...The crumble of the Lehman Brothers undertook the world by storm. The Lehman Brothers was the leading mortgage broker in the across the globe for centuries. When they filed for bankruptcy in 2008 the financial world was crippled. Over 25,000 employees lost their jobs and livelihood due to the fact that this bankruptcy uprooted their lives and deserted them with absolutely nothing. The Lehman Brothers assets calculated up to $639 billion while their debt equaled to $619 billion (Case study: The collapse of lehman brothers, n.d.). This enormous volume of money for bankruptcy summed up to be the greatest bankruptcy in accounting financial history. This is clearly not the record the Lehman Brothers were attempting to break, but it was the reality. This catastrophe interposed to the $10 trillion in market capitalization that has affected the finance worldwide for the month of October 2008 (Case study: The collapse of lehman brothers, n.d.). This exploit devastated the stock market, the economy, the employees, and the families who trusted the Lehman Brothers company to use them to finance their home loans. Henry Lehman, a German immigrant, started a diminutive conventional store in 1844 and that was established in Montgomery, Alabama (Case study: The collapse of lehman brothers, n.d.). Then by 1850 Henry, Mayor, and Emanuel created Lehman Brothers the mortgage broker company (Case study: The collapse of lehman brothers, n.d.). The organization flourished as the nation grew...
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...Lessons from Lehman Brothers: Will We Ever Learn? On September 15, 2008, financial services firm lehman Brothers filed for bankruptcy with the U.S Bankruptcy Court in the Southern District of New York. That action - the largest Chapter 11 filling in financial history – unleashed a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” The fall of this Wall Street icon is, unfortunately, not a new one, as we’ve seen in the stories of Enron, WorldCom, and others. In a report released by bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the firm’s auditor, Ernst and Young, were lambasted for actions that led to the firm’s collapse. He said, “Lehman repeatedly exceeded its own internal risk limits and controls, and a wide range of bad calls by its management led to the bank’s failure.” Let’s look behind the scenes at some of the issues. One of the major problems at Lehman was its culture and reward structure. Excessive risk taking by employees was openly lauded and rewarded handsomely. Individuals making questionable deals were hailed and treated as “conquering heroes.” On the other hand, anyone who questioned decisions was often ignored or overruled. For instance, Oliver Budde, who served as an associate generals counsel at Lehman for nine years, was responsible for preparing the firm’s public filings on executives were paid,” Budde argued with his bosses for years about that matter...
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...Case Study : Lehman Brother’s Demise of Lehman Brothers Lehman Brother’s demise was the event that gripped the US financial system into shock. It was the fourth largest investment firm in the US as of 2007 with 25,000 employees worldwide. The Firm had an exponential growth and recognized profits from 2005 to 2006 and in 2007 reported a net income of $4.2 billion dollars on revenues of 19.3 billion. The stock price of the company reached all-time high when it hit $86.18 per share. Lehman increased 56% in its revenues only from the subprime mortgage business alone. While the company kept reaping benefits, the real estate market in the US started to show signs of pending bubble burst. In March 2007 stock market experienced biggest drop in 5 years and mortgage defaults rose up to the highest percentage in almost a decade. Investors were confident with their money as they were satisfied with Lehman’s financial statements and their past resilience with depressions. According to NyTimes “Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio.” Later when Lehman was exposed of their use of accounting gimmicks to mislead the investors. This led the investors to lose confidence in Lehman brothers. Investors started dumping their stocks while other...
