal agencies in order to see if these banks are running in a safe and sound manner. The act loosened up the credit to minorities in neighborhoods that were mainly populated by minorities. These banks were monitored in order to make sure that these banks were complying with the new regulations. This was a moderately successful bank it lessened the discrimination although it didn’t officially stop all of it. This act made it possible for many of these minorities to own homes as long as they were well qualified to purchase homes. Some of these loans were made at higher rates than that of Caucasian people that were getting loans for their homes.
In 1995 there was another important regulation passed by Bill Clinton. The change in regulation simply made it easier for banks to comply with the regulations already enacted and also forbade the discrimination of loans originating from slum neighborhoods. The regulation would cut costs on issuing these loans and would cut out the majority of the paperwork needed for these loans. By making these regulations, banks were in a sense forced to make risky loans in order to comply with the CRA act. The CRA act made it possible for millions of home loans to be made to many unqualified Americans. These unqualified Americans were getting the loans that they needed, but they were paying a premium on the loans. The unqualified people were paying higher than normal interest rates over the life of the loan.
During the Clinton presidency the economy was booming. The introduction of the CRA Act made it easy for a minority to go to a bank and apply for a loan. Some minorities would be unqualified and the banks would try to reject them and they would say that they would be filing a lawsuit due to discrimination. Although this was happening at the same time banks were making risky loans in order to create more wealth. These risky loans may be the root to the whole global meltdown that happened during the late 2000’s .The market for sub-prime loans was created by the US government which led lenders to increase their profit in one way or another in order to compensate for the riskier loans. The banks would make these loans to people that have tarnished credit as well as really bad credit. The loans usually came with a much higher interest rate that would offset the risk taken in these loans.
The housing crisis started with the legislations that were passed throughout the last two decades. The housing market was booming with the massive construction and development of new homes. The creation of jobs was tremendous and our economy was growing. During the Clinton presidency, the economy was growing on an average of 4% per year when compared to the Reagan-Bush administrations. The amounts of jobs created are staggering there were more than 22.5 million jobs created in eight years. This was due impart because of the booming property and housing market. The median household income also rose by $6.000.00 during the Clinton presidency. This could be because of the rise in minimum wage, or the longer hours worked throughout the industries. The inflation was the lowest since the 1960’s, and along with all this growth of course came the huge leap in homeownership figures which were at 67.7% in the third quarter of 2000. The homeownership was directly influenced by the legislations made by Carter and Clinton.

With the large scale of development, came many loans and sub-prime loans with adjustable rate mortgages. The amount of houses began to surpass the amount of houses being sold and therefore created a surplus in the housing market. The surplus made the prices of the homes to decline and it led to the inability to refinance these homes because of the decrease in value over the cost of the building of these homes. Because of the change in the economy as well as the job losses that came with the slowdown of the economy brought with it the mortgage delinquency and foreclosure. Many of the subprime loans holders could not keep up with the payments of the homes that they were purchasing. The Adjustable Rate Mortgages would be too much for these people to pay for these homes. The negative effects to the economy simply magnified the recession that the country was already going through.
There was more than one culprit in this economic recession and the government was one of the many agencies responsible for the recession. With all of these loan opportunities, came Roland Arnall he is said to be the father of sub-prime lending. He is the owner of the lending giant Ameriquest. In the times of the mortgage boom this company was a huge force in these loans. The company would offer a teaser rate mortgage and it would be low for the first few years and then jump dramatically over the life of the loan. Banks had most of the blame for the economic crisis since their greed led to mortgages that should not have been made. The loan officers were simply blinded by the money. To all of these banks including the CEO’s the money was worth all of these loans. During these times the banks were so greedy they would even make loans to illegal immigrants. This was an extreme corruption in these banks in order to make a huge profit. This was not the only bank issuing these types of loans there were many. These banks would than turn these loans in to securities. The banks would repackage and resell these loans and bundle the good and the bad together in order to lower the risk of these bundle. The bundles would be sold to other banks which in turn would turn to investors in order to buy these investment securities in order to make a profit. The securities were sold globally and that is one of the reasons why the whole world was affected by the mortgage profit. The bundled mortgages were insured by the credit default swaps. These credit default swaps are agreements in which the investor receives payments to protect the seller and in exchange gets a payoff in credit usually a bond or a loan. These investments seemed very opportunistic to investors.

