Lehman Brothers Holdings Inc. was ranked as the fourth largest bank in the US before it declared bankruptcy in 2008. The company was dealing in investment banking, equity and fixed income-income sales and trading, research, investment management, private equity, and private banking. A significant number of clients withdrew their accounts from Lehman Brothers and the share price of the stocks fell at an exponential rate. Consequently, on September 15, 2008 the company filed for bankruptcy under Chapter 11. Lehman Brothers played a major role in the recession of the late 2000’s which drastically affected the entire country. The company had previously borrowed large amounts for investment purposes before the company finally collapsed. Most of the investments were made in the real estate which helps explain the fall of the housing sector. As Lehman Brothers were not subject to the same risk-taking legislations as other banks they were more vulnerable at the time of recession. As a result of the recession they were forced to shut down and this was the end of the company.
The subprime lender of Lehman Brothers, BNC mortgage, was closed in August 2007 which resulted in a loss of 1200 jobs in 23 places. As a result, there was a loss in goodwill which amounted to $27 million. The management of Lehman Brothers justified this closure as a reaction to the poor market conditions of the subprime space and that it was leading to a hold-up of resources unnecessarily. Regardless, of getting rid of BNC mortgage, Lehman Brothers had a huge stake in lower rated mortgages which they were unable to sell; thus, this caused them a huge loss. Even though Lehman Brothers reported a loss of $2.8 million in the second quarter of the fiscal year they still raised $6 billion as additional capital. As the stock price reduced by 73% in 2008, they fired 6% of its workforce prior to finalizing the third quarter accounts. Lehman Brothers had such a strong influence on the S&P 500 that when the company’s stock price lost half of its value the S&P 500 dropped by 3.4%. This raised concerns amongst investors about the stock prices of other banks which resulted in a decrease in the stock price of Dow Jones which accounted for almost 300 points. As the US government did not show concern toward helping Lehman Brothers regain their position in the banking sector investors developed negative feelings about the future of this company.
The president of the Federal Reserve Bank of New York called an emergency meeting on September 10, 2008 which concerned the liquidation if the assets of Lehman Brothers. Upon the notice of this emergency meeting called by the FED it was discovered that Lehman Brothers was looking for an opportunity of selling off its business to Bank of America and Barclays. However, upon the deteriorating condition of this company in terms of its financial position and possible bankruptcy, Barclay withdrew its offer of purchasing Lehman Brothers and help regain the position it once had.
The scandal of Lehman Brothers was investigated upon after its collapse and a 2200 page report was published that included the minor to major details. The company made a contract with banks in the Cayman Islands in which they agreed to buy back the assets within a time period once they were sold to other banks. Through this tactic the company was able to show they had a strong financial position, but this was only true for reporting purposes. The company’s strategy helped the management benefit them alongside fooling investors and credit rating agencies. This strategy is not uncommon in the banking industry; however, it is the treatment of these assets that was done differently by Lehman Brothers. Instead of showing these assets as loans, the company considered them as revenue in its books of accounts. The scandal of Lehman Brothers is referred to as the Repo 105 scandal. The CEO of the company at that time referred to this fraud as negligence. However, critics have suggested that this is not negligence as the company intentionally wanted to manipulate investors, credit rating agencies, and their regulators. The impact of the Repo 105 scandal was so widespread that it resulted in the largest corporate bankruptcy in US history (Sharp, 2010).
It was not until 2008, that Lehman Brothers were successful in concealing their true financial status. As mentioned earlier, the Repo 105 which is not uncommon to investors was majorly implemented in concealment of accounts. The Repo 105 was able to boost the true financial position of Lehman Brothers alongside fooling investors who continued to buy the stock of this company. Since, Lehman Brothers showed an income from the sale of assets the financial status of the firm seemed to be stable. During the investigation of this fraud, the company’s global financer admitted to having no material evidence that would support the Repo 105. The official audit firm of the company, Ernst & Young, also failed to inform the internal and external stakeholders about the company’s manipulative activities. Thus, they are to be equally blamed in this fraud as they concealed the company’s image and caused a huge loss to the entire US economy. The company’s officials routed their sales through the British legal system that allowed the investment bank t constitute its repurchase agreements as sales (New York Times, 2010). Consequently, $50 billion were reshuffled off from the balance sheet of the company. An outcome of the Lehman Brothers scandal opened the eyes of US officials towards the weaknesses in accounting standards of US. The firm’s auditors did not reveal the concealment of accounts because the activities of the company were not considered illegal under the British Law. As the US laws did not attend to every inch of details Lehman Brothers were able to justify themselves in most accuses against their firm. As international accounting principles are broader in their approach, they were able to protect Lehman Brothers and their Repo 105.
