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, to no avail. Then, one time he objected to a tax deal that an outside reshuffling some papers to get an expense off the balance sheet. It was not the right thing, and told them.” However, Budde’s bosses disagreed and Okayed the deal. Another problem at Lehman was the firm’s top leadership. Valuka’s report was highly critical of Lehman’s executives who “should have done more, done better.” He pointed out that the executives made the company’s problems worse by their conduct, which ranged from “serious but nonculpable errors of business judgment to actionable balance sheet manipulation.” Valukas went on to say that “former chief executive Richard Fuld was at least grossly negligent in causing Lehman to file misleading periodic reports.” These reports were part of an accounting device called “Repo 105.” Lehman used this device to get some $50 billion of undesirable assets off its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss. The examiner’s report “included e-mails from Lehman’s global financial controller confirming that the only purpose or motive for Repo 105 transactions was reduction in the balance sheet, adding that there was no substance to the transaction.” Lehman’s auditor was aware of the use of it as well; however, he signed off on quarterly reports that made no mention of it. Fuld’s attorney said, “Mr. Flud did not know these transactions were – he didn’t structure or negotiste them, nor was he aware of their accounting treatment.” A spokesperson from Ernst & Young (the auditor) said that, “Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets.”

Discussion Questions
1. Describe the situation at Lehman Brothers from an ethics perspective. What’s your opinion of what happened here?
2. What was the culture at Lehman’ Brothers like?? How did this culture contribute to the company’s downfall?
3. What role did Lehman’s executives play in the company’s collapse? Where they being responsible and ethical? Discuss.
4. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.
5. After all the public uproar over Enron and then the passage of the Sarbanes-Oxley Act to protect shareholders, why do you think we still continue to see these types of situations? Is it unreasonable to expect that businesses can and should act ethically?