Below are some statistics on the housing market.

The banks that were bundling all of these mortgage backed securities were also in turn buying securities that were mortgage backed. The Chinese government had a huge cash reserve from all of their economic growth and therefore invested in western markets. These Chinese invested heavily in the mortgage backed securities. The Chinese were impacted heavily by this economic crisis because of the large investments made in the US economy. These securities appealed to almost any investor. The loans were sold by banks in order to make a profit as well as cut off risk of those loans in order to avoid having the defaulting loans or potential foreclosures.
The attacks on the world trade center were much more drastic than initially thought. The attacks closed the market for approximately a week. The market had a shock in it and it was too much for the economy to overcome. Eventually the economy began to slowly head south. The economy of the United States began to falter. The whole economy was affected from the banking industry to transportation to production. The stock market fell sharply as shown below in the chart. The market hit rock bottom after the attacks. The enormous strain from the attacks made it very difficult for the economy to recover as quickly as initially intended.
Below is a chart of the Dow Jones Industrial Average before during and after the attacks.

Throughout the next six or seven years the economy began to slowly recover and it was growing again. Investors kept investing although the stock market seemed to be more volatile , but steadily growing. The markets are beginning to grow rapidly once again. The investors’ confidence is beginning to increase and trading is once again making leaps and bounds. By the year 2007 the market had once again regained approximately 75% of its value since the September 11Th attacks on the world trade center. The markets were about to get yet another shock, the mortgage loan crisis. The crisis damaged most of the economy of the world. No person was untouched by the market crisis. Every person is feeling the repercussions of the greedy investors.
The economy will never be the same after all of the changes in regulation that must be made in order to keep this country and the world in check. Greed must come to an end as well as lavish lifestyles. The impact of greed has almost brought this country to its knees. The government must regulate the industry in order to oversee a healthy economy. The following is a description of the rise and fall of the Lehman Bros.. Lehman Brothers Mortgage Bundles
Like many other banks, Lehman Brothers were taking advantage of the U.S. Federal Reserve monetary policy and the federal regulations which required banks make mortgages more accessible to low income individuals. The government’s plan was for more Americans to be homeowners. This gave opportunity to Lehman Brothers and other banks to finance mortgages to low income people.
In the banking world it is common for banks to trade transactions or bundle of transactions among each other. Included in these bundles were mortgages that were bundled up and labeled as very profitable assets which were sold to other banks in the U.S. and around the world.
The goal was to have more people own their own homes. Lower class people were very excited about it but were not well educated when it came to financing a home. These consumers put their trust in their banks who offered very attractive packages. The packages, at first, seem to be very affordable to these people, but what they didn’t know is that the rates that were being offered were only introductory rates. Introductory rates are normally advertised by banks to attract customers. After a certain period of times the introductory rates go up which could cause homeowners default on their loan. If an individual defaults on a loan, the bank obviously loses money because they are no longer receiving a monthly payment which pays for the principal and the interest charged by the bank. But this was not a problem for the Lehman brothers because they didn’t plan to hold on to those assets for long. These were the type of mortgages that were bundled up and labeled as very profitable assets and sold to other banks.
Lehman Brothers were not just financing these loans; they also purchased these bundles from other banks like Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are the two largest giants in the U.S. who own a large amount of mortgages. For decades property value had steadily gone up in value over the last few decades, but in just 7 years, property value more than doubled. Fannie Mae and Freddie Mac are blamed for this sudden increase in property value.
