lehman brothers dissertation

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In yr 2008, financial meltdown had generated the failure of many banking institutions in Us. Lehman Friends was among the banks that had registered its individual bankruptcy on 12-15 September 08. It was the most important bankruptcy inside the history and that still is for the time being. Being the fourth largest expenditure bank in United States that had been established for 158 years, its inability had helped bring a big impact to the world economical markets. The failure of this large investment bank had triggered people around the world.

After the inability of Lehman Brothers in 2008, there are a variety of analysts and research workers that experienced tried to discover the root of such event, the causes of the collapse, the effects of the failing and some lessons that could be discovered from the failure of Lehman Brothers. All of these papers and analysis get their own standpoint. Therefore , there are many objectives that I would like to concentrate on. In this paper, we will first focus on “What brought on its failure?  Exactly what happened could have its own reasons and causes.

Next we will focus on “what is the effect of its failure?  One other objective that people are centering on is the lessons that we attained from this failure. It is very important to examine the story of Lehman Friends who was a legend because it was established in 1850 until 2008 and they had made it through through the community financial crisis.

1 . 0 Good Lehman Siblings

Lehman Brothers was first founded by a fresh German migrant Henry Lehman in Montgomery, Alabama in year 1844. He started up a shop known as ‘H. Lehman’, which sells groceries and dry products to some local cotton maqui berry farmers. In 1847, his sibling Emanuel Lehman arrived, and in addition they change the name again to ‘H. Lehman and Bro’. In 1850, their youngest brother Mayer Lehman found its way to Montgomery and once again they changed its name and ‘Lehman Brothers’ founded by then.

During that time, cotton was one of the essential crops hence they have a large market value. The three Lehman siblings started to acknowledge raw cotton from their buyers as a source of payment for merchandise. In a few years, the trading of cotton came into existence their essential part00 of their procedure. In 1855, Henry Lehman passed away when justin was 33 from yellow fever. After Henry’s death, Mayer and Emanuel continued their very own business in commodities trading. They have their own policy, only their relatives members-sons, siblings, and cousins-that were allowed to be their partners. This policy persists until 1920s.

Their business grow and in addition they formed a partnership which has a cotton product owner John Wesley Durr to build their own storage warehouse. They will used this warehouse to store their mass amount of cotton in order to support much larger sales and trades. All their business continuing to increase and they set up an office in New York in year 1858. However , Lehman Brothers faced hardship during the period of Civil Battle but they were able to rebuild their very own business following the war, and focusing their particular operations located in the New You are able to office. Lehman Brothers increase to include sales and trading of additional goods. Besides forming the New York Cotton Exchange, these were involved in developing the Coffee Exchange and Petroleum Exchange. In 1868, Lehman Siblings became the agent of the Alabama authorities in selling the state’s a genuine.

In 1906, under the command of Philip Lehman, kid of Emanuel, he joined with Goldman Sachs, with each other they helped bring the General Cigar Co. to advertise followed by Target, Roebuck and Company. There have been around hundred new issues that were underwritten by Lehman Brothers together with Goldman. Philip Lehman retired in 1925, and the business was absorbed by his son, Robert Lehman. Below Robert’s leading, the company made it through through the Great Depression, and they go on their operation focusing on venture capital. In 1930s, they underwrote the Initial Community Offering (IPO) of the initial television producer, DuMont. Additionally, they helped to finance companies just like Halliburton and Kerr-McKee.

In 1969, Robert Lehman died and having been the last part of Lehman relatives to lead the organization. Robert’s fatality had resulted in problems that brought hard times towards the firm. In 1973, a significant person, Pete Peterson was brought in to save lots of the firm from its difficulties. He while the Leader and CEO had led the company from working losses to record profits in five consecutive years. Lehman Friends merged with Kuhn, Loeb Inc., and formed the country’s fourth largest expense bank forwent by Salomon Brothers, Goldman and Initial Boston. In 1984, American Express acquired Lehman Siblings to combine with selling brokerage Shearson to form Shearson Lehman Brothers.