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...Lehman Brothers Holdings Inc. The control break downs of Lehman Brothers Holdings Inc. included the massive amount of money borrowed to fund its investments. A considerable portion of this investment was in real estate, which made the investment defenseless against a fall in the market. Lehman also used one of its small companies to reallocate investments off its books. The firm was active in the market for Residential Mortgage Backed Securities (RMBS). The process involved buying several residential mortgages, combining them and selling them as securities. RMBS buyers actually purchased claims on the cash flow generated by the securities. Lehman produced a great amount of these securities, making the demand high for mortgage originators. This led mortgage originators to extend credit to people who were not credit worthy, or did not have enough income causing these people to have upside down mortgages on their homes when housing prices plummeted in 2006. In 2000, the stock market started to decline and the Federal Reserve significantly reduced interest rates. These lower interest rates caused inexpensive mortgage payments, which lead to a large demand for homes. Homeowners took advantage of the low interest rates and refinanced their mortgages. In 2008, Lehman announced that they would file for bankruptcy after a huge loss in the market, a loss of investors and their inability to find an adequate buyer. Soon after, their collapse set the market into panic mode...
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...Lehman Brothers Holdings, Inc. 1) Ernst and Young was acting as the independent auditor for Lehman and not as consultant. Therefore, I do not feel that Ernst and Young had a direct responsibility in being involved with the developmental process of the Repo 105 accounting policy. The party who would be labile for implementing Repo 105 would be management and not the independent auditors. AU 110 discuses responsibilities and functions of the independent auditor, it clearly states how management is in charge of creating accounting policies and not the external auditors. The role of the auditor would come in after the accounting policies have been made by management, it would be there job to evaluate the policies that were set in place and to make evaluations on whether or not everything complied with GAAP, that no illegal accounting tactics were being used, and that due diligence...
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...Henry Lehman created a small general store selling groceries and dry goods to local farmers in 1844. Shortly after, Henry’s two brothers, Emmanuel and Mayer, joined the business. The three brothers established the business known as Lehman Brothers in 1850’s. The business transitioned from selling merchandise to commodities brokers, where they bought and sold cotton. Lehman Brothers grew rapidly due to the capitalization of high cotton prices. A partnership was formed with a cotton merchant that allowed Lehman Brothers to pursue other venues. Through strategic partnership the business survived the difficult times it experienced during the Civil War. Lehman Brothers opened a new office in New York which became the main campus for its operations. This office furthered their trading business and introduced them to the financial industry. In later years, Lehman became involved in the New York stock exchange where the underwriting business began. The firm grew rapidly and was very successful for years. After many years of hard work and success the company collapsed and filed for bankruptcy in 2008. Lehman had been unhealthy for a while and covered it up by secretly shuffling debt around to make its books look in order and deceive the real situation. Lehman used an aggressive accounting method to hide their losses and made it difficult for investors, executives and/or auditors to detect their actual financial status. This accounting method is known as REPO 105, which...
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...Introduction History of Lehman Brothers Subprime Crisis Explained Vicious circle & the fall of Lehman Brothers Organizational Culture at Lehman Brothers Future Conclusion Introduction Lehman Brothers Holdings Inc, aka the fourth-largest investment financial institution in the US (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), was a 158 years old bank that had to declare its bankruptcy in September 2008. Led by its CEO, Richard Fuld, Lehman Brothers was a glorious and respected investment bank for which some of the most experienced and intelligent financial analysts/investors were working. How come then, than in a less than one week, the whole structure imploded and led to one historical bankruptcy and with the same occasion, became the trigger of the 2nd most dramatic worldwide financial crisis? This essay has been written, in what seemed to me, the most logical way to approach this very interesting and complex subject. A quick peak to Lehman Brothers’ history will help the reader to understand how, starting from very humble origins, Lehman Brothers became one of the top investment financial institutions in the US before its collapse. The financial crisis of 2008, also called the subprime crisis was the biggest reason of LB’s downfall. Having done some researches, the reader will be explained, in a very intuitive but complete manner, how this crisis began and how it evolved until it affected the whole world. One can already agree that LB’s got caught...