The increase in property value made it more difficult for low income individuals to afford a house payment. But this didn’t stop Lehman Brothers from financing to individuals who didn’t qualify for these loans. In fact most of the loans that were given were not necessarily to individuals who qualified but to individuals that were very high risks. This is the time when the NINJA Loans were created. Loans were given to individuals who had No Income, No Jobs or Assets. Richard “Dick” Fuld, CEO of Lehman Brothers, was a too greedy let this perceived opportunity go. He knew that he could get some leverage to invest more into these mortgages.
Leverage is always good if you can apply it well. Almost everyone uses leverage one way or another. People who buy homes don’t pay for them cash, they get leverage by borrowing money from their bank, this allows them to make other investments with the money they have available. Businesses do the same thing, they get leverage from banks or other investors to finance some of their investments. Some business uses this leverage to pay for supplies or to even finance their payroll. This leverage can bring higher profits to a business because they can make other investments while they borrow money from their bank. Leverage is also risky and could cause some losses. If the investment does not generate profits or if business doesn’t even get their original investment back, they will not have the funds to repay their leverage.
Lehman Brothers was no different from these businesses, they too worked on leverage. By 2008 the Lehman Brother’s ratio was forty four to one. This meant that for every dollar they owned the owed forty four dollars. Leverage this high was very risky. If rates would go up, Lehman Brothers would make billions profits, but if rates would go down, they would have losses for which they didn’t have enough assets to cover with. While this was going on, investors and auditors were not aware of the leverage that Lehman was operating with. Lehman Brothers did not have enough liquid assets to finance itself. So the only way out was to “Cook the Books”. Lehman had to report assets in order to be profitable. Banks normally let other bank borrow money in exchange for assets. Most of the times these assets are not worth as much as the loan value or many times these assets did not even exist. But this was not a problem to the banks because they knew that by the end of the week Lehman Brothers would pay the loans back. The money that they borrowed from other banks were reported as cash on hand but the loan was not recorded as a liability.
At the end of 2007, Lehman Brothers was celebrating another successful year with $4 billion dollars in profits. Of course, this meant that Dick Fuld and his employees would receive very high bonuses for that year. In 2004 Lehman Brothers paid his employees over $5 billion dollars in salaries and bonuses. Dick Fuld was who got compensated the most. It’s estimated that between 2000 and 2008 Dick Fuld got paid between $300 - $500 million dollars.
In 2008 the economy started to take a turn for the worse. The introductory rates were not as low as when people first financed their homes. People started struggling in making their mortgage payments. Many started to default on their mortgages. The economy started to take a hit as more and more people started defaulting on their mortgages. Lehman Brothers had a large amount of these risky investments. When this property crash occurred it caused negative impact on Lehman Brother’s balance sheet. In August Lehman Brothers had said that its financial portfolio was worth $40 billion dollars but in reality it was much less than that. Lehman Brothers had made this investments when the property prices were booming. Since 2006 property prices started to decrease. If Lehman Brothers bought a property for $1 Million dollars but the because of the property value had decreased, that property was now worth $500,000 or $250,000. Lehman Brothers now had a loss for the difference in these property values. By 2008 that was the case with most of the mortgages that Lehman had invested in.
In the third quarter in 2008, Lehman Brothers reported $2.5 billion dollars in losses. Year-to-date they had reported $6 billion dollars in losses. Investors started to lose faith in Lehman Brothers and started dumping stock and banks were withholding Lehman Brothers’ credit line. They started to believe that Lehman Brothers did not have enough assets to back up their loans. They didn’t want to risk their own bank and follow Lehman Brothers steps. By now Lehman had already reported $6.5 billion dollars in losses but started to lose $8 million per minute.