However , a couple of years later in 1993, the firm content spun off and became known solely as Lehman Brothers. In 2001, the earth Trade Middle offices were destroyed simply by terrorist assault therefore all their headquarters was moved to New york in 2002. The company continue to sparkle until 2008, it had recorded a high revenue in 2007 but in not more than a year’s period they was entangled in the subprime mortgage lending crisis. On September 15 2008, they submitted a Section 11 personal bankruptcy in government court.

installment payments on your 0 Causes of its Inability

The break of Lehman Brothers was obviously a huge influence because everybody was thinking that it is impossible for such a large bank to break down. Lehman Friends had just reported a sizable profit in 2007, in under a year period they submitted for their bankruptcy. After the inability of Lehman Brothers, there have been many people discussing about the causes that led to the failure on this large investment bank. Even though managed to go through the past economic depression with their business strategies nonetheless they could not endure the fall of the housing market of United states. Until today, the causes of it is failure had been still becoming discussed when it comes to around the world. Several would say that the poor management of the organization itself was your key to the collapse in the bank.

The best management of Lehman Brothers failed to discover the problem that may occur with their balance sheet and their Chief Executive Officer (CEO), Richard M. Fuld experienced miscalculated the severity with the market upheaval. Lehman began to emerge in home mortgages in 2005 without bothering the early warning that the housing industry in Usa is being overheated and it will broken anytime. In 2007, two hedge cash sponsored simply by Bear Sterns collapsed as well as the market’s focus had centered on the value of subprime mortgages. The firm offers confidence with itself mainly because they consider itself because an expert in the financing real estate. Lehman Friends did not have the ability to detect the alarm however because all their balance sheet was heavily measured in commercial real estate which usually had not do with the residential housing sector. Even though the lower managing might have diagnosed the danger previous but the reports could not reach until the leading management.

The firm did not realize that it absolutely was actually a ticking period bomb that might explode anytime. It is a norm that the leading management was your last person to know whenever there is a danger because the staff would try to cover up. For this reason the top supervision could not respond to save the firm at an earlier stage. Some could argue that the CEO, Fuld was to blame because of his overconfidence and failure to acknowledge that Lehman faced an essential crisis. Besides, Lehman paid out an extremely excessive salaries and bonuses for his or her employees which usually total up more than half of the company gained in pre-tax profit. Additionally , the accounting system of Lehman itself was a big fail. They utilized “Repo one zero five transactions that was explained by their personal accounting personnel as an “accounting gimmick. First of all, a few would issue what does “repo means.

“Repo means repurchase agreements, purchase which banking institutions use it to borrow money for short term. It consists of raising money by lending out top quality assets for a short period of time. The banking companies will accept to repurchase their very own collateral in a few days or several weeks. This way of recording all their accounts created a false characterization of their authentic financial position. Even the exterior auditor, Ernst & Small did not take further actions to investigate the “repo. According to Stern Stewart (2002), he stated that accounting is no longer counting what counts and the ones in charge have never been wise enough or perhaps strong enough to resist their ploys to make the auditors’ meaning of earning in a reliable way of measuring value. Accounting fraud and accounting treatment are the main reasons to companies’ failure and financial downturn. They intend to keep this matter and hide this from the shareholders and the public. In such a case, the external auditors did not do what exactly they are supposed to do.

That they failed to offer any caution to the shareholders about the non-disclosure with their financial statements. According to the General public Company Accounting Oversight Table, “an exterior auditor provides a responsibility to plan and perform the audit to have reasonable assurance about whether or not the financial transactions are free of material misstatement, if caused by error or fraud Lehman Brothers’ reckless means of lending built the organization into more liabilities. The subprime loans were to meet the needs of Americans whom could not become qualified pertaining to long-term mortgage loans. Subprime mortgages were targeted on credit unworthy person but likewise had low interest on permanent basis. Therefore , subprime mortgages were loans that are high in risk yet low in go back compared to the home to be purchased. Meanwhile, Lehman also encourages the “ninja (no income, no task, and no assets) or better known as liar loans. These kinds of loans were banned in United Kingdom since “ninja loans are loans offered to open public without any sort of collateral. Any individual could bank loan from the financial institution even he’s without a job, with out stable profits and without any assets available.

