The Lehman Brothers originated in 1847, by a man named Emanuel Lehman. Back in the 1840’s, the company was known as “H. Lehman and Bro.” The company was located in Montgomery, Alabama, where they produced cotton, the most desired crop of that time. In 1850 the firm changed its name to what is now known as, “Lehman Brothers”. The Lehman Brothers then moved their company to lower Manhattan in 1868, where they founded the New York cotton exchange. However, at this time they were also in dense collaboration with Goldman’s Sachs. By the turn of the century, they were raising money to help other companies and also invested in their own wealth. This all added up to what Lehman Brothers became in 1994. The Lehman Brothers Holding Incorporated was then known and seen as a very powerful global financial services firm. This firm was once the fourth largest investment bank in the United States, following behind companies such as Goldman’s Sachs and Morgan Stanley. Lehman Brothers financial firm did everything from investment banking, equity and fixed-income sales and trading, research, etc. Up until 2008, Lehman Brothers held a very strong and well-liked title. On September 15, 2008 the entire financial industry was utterly shocked when the company filed for Chapter 11 bankruptcy’s protection. This amounted to the largest bankruptcy’s case the United States history has ever encountered. The Lehman Brothers not only caused the biggest bankruptcy of all time, but also made it look like finances were healthy, liquidity levels were high, and that leverage was manageable.
There is not one single cause that amounted to the failure of Lehman Brothers, there were numerous. The causes and agents that led to this catastrophe, included greedy wall street traders, the Fed’s action, the debt acquired by American households, rating agencies, and most importantly deregulation. Deregulation is the reduction of government power in a particular industry, usually enacted to create more competition within the certain industry. In this case, The Lehman Brothers had little to no deregulation which created an easier way to create an up and coming scandal. One of the bigger causes that led to this massive scandal was the market of credit default swaps. This led the company’s crisis to snowball into what is now commonly known as the “Financial Crisis of 2008”. This financial crisis was discovered when their misuse of REPO 105 agreement was shared to the public. Repo 105 is a repurchase agreement (repo) that has historically been used by companies to manage their short-term cash. (pg. 7). The Lehman Brothers took a different approach than the typical usage of the Repo 105. The company as a whole manipulated the agreement to make their own balance sheet look healthier than it was in reality. The proper use of the Repo 105 involves the fact that cash is accounted for as loans with collateral, but in Lehman Brother’s case they would sell the collateral for money. The Lehman Brothers thought outside of the box as they utilized the Repo agreement. When using this agreement, they would use the balance sheet to temporally remove any harmful or troubling liabilities from the financial results, to then be later shared with the public. All of this was done to trick the public into believing that Lehman Brothers was a healthy and ethically ran business. The Lehman Brothers essentially recorded their transactions as sales rather than loans. Another beginning to the end for the Lehman Brothers was the when the Glass-Steagall Act was repealed in 2008. Although the financial crisis would have most likely gone down with or without the Glass Stegall-Act being revoked, it still contributed to the crisis. This is due to the fact that banks were no longer prevented from operating as both investment or commercial banks.
The Lehman Brothers proved themselves to be a very unethical company as they misused the Repo 105 agreement, along with the Sarbanes-Oxley Act. The Sarbanes-Oxley Act was put into place in hopes of restoring the accuracy of financial reporting, to improve the corporate governance system and the timeliness of the disclosure requirements, to strengthen the role of independent directors, and to lastly improve the internal control practices and procedures. This act was extremely violated due to the fact that the Lehman Brothers did not ethically follow any of its guidelines. The company was fully aware that the Repo 105 was being violated in ways to make their financial statements look better. From all accounts, it appeared that the management knew of the Repo 105 transactions and still proceeded to acknowledge them as accurate when in reality knowing they were fraudulent. This led to all Lehman executives to be subjected to financial and criminal liability.
The Lehman Brothers weren’t necessarily caught participating in a scandal even though it was starting to become clear to workers or investors that something was off about the company. The Financial form was caught or in other words plummeted, when surprisingly turning themselves in. Lehman did this because they were simply unable to sell the lower-rated bonds. At the beginning of 2008 alone Lehman Brothers lost 73 percent of its value and counting. On September 12, 2008, Timothy Geithner, the president of Federal Reserve Bank of New York, assembled a meeting on the future of Lehman. This concluded in an emergency liquidation of its assets. Bankers representing major Wall Street firms attended. On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy with $639 billion in assets and $619 billion in debt. Lehman’s bankrupts went down in United States history as the largest ever. The massive amount of assets surpassed any of the previous scandals, including, WorldCom and Enron.