On a crisis like this it was obvious that Lehman Brothers would go to the treasury secretary, Hank Paulson. But Paulson refused to help Lehman Brothers. He felt that it would not be fair to bail out a bank, with tax payer’s money, that was negligent enough to get itself into that situation. If the government did this for one firm then others would be as negligent and expect for the government to bail them out. Lehman Brothers still had branches of business other than mortgages which were still profitable. Dick Fuld felt he could still save his bank if he could sell these to Bank of America. It was expected for Bank of America to make an offer.
Mean while, Dick Fulds rival, John Fayne who was the Meryl Lynch Chief Executive had his own worries. He thought that maybe Lehman Brothers problems would start to affect Meryl Lynch and would have the same fate as them. He knew that Lehman’s problems would eventually effect the world. There was nothing he could to prevent what was going to happen but he could still act to help save his bank, Meryl Lynch which was facing similar problems as Meryl Lynch. On a Saturday night he decided to call Ken Louis, Bank of America’s Chief Executive. He told him that he wanted to make him a deal. Louis agreed and flew to New York to meet with Fayne. Two days later Bank of America announced that they had purchased Meryl Lynch.
Dick Fuld was surprised and upset to hear this news and knew that Bank of America would not make him an offer to buy Lehman Brothers. But this was still not the end of the Lehman Brothers because there was still one more potential buyer. Barclays Plc, the U.K.’s third largest bank was another potential buyer. The British Government did not allow for Barclays to continue with the transaction. This is something that Dick Fuld did not see coming. On Sunday night he called, Harvey Miller who was known for being the most famous bankruptcy attorney in the U.S. Lehman Brothers attorneys were summoned to the FED and were told that Lehman Brothers had to prepare for Bankruptcy that same night. The FED made it clear that they would not finance Lehman Brothers unless they went into Bankruptcy. There’s an unofficial story that a second cousin of George Bush worked at Lehman Brothers. He called the White House under Duress but was unsuccessful because the operator told him that the President could not take his call.
Lehman Brothers filed for Chapter 11 Bankruptcy on September 15, 2008. Once again Lehman Brothers hit a new record; this was the largest bankruptcy in history. The total amount was $600 billion dollars in assets. Lehman Brothers was the first ones affected by the property downfall but others would follow. Many people lost their lifetime investments with Lehman Brothers and thousands lost their jobs over night. The entire European branch was out of job the following morning.
People around the world started to panic, if a bank as big as Lehman Brothers could go bankrupt others could follow. The next day the stock market had crashed. It was the lowest drop in one day since 911. Banks lost confidence in banks because they didn’t know if they were in a similar situation as Lehman Brothers. Banks exchange rates increased among themselves. These rates were too high that banks were unable to borrow the money which in turn meant that they could not lend money to their customers. Banks were no longer able to leverage business transactions. Businesses could not finance their inventories while others could not fund their payroll.
The next day Hank Paulson held a press conference and stood behind his decision by saying that he “didn’t feel that it would be appropriate to put tax payer’s money in resolving Lehman Brothers” There is a debate whether or not the government should have aided Lehman Brothers or not. Two days after Lehman Brothers filed for bankruptcy Barclay’s decided to buy Lehman Brothers North American Assets for $1.7 billion dollars. Much less than they would have paid if the they had not gone bankrupt.
Dick Fuld was summoned to the Washington to account for his faults with Lehman Brothers. To many he simply says that he is accountable for everything that happened but didn’t admit that he did anything wrong. Dick Fuld has no remorse because his share holders who lost billions of dollars now have nothing but he gets to walk away with all of his compensations that he obtained over the last few years in the sum of new $500 million dollars. Dick Fuld found that his compensations were appropriate because Lehman Brothers had a compensation committee which looked for the best interest of his employees as well as the share holders. Fuld blames the regulators “for the lack of regulations caused to be where we are today”.