These financial loans are an additional key for the failing of Lehman. Such loans are the mating ground of unethical actions in the financial market. These loans encourage the meaning hazard to take place because the debtors had not lose because they have no assets to be kept as assets. Following the episode of the failure of Lehman, there are people questioning your decision of the Fed for not bailing out Lehman. Federal Book does not entente out Lehman because Lehman could not prove that they have a chance to repay the money from Fed. There is a theory in the economics called the “Big Traditional bank Theory which means governments will never allow a sizable bank just like Lehman to collapse because it brings a huge impact towards the economic. This theory does works the moment American Worldwide Group (AIG) and Endure Sterns were being helped by simply Fed in order to avoid it coming from falling. Everyone thought a similar fate may happen to Lehman as well due to theory “too big to fail.

Nevertheless , Lehman Friends could not escape from the bankruptcy fate. Given had conducted assessments and it revealed that the failure of Lehman would not provide such a huge impact to the complete world when compared to AIG or Bear Sterns. Federal Hold chose to bailout Bear Sterns but not Lehman Brothers since when the Given bailed out Bear Strict in Drive 2008, that claimed the fact that bailout was an “extraordinary event, thus it is extremely hard for Provided to save an additional troubled monetary firm since it is not possible intended for “extraordinary events to occur that often. Competitions are very common in each and every sector including financial and fund sector. Banks will contend among themselves on the two assets and liabilities.

In accordance to Bolt and Tieman (2004), to survive the competition intended for loans and remain profitable, banking companies undertake steps that will drive the loan amounts and enhance profitability but ultimately compromise their property quality and increase the possibility of falling apart. Bank consequently started to improve the risk in their portfolio by simply lowering conditions or terms and state for a loan. Wilmarth (2009) decided that competition impacts negatively on lending standards, depending on events ultimately causing the global financial disaster in 3 years ago. Banks compete blindly with one another neglecting the possible danger that might come up and damaging towards the banking institutions. They keep about offering subprime mortgages with low repayments in order to entice more buyers. When the housing prices collapsed in 3 years ago, the debtors could not refinance their home loans and defaults happen ultimately lead to the subprime financial disaster.

3. zero Effects of Their Failure

In March 2010, it surfaced that the bankruptcy was not just the largest ever to be knowledgeable in the American financial system, but it was also one of the largest accounting scandals ever (Connerty, 2010). The failure of Lehman Brothers is similar to that Enron skilled earlier in 2001. These kinds of failure and the present circumstance of Lehman show how an investment financial institution had efficiently fool all of the investors and financial experts. The traders of Lehman Brothers were badly affected because they will could not avoid from the financial crisis impact. In many countries, the shareholders were poorly affected because most of them are holding the bonds issued by Lehman before that collapses. In Hong Kong, you will find 43, 1000 individuals who had bought the so-called mini bonds up to a total of $ 1 ) 8 billion. Pension funds, such as the New York State Teachers’ retirement prepare had as well incurred losses due to the fall of Lehman (Bryan-Low, 2009, cited in Swedberg, 2010).

Once Lehman declared its bankruptcy about September 08, investors lose their money plus some investors are actually senior citizens. However some investors perform suffer an enormous loss, yet most of the world’s leading expense banks made big revenue again last season. Investment financial institutions have always been a really volatile business and it will even now continue on to obtain its pros and cons. The failure of investment banks would not affect the long term of the business because it is a really profitable business. The consequences in the collapse of Lehman are not that long mainly because some banking institutions started to record profit in a year. Yet , United States of America’s overall economy was really affected plus the US govt needs to support the markets to avoid any further catastrophe and to prevent the history of the Great Depression thirties to happen once again.

4. 0 Lessons Learned after the Break

Caplan et al., (2010) mention that 5 years ago, Lehman manufactured a strategic decision in pursuing a higher-growth organization strategy. To accomplish their objective they made from a low-risk brokerage model to capital-intensive financial model that required those to buy property and retail store them as opposed to acquiring resources to generally moving them to a third party. This tactic at the time as well brought a higher risk because a lot of the assets had been long term plus they were remarkably illiquid. While the subprime crisis took place, Lehman were required to act quickly to liquidate it is illiquid assets in housing mortgages. The crisis caused the possessions to be discovered at lower price due to the negative notion in the general public. Lehman should have forgone their high-growth approach because its expense had outweighed the benefits. Holding on with the technique kept dragging Lehman into deeper hazard because they should have sacrifice part of the profits to protect themselves from substantial loss.