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...Profile of Lehman Brothers Lehman Brothers, which shook the US financial system with a statement declaring itself bankrupt Monday, is the fourth-biggest New York investment bank with roots going back to 1850. By AFP September 15, 2008 Be the first to post a comment NEW YORK - Lehman Brothers, which shook the US financial system with a statement declaring itself bankrupt Monday, is the fourth-biggest New York investment bank with roots going back to 1850. The bank, one of the most prestigious names in finance, employs about 27,000 people after staff cuts in response to asset writedowns totalling 13.8 billion dollars because of the subprime home-loan crisis. OPERATIONS: Lehman is one of the banks at the heart of the US, and global, financial system, being a primary dealer in US Treasury securities - US debt instruments. It has operations in investment banking and asset management, mainly through its Neuberger Berman unit. FINANCES: Lehman posted a loss of 3.9 billion dollars in its third fiscal quarter to the end of August, following a 2.8 billion-dollar loss in the second quarter. The firm has written off 13.8 billion dollars linked to the US subprime mortgage crisis, and has raised 10 billion dollars through share offerings this year. SHARE PRICES/VALUE: Lehman shares have slid from a high point of 66 dollars in February to less than 10 dollars. The 85-percent drop places its market capitalization at about 5.5 billion dollars, close to the level of...
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...The Lehman Brothers Bankruptcy Abstract Lehman Brothers filed for bankruptcy and very nearly caused a collapse of the world’s financial system on September 15 2008. This report looks at the reason behind Lehman bankruptcy and how this create financial panic during the fall in the year 2008. Introduction The Lehman brothers had played an important part in the growth of American industry and technology as well as the establishment of the modern corporation for more than 150 years Executive Summary The largest bankruptcy of Lehman brothers ever filled which losses to investors and billions of dollars. Lehman Brothers profoundly invested in pension plans such as the New York State Teacher Retirement Plan and the California Public retirement System, traded at a high over $ 65 per share. Lehman Brothers Bankruptcy, after a year they have had their biggest profit. U.S investment Bank Lehman Brothers filed for chapter 11 Bankruptcy in 15th September 2008.Lehman’s Brothers bankruptcy was considered the largest in history with $639 billion in assets and $ 619 billion in debt. At the time of its collapse, Lehman was the fourth largest U.S investment bank with worldwide employees. One of the root causes of the Lehman’s collapse is U.S subprime mortgages and real state market. History of the Lehman Brothers Henry, Emanuel and Mayer Lehman Migrated from Germany to Montgomery, Alabama in the mid-1800s.They started their business from a small grocery shop to the local cotton...
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...Lessons from Lehman Brothers: Will We Ever Learn? MGT 521 September 9, 2013 Introduction Lehman Brothers financial services filed bankruptcy on September 15, 2008, in the New York Southern District U.S. Bankruptcy Court. Resulting in an immediate 500 point drop in the Dow Jones (Did Ernst & Young Really Assist Financial Fraud? 2011). This day became known as ‘‘Dark Monday’’ (Donaldson, 2012). This was to date, the largest bankruptcy filing in history unleashing a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” However this financial icon’s fall is no surprise. The bankruptcy examiner released reports saying that the firm’s executives and auditor, “lambasted” for what they did to cause the collapse of the firm (Robbins & Coulter, 2010). The Lehman Brother culture was one of risk and reward. At the company, “Excessive risk taking by employees was openly lauded and rewarded handsomely. Employees knew they could give risky ideas and they would get rewards for them. Individuals making questionable deals were hailed and treated as ‘conquering heroes’.” (Robbins & Coulter, 2010, pp. 147-148). If anyone would question decisions made or speak out in disagreement, executives would not listen. In addition, the executives would overrule and go with the least desirable decision. Most companies would be wary of taking so many risks and only give reward after that...