Was it really the regulators lack of regulations that caused Lehman Brothers to go bankrupt? Or did Dick Fuld take advantage of a perceive opportunity. “By hiring an unregulated bond rated agencies which conflict of interest gave them every incentive to rate the company’s risky bonds as safe investments. How housing and banking regulators failed to curve the predatory lending abuses in the subprime market. How the net capital rule was implemented so Lehman and other investment banks could ramp up their leverage to dangerously high levels.” Diane Watson
The Lehman Brothers; an investment banking firm that competed against companies like Meryl lynch, and Fannie Mae, went bankrupt on September 11, 2008 when they filed the chapter 11 bankruptcy protection; which is an alternative so that the corporation can still run its business and control the bankruptcy process, since sometimes there are businesses that are able to become profitable again, or like Lehman Brothers liquidate itself. (http://www.sec.gov/investor/pubs/bankrupt.htm)
The day after the Lehman Brothers filed for the bankruptcy, economic and financial chaos began. This was going to lead to a devastating blow to all markets worldwide. When this occurred, Hank Paulson; who worked at Goldman Sachs left to become Treasury Secretary, he was called upon to see what they could do to figure out this problem. The U.S Treasury and financial firms met to talk the issues out. The Lehman Brothers were involved in many investments, especially what had to do with property. Lehman as a financial firm was lending out money to individuals and businesses to purchase homes and other properties, but they did this in a very risky manner, they would lend out without the loaner having something strong enough to back it up. The loans interest rate the rose, as the property value went down, and as the loaners did not pay Lehman Brothers lost. There was also the fact that other financial institutions did not trade with Lehman Brothers because, they did things in a strange opaque manner; like the riskiness of the loans. There was a 60 billion loss on bad debt loans do to this, which was a big part of the bankruptcy. This was all lead by the pride, arrogance, and greed that this institution had that was mainly implemented by CEO Richard Fuld. There were also shareholders that were dumping stocks and banks that were withholding credit. The interest rates that rose amongst bank institutions caused the withholding of lending, there was a lack of confidence amongst banks and all this was lead because of Lehman Brothers. Lehman Brothers was losing 8 million dollars per minute; they were really obviously in trouble. At this point in time The U.S. Treasury and the Fed decided to bailout AIG and Behr Sterns which was an amount of 200 billion dollars and 30 billions dollars as well; the public was confused because why had they bailed out these institutions but not on Lehman Brothers. The fact was that Lehman Brothers had a different complexities which were because of there fraud, and losses. (DarkAngelStarQ Pt. 1)
The financial institutions were all losing because the liquidity of the U.S. dollars was completely freezing, affecting all markets, all over the world. All other big businesses were also in a predicament, since they also had the need to borrow money for operational business needs, and some did this with commercial paper; Commercial paper consists of short-term, promissary notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days. Many companies use commercial paper to raise cash needed for current transactions, and many find it to be a lower-cost alternative to bank loans. (federalreserve.gov) after the aftershock of Lehman Brothers it caused the closing of all commercial papers. A big part of Lehman Brothers was money market funds which were alternatives for putting money like in a savings that would then be lent to other bank institutions and big business, they collapsed owing 800 million dollars that were owed to the reserve primary. This all affected other business and financial institutions. (DarkAngelStarQ Pt. 1)
The credit that banks had became useless; there wasn’t any to support individuals and businesses. There were big blue chip businesses that were not able to make payroll, fund there inventory, and fund their operational needs, they couldn’t finance there current needs and this had to change, immediately. These same things were affecting the markets in the U.K., and since a whole year before. It was leading to the affect of big financial European institutions, like H Boss, they were helped out by the government though, and they knew that Britain that to foster the financial fix up. America though, had a bigger problem that they had to face, which was that all the mortgages that institutions had bought and traded during the boom, were called toxic assets; certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder. The term became common during the financial crisis of 2007–2010, in which they played a major role (wikipedia.org). These were bought by banks, for which they borrowed money form other institutional banks; this was called leverage. Leverage can increase profits in good times, but leverage can also worsen losses. Since the property values had dropped the value of the assets did the same, banks said that they were very complex to price these properties, and there were still very large loans that needed to be paid. There was a lot of problem raising capital amongst financial institutions and since there wasn’t enough they began to sell assets, and since the price on these assets had gone down, they needed to sell more assets which affected then even more. (DarkAngelStarQ Pt. 2)