Besides that, the very best managers needs to have eliminated doubtful accounting techniques by having to a excessive ethical regular. Lehman used Repo a hundred and five was merely one of the technique of many wrongful action used by Lehman showing that their financial claims are still secure and at a healthy state. Lehman practiced the Repo a hundred and five in an underhanded way to be able to acquire new loans simply by displaying a healthier situation compared to the genuine situation. A normal accounting program open just how for unethical managers to take advantage of it.

They excercise the standard in accordance to their individual unethical behavior in order to obtain or to screen a healthy scenario to the public. Therefore , the accounting requirements must be altered to avoid one of the unethical conduct that could affect the benefits of people. The financial statements must meet the important accounting regular and the external auditors should point out the mismatch from the balance sheet and investigate for any problem occurred. In this way, it truly is easier to track the problem earlier and the administration could not have chance to cover the true condition of their firm. Caplan ou al., (2010) suggest that substance must be taken into consideration over contact form, in which the fairness and the health of the business must be evaluated based on the substance from the statements and not simply the ratios inferred from their website.

Basically, increasing safety netting involves providing all-embracing ensures to equally creditors and depositors of both business and expense banks (Rochet, 2010). Expanding the safety netting is to maintain funding specifically during the economic downturn times and also to rebuild the investor self confidence after such a major recession. The strategy to stabilize the economic is important and it requires to be carrying on a long term basis to be able to prevent upcoming failures. These strategies needs to be carried out by investment banks themselves as they had been one of the factors that caused the Lehman Brothers to collapse.

In addition , we should have come away with approaches that were fond of dealing with the challenge assets and implement the strategies in advance before the financial system failure happens. It is better to get ready earlier rather than waiting for the failure to occur by its. These strategies are basically of two styles; they can either be in terms of government guarantees on specific high value financial loans but still to get loans for the failing firm’s balance sheet or perhaps acquisition of a few or all structures securities and financial loan assortments (Stephanou, 2009). Even though dealing with individuals problematic property does not genuinely reduce the business vulnerability to such exposures but at least these strategies may tackle the liquidity concerns and improve their creditworthiness. Government plays an essential role to motivate the private buyers to acquire the problematic assets or govt can co-finance the acquisition of these assets.

There is requirement of the sector regulators to enforce more stringent actions to ensure that expenditure banks will not bite a lot more than they can munch. The government bodies should have regular monitoring done on each of the investment banks to ensure that they may be on the right path and did not consider up too much risky purchase. From the failure of Lehman Brothers, we’re able to see that the majority of the investment banks faced economic crisis with too little capital angles and insufficient liquidities. The regulatory assess must be capable to ensure that banking companies have the ability and quantity capital bases that can buffer the financial institutions from massive loss and to end up being strong enough to withstand any failures in the future. Banks need to have a good number of liquid assets on a regular basis so that the property could quickly be changed into cash to handle any panics. To conclude, it is vital to put in force standards around the capital, influence and fluidity of every purchase banks to prevent financial crisis down the road.

5. 0 Conclusions

The recent competition in the banking industry has resulted in most of this banks participating in risky exposures (Raghavan, 2003). This is very obvious in the break of Lehman Brothers. We should learn up from the mistakes and ensure that we do not repeat it in the future. Inside the collapse of Lehman we’re able to see that company governance performs an important function in every firm. The supervision must be obvious with the business’s condition and to help make it the right decision for the firm and also to be alert towards any sort of possible threat. The Board and limiter could have intervened if Lehman practiced audio corporate practices and had certainly not withheld information regarding the risk levels of the firm. Besides, the external auditors are also an important part in this failing because they will failed to identify the malpractices in their monetary statements.

According to Greenfield (2010), the key indicators of fraud could possibly be detected inside the financial declaration apparently; the external auditors could not discover this activity. Looking forward, there is absolutely no crystal ball. However the system known is that the international financial system is actually a complex web of dealings, relationships and dependencies. It should however end up being noted the fact that demise of Lehman hadn’t impacted around the US economic climate alone however the world all together. Lastly, never assumes too big to fail. However, most sophisticated financial equipment, cannot forecast or period the market effectively. No one certainly nothing guarantees you that having past success, you can be naturally the same in the future.

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