This Financial crisis alone caused almost 6 million people to become jobless, the government to react by bailing out cash starved banks, and unemployment rate doubling to almost 10 percent. These unimaginable occurrences all tie back to the day the Lehman Brothers filed for bankruptcy. This crisis not only directly affected the lives of Lehman CEO at the time, Richard S. Fuld Jr., but also all Lehman Brother employees, along with their families. Richard S. Fuld Jr. was known for his brilliance and competitiveness within the financial industry, however, he is now more commonly known as one of the ten most wanted culprits of the 2008 financial collapse in the United States. Richard S. Fuld Jr. was forced to transfer his Florida mansion to his wife for 100 dollars, ultimately losing over 13.75 million dollars in assets. He also lost his 71-acre estate in Sun Valley, Idaho, amounting in a loss of about 20 million dollars. Fuld is one of many that were affected by this tremendous crisis. Overall, everyone in the world was affected by this financial crisis in the sense that the financial industry would never be the same.
The question of whether or not the investors or auditors could detect the lies that were hidden by top management keeps coming to mind. Financial statements three years leading up to the bankruptcy show warning signs that should have been or easily could have been discovered by any investor working within the firm. One of the main reasons the bankruptcy failed to be detected was the imbalance of the cash flow financial statement. Over the three years leading up to the bankruptcy the Lehman Brothers acquired negative cash flows of 161.7 billion dollars. The red flags showing unethical behavior with the firm can be summarized in three different categories. The first would be the massive investment in working capital items and even more intensive investments in financial tools. This is a major red flag due to the major overuse in working capital. Another red flag was the firm’s inability to generate cash for their own operating activities. Generating cash from operating activities is a huge part in running a healthy and strong company, making this a very big sign of unethical activity. The last, yet biggest red flag, was the fact that there was a steady deterioration of cash flows over three years leading to the crisis. This is a huge sign of unethical activity that would be almost impossible to miss. All healthy and ethical companies should be receiving a steady income of cash flows, yet Lehman Brothers was functioning the complete opposite. When the summary is made based on the statement of cash flow, the financial deterioration of the company becomes very obvious. All of this information could bring any individual to the conclusion that the financial crisis of the Lehman Brothers firm could have easily been predicted or prevented. In the whole grand scheme of things, the biggest cause of the financial destruction of this company was the lack of ethics.
I personally believe that ethics are one the most important things any individual could acquire. Ethics drive people to do better and be better every day. When it comes to the business world, ethics are valued at an extreme, however, in the Lehman Brothers case ethics were not apparent. Investors, CEO’s, CFO’s, and many other individuals, had the chance to come forward to the public with all of the unethical behavior going on within the firm, yet didn’t. In this case these individual’s ethics were being questioned and still no one came forward. Your own ethics are questioned everyday whether we see it or not and we as individuals have to use our morals to decide the outcome. The Lehman Brothers and all individuals tied to the crisis, payed for their unethical behavior when forced to file for bankruptcy. This bankruptcy required a lot of legislation action, whether it be for criminal or financial punishments. The Lehman Brothers and everyone within the firm learned that being ethical is far more valuable than almost anything else. Overall, following your own ethics is the best thing anyone could do.
One can learn many lessons from failure, and in this case, people can learn a lot. One lesson would be not letting anyone come in the way of your own individual ethics. If investors followed their own ethics when first realizing the unethical acts within the firm, things could’ve ended so differently. Going forward I would modify accounting practices and add faster and easier ways to acknowledge the unethical behaviors going on. I would personally create a new side to any company, being a confidential place to go and talk about what is going on within the firm from an individual perspective. This way, if any one feels as if ethics are being questioned, they can do something about it without having the pressure of the company’s success weighing on them. I would also say that high standards should be held by all CEO’s of any company in the sense that they as individuals set the stage and work environment for all people working within the firm.
The failure of the Lehman Brothers contributed many factors that added up to become the biggest bankruptcy in US history. Doubtful accounting practices could not be made possible if ethics were practiced in the right way. It seems as if the auditors within the company just did the bare minimum in a way to shield themselves from legal actions. In order to please investors and lenders the Repo 105 was violated by unethical accounting practices. The complex structure of the Lehman Brothers firm created a huge window of opportunity for unethical practices, yet it doesn’t make it any more okay. It can only be concluded in the way that the Sarbanes-Oxley Act was completely violated due to the falsely shown financial statements of the company to make it look better than it was. Overall, Lehman Brother’s failure has impacted the financial industry beyond imaginable. The consequences didn’t end with the individuals directly working within the firm, but also within society. The society as a whole was negatively impacted by the decline in confidence in institutions and the financial industry as a whole. In any business, holding high standards and ethics by all who work underneath the firm is essential to the success of the company.