Three days after the fall of the Lehman Brothers, the U.S. Treasury decided to tackle the problem; they came up with four main options, 1.) buy the assets, 2.) insure the assets, 3.) inject capital, or 4.) bail out the homeowners; the problem with these option were that they would end up costing all around half a trillion dollars, needed presidential approval and the yes of the U.S. Congress. Well they ended up approving the buying of the toxic assets, the cost of this would be around 700 billion dollars and the reality was that it wasn’t what they wanted. The presidential election only slowed things down, as McCain and Obama decided to partake in the decision process that would take place, they agreed on nothing and only held up things. Ten days had passed since the fall of the Lehman Brothers and things were getting worse, the markets were going crazy, banks were hours from insolvency, and Ireland was in a recession.(DarkAngelStarQ Pt. 3)
Britain was the biggest exporters in banking from Europe, therefore they needed to come up with a solution to address this issue, they decided to fly to America to see how it was they were going to fix the problem and analyze there solutions and see if it would benefit them in Europe. They left unconvinced and turned to there alternative plan while awaiting the decision of the senate to pass the buying of the toxic assets in the U.S.; it was denied, it was not passed and they were already eleven days into the issue; it was a big disappointment. It took another four days to pass the bill, but by then damage had been done and extremely. This lead to the damage of so many businesses, the stock market crashed, and lending rates skyrocketed amongst banks. In Europe the government had to step in and relieve banks that were becoming insolvent. Iceland and Ireland though were being affected tremendously, there past financial actions and activities hurt them even more especially after the fall of the Lehman Brothers. It hit there banks very hard some banks had debts eight times higher than their own GDP (Gross Domestic Product) or Gross Domestic Income. The entire Irish financial institutions were on the verge of breaking, so they decided to guarantee the banks there, and this was done with the support of the other European countries. They all got together to agree on a way to help these banks, in a quick and effective way.(DarkAngelStarQ Pt. 4)
The plan had become real, they were going to inject capital into the banks, and this was done in support by other countries around Europe. The decision to pass this motion was still being awaited by everyone, and at this time two of the big bank institutions Royal Bank and H Boss were in the biggest of problems, they needed help immediately. So many things that could occur, one of them was becoming insolvent; they were on the verge of bankruptcy, they were running out of U.S. dollars and this could affect businesses as well as their financial institution and people as well since any type of deposit would be frozen, there would be no type of withdrawals or way to pay for salaries and wages, or even pay bills. Iceland was a great example, they were in all actuality bankrupt, this all lead by the fall of the Lehman Brothers; so there was a big need to pass laws that protected the people, but it was too late. The government therefore kept a very close eye on the two major banks that were in desperate need; H Boss and RBS. Britain agreed to get together with all the other big banks and come to a solution to help them to get through the week at the most. It helped, but the prime minister and the chancellor needed to prepare themselves to give their notice on what they were deciding to do to fix these financial issues. (DarkAngelStarQ Pt. 5)They presented there resolution and what they were going to do was use tax payers money to inject capital into money as well as guarantee loans. This was something that they also wanted all of Europe and other major countries to implement so that it could be something that would the done to cause a world wide effect. This though put the U.S. in a very difficult position. The United States Treasury then decided to buy equity stakes, and a wide variety of banks and thrifts. The U.K. had done its job in having the U.S. follow in its footsteps, by having them divert the money that they had thought of, for buying toxic assets with and instead bought shares in its banks and set up a way to guarantee bank loans. This was a great way to help improve the financial system.(DarkAngelStarQ Pt. 5)