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...a date that modern day Wall Street insiders will not soon forget. On that day, one of Wall Street’s iconic investment banking firms, Lehman Brothers, filed for bankruptcy. That bankruptcy filing ended the proud history of a firm that had played a major role in shaping the nation’s securities markets and economy for more than a century. Lehman Brothers had approximately $700 billion in assets when it failed, which makes it the largest corporate bankruptcy in U.S. history, easily surpassing the previous headline-grabbing bankruptcies of Enron, General Motors, and WorldCom. By comparison, the telecommunications giant WorldCom, which temporarily held the title of the nation’s largest business failure after collapsing in 2002, had less than onesixth the total assets claimed by Lehman Brothers. The shocking announcement that Lehman had filed for bankruptcy caused the DJIA to plunge more than 500 points within a few hours. That large loss was only a harbinger of things to come. Within six months, the DJIA had declined by more than 50 percent from its all-time high of 14,164.53 that it had reached on October 9, 2007. That market decline wiped out nearly ten trillion dollars of “paper” wealth for stock market investors and plunged the U.S. and world economies into what became known as the Great Recession. In the spring of 2010, the Lehman bankruptcy once again captured the nation’s attention when the company’s court-appointed bankruptcy examiner released his 2200-page...
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...------------------------------------------------- Lehman Brothers Collapse ------------------------------------------------- Lehman Brothers Collapse Executive Summary The following report discusses and analyzes the events leading up to the failure of Lehman Brothers as well as outcomes and repercussions of one of the largest bankruptcy cases to date. The first part of this paper describes the primary factors that contributed to the ultimate demise of Lehman Brothers. The main factors that lead to the crisis include, but are not limited to; the misrepresentation of financial statements, a complete lack of internal control, accounting as well as management collusion, managerial fraud, increased moral hazard, and the overpayment of executives within the firm. Misrepresentation of the financial statements and the misuse of accounting practices was the main reason for the Collapse of Lehman Brothers. It was said that upper management violated the Sarbanes-Oxley Act through the use of questionable and unethical accounting practices, more specifically through the use of Repo 105 transactions. The second part of this paper addresses the underlying causes and issues relative to the study of financial ethics. This paper also addresses those who were involved as well as affected by the events that took place in the Lehman Brothers scandal. After evaluating the reasons for Lehman Brothers failure, the report discusses possible courses of action to take in order...
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...Lessons from Lehman Brothers: Will We Ever Learn? Steven Figueroa, Adrian Bland, Victoria Fabuluje, Amy Ramkey, Carmen M. Ortiz MGT/521 03/10/14 CHRISTINE GNIEDZIEJKA Lessons from Lehman Brothers: Will We Ever Learn? 2. What was the culture at Lehman Brothers like? How did this culture contribute to the company's downfall? Anyone knows that rewarding bad or illegal behavior can lead to the making of a person who is irresponsible and reckless. This is a general description of the type of employees involved in the Lehman Brothers company culture. The Lehman Brothers culture was out of control and a blind eye was turned to any high risk deals and or illegal modifications done to the company balance sheet. Many failed or wrong decisions made by management often went without consequence. In fact, individuals making any high risk or questionable deals were treated like superstars or moneymakers rather than irresponsible or uncalculated decision makers. This type of reward system can only draw the attention of the greedy and crooked minded. The type of culture created was a recipe of disaster for the Lehman Brothers company. There were some employees that did not agree with many of the choices made by upper management. But, when they attempted to voice their opinion or concerns they were ignored and overruled leaving them no choice but to follow suit. By ignoring any standards, ethics or controls to guide the Lehman Brothers culture the employees were left to express their...
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...Lehman History Lehman Brothers had humble origins, tracing its roots back to a small general store that was founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844. In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers. While the firm prospered over the following decades as the U.S. economy grew into an international powerhouse, Lehman had to contend with plenty of challenges over the years. Lehman survived them all – the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998. However, despite its ability to survive past disasters, the collapse of the U.S. housing market ultimately brought Lehman Brothers to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step. As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times...
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...Bankruptcy of Lehman Brothers Causes CAUSES Malfeasance A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firm’s financial condition in late 2007 and 2008 Subprime mortgage crisis In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. Short-selling allegations...
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