The Securities and Exchange Commission’s eight member Lehman Brothers team reached a conclusion at a closed door meeting in early 2011, that suggested that punishing the executives of Lehman Brothers alone is not justified (Protess & Craig, 2013). However, this point of view was objected upon by the chairwoman of SEC, Mary L. Schapiro. Schapiro suggested that the executives should be held responsible because they were responsible for a crime that led to a recession across the US. There have been no such steps taken ever since to actually hold someone responsible for the collapse of Lehman Brothers and the case is not officially closed. There are justifications to prove that the CEO of Lehman Brothers at the time of the scandal was actually unaware of the questionable accounting practices that were widely practiced across the organization over the years.
There have been concerns about the ethical stance taken by the executives of Lehman Brothers. Questions have been raised about the fact that would ethical employees and individuals manipulate accounts knowingly or intentionally. The stakeholders of this organization would have believed in the firm as being virtuous. Therefore, the manipulation of the accounts of Lehman Brothers was an unethical activity by the accountants and informed management of the firm. The investors who were investing in Lehman Brothers had to face losses because of the manipulative and greedy nature of the employees. Regulatory bodies would have expected the company to follow the rules and regulation set by law; however, this was proved to be a false trust as Lehman Brothers betrayed the trust of these regulatory bodies as well (Seven Pillars). This act by Lehman Brothers says a lot about the organizational culture of the company. As there were hardly any stringent checks upon whether rules were being followed or not this act had come about. If the management of the firm were supporters of ethical behavior they would have ensured that this behavior is eradicated as soon as they realized. However, most financial institutions and companies are involved in window-dressing their accounts but the extent of this forgery is not as great as the scandal of Lehman Brothers.
The scandal of Lehman Brothers had shaken the entire US economy. It was where the recession started and there was a decline in the stock market. Investors grew skeptical of investing anywhere because this behavior was expected of any managerial group as Lehman Brothers was a known name in the market. As investors grew skeptical, there was an impact upon other financial institutions as well and their earnings also portrayed a downward trend. The real-estate market was the worst hit which had a negative effect on the lifestyle of the common man. People were unable to pay their mortgages as unemployment grew in the economy. People were forced to look for more than one job in order to support their living standards and provide for their families basic necessities. The end of the Lehman Brothers may be seen as having a cyclical impact upon the entire economy. It did not only affect the financial sector or the stock market rather it had affected every facet of the economy. People are still recovering from the recession of the late 2000’s and many have moved out of the US in order to search for better and more secure jobs. However, it must not be ignored that the US was not affected alone; all countries which were related to the US in some way either direct or indirect were affected by this recession. Thus, it can be said Lehman Brothers did not just cause a collapse of their own firm as a result of account manipulation but it took the world down with them. There are criticizers and sympathizers of Lehman Brothers but the truth lies in the fact that they were responsible for the recession to a large extent. They should be punished for their act as they affected the lives of many people from all walks of life.
Hiding Money With Global Rules. (2010, March 16). The New York Times. Retrieved April 10, 2014, from http://www.nytimes.com/2010/03/17/business/17views.html
Lehman Brothers Collection. (n.d.). History of Lehman Brothers. Retrieved April 10, 2014, from http://www.library.hbs.edu/hc/lehman/history.html
Protess, B., & Craig, S. (2013, September 8). Inside the End of the U.S. Bid to Punish Lehman Executives. DealBook Inside the End of the US Bid to Punish Lehman Executives Comments. Retrieved April 10, 2014, from http://dealbook.nytimes.com/2013/09/08/inside-the-end-of-the-u-s-bid-to-punish-lehman-executives/
Seven Pillars Institute. (n.d.). Seven Pillars Institute Lehman Brothers and Repo Accounting Comments. Retrieved April 10, 2014, from http://sevenpillarsinstitute.org/case-studies/lehman-brothers-and-repo-accounting
Sharp, A. (2010, March 15). Lehman Brothers' 'Repo 105' Accounting Scandal. Lehman Brothers' 'Repo 105' Accounting Scandal. Retrieved April 10, 2014, from http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375