With all this, it still caused a great recession that not only affected the U.S., but the rest of the world, there was not one country that this economic situation did not touch. So many businesses became busted and broke. Since the bankruptcy of the Lehman Brothers governments have spent at least 6 trillion dollars to fight the crisis. The Treasury says that the U.K. could have its debt rise by twenty percent or to around a trillion dollars in the next five years. There have been regulations that have been wanted to be passed, but they are still in the working process, because they are difficult to come through with. The Lehman Brothers collapse shattered the assumptions over decades, that modern finance eliminated risk, that asset prices would only rise and that the market works best when left alone, and that the most importantly the fall of Lehman shattered the illusion that we can ignore history. The fact of the manner is that it has been seen in the past and nothing that has been able to be done; is a big financial alarm to what could be ahead. (DarkAngelStarQ Pt. 6)
There are ways that a lot of these things could have been avoided, and this is meant because of what we have seen throughout our Forensic Accounting course. If Lehman Brothers had not been so greedy and been more responsible on the decisions that they made they could have been in a better position. Yes, the financial position of the economy was in a downturn, but who wasn’t; bad decisions are made by even the best corporations, but that doesn’t mean that they go off and do things that are unethical and illegal. It all started with their top management, Richard Fuld, he put in a way a bad example; he made believe people that in reality they were doing okay and that everything was normal, but that wasn’t the case. As it is talked about throughout this paper there irresponsible decisions and actions led to so many events that affected our financial world market and what it has become today; very fragile.
Conclusion
Lehman Brothers is one of the most important companies that have ever existed in this time. After taking a deep look at the fraud committed here, we have been able to conclude several ideas. Throughout the semester we have been talking about the fraud triangle, which we believe played a very important role in this case. The triangle consists of three categories which include: Perceived Pressure, Rationalization and Perceived Opportunity. We truly believe that perceived pressure played a very important role in this fraud since the need to report financial results better than actual performance was present in this case, even a challenge to beat the system could have been a cause. Rationalization, Mr. Fuld stated in his statement that every decision he took was “prudent and appropriate” given the data he was counting with at the time. Perceived Opportunity, we believe that the people involved I this fraud believe they could conceal the fraud. As stated in the book, financial pressures have a big role in frauds and greed is part of them. Lehman Brothers Holdings Inc. had been in business for a really long period of time as discussed in the introduction, but as the book states: “The fact that someone has been an ‘honest’ employee for a long time seems to make no difference when severe financial pressures occur or an individual perceives that such pressures exist”. It is also known that 70 percent of employee frauds are committed by employees that have 4 to 35 years of experience. This is exactly the category in which Lehman Brothers CEO falls into. Management’s Role and Example is the most important element in establishing an appropriate environment. We believe that everything starts with top management, how they behave in the organization and the example they give to their employees. We also believe that employees will most likely follow the behaviors that they see in their supervisors, managers and other top executives. In this case, the CEO of Lehman Brothers was not setting a good example. The behavior shown in this case affected not only employees of the company, their families, and the community in the town, this came to affect enormously the economy of the world. We have learned that lying, or as it is known “cooking the books” can only last for so long, and at the end the truth comes up and the ones responsible for the fraud have to pay the damage.
There are many ways that us, as future managers or owners of a business can avoid being victims of fraud or even being involved in a fraud. In this case we look at our internal control structure. Important factors here include: Management philosophy and operating style, modeling, effective hiring procedures, clear organizational structure of proper modeling and labeling, effective internal audit department, valid transactions, properly authorized, completeness, proper classification, proper timing, proper valuation, correct summarization, segregation of duties, proper procedures for authorization, adequate documents and records, physical control over assets and records, and independent checks on performance. Another important aspect of fraud is that legal action should be taken against the perpetrators to make everyone in the company aware that if a fraud is committed, the perpetrators will be punished and this will strongly affect them. We believe this type of awareness is very important to achieve a fraud free organization.

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STATEMENT OF RICHARD S. FULD, JR. BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES - APRIL 20, 2010.