Republic of the Philippines

Bulacan State University, Bustos Campus

CASE STUDY ON LEHMAN’S BROTHER

In Partial Fulfillmentof the Subject

Monetary Policy and Central Bank

Submitted by:
Agtarap, Rainer Irvin S. Evangelista, Briamae C.
Albiz,Vanessa R. Flores, Caitlin Joyce M.
Bernardo, Marielle Sta. Maria SM. Rabino, Mary Elizabeth C.
Buenzalida, Dante T. Raya,Ivy Grace M
Dela Cruz, John Mhiko C. Trinidad, Joyce DP.
De Leon, Diane DJ. Velasco,Marielle P.

.
Submitted to:
Laurence C. Espino, MBA
Introduction

Most of the world's top financial institutions filed for bankruptcy and liquidation during
the global financial crisis of 2008. (Mensah, 2012; Murphy, 2008).Those who were left behind
either saw their particular activities and returns fall precipitously or declared bankruptcy on their
own volition. The biggest calamity to ever affect the U.S. financial industry was the Lehman
Brothers bankruptcy scandal, which occurred in the midst of the global financial crisis (Morin
and Muax, 2011). Having the most valuable assets in the sector, Lehman Brothers was the
market leader (D’Arcy, 2009).

Lehman Brothers' fall was the largest unit financial firm to have collapsed with such
significant assets, surpassing the well-known Enron debacle in the early 2000s (Jeffers, 2011).
Within the month of September, the top US investment bank experienced significant losses.They
had lost around $3.9 billion by the middle of September 2008 in their attempt to sell the majority
of their shares in one of its subsidiaries after the stock price had plunged by 73% in the first half
of September (Mauz and Morin, 2011).

The global financial crisis forced the bank to close its top subprime lender (BNC
Mortgages) in 23 locations prior to their demise (Wilchins and DaSilva, 2010). Lehman Brothers
voluntary declared bankruptcy at the US Bankruptcy Court by September 15th 2008 as a result
of the losses occurring one after another (Murphy, 2008). The unsuccessful attempt at potential
mergers, the government bailout, and other takeover attempts by businesses like Barclays Bank
and others all contributed to the need for the voluntary bankruptcy. A number of academic and
practical arguments have been made by financial experts in an effort to identify the precise
causes of the meltdown in order to understand the potential causes of the Lehman Brothers
demise. Others have conducted deliberate studies to explain the collapse of Lehman Brothers
(Albrecht et al., 2004).

Background
History of Lehman Brothers
Henry, Emanuel, and Mayer Lehman immigrated to Montgomery, Alabama, from
Germany in the middle of the nineteenth century. There, they opened a small store in 1844 that
catered to the needs of the neighbourhood cotton growers. The brothers quickly discovered that
selling cotton was just as important to their business as selling dry items since farmers frequently
paid their debts in cotton. The brothers decided to concentrate on trading cotton, so they opened
an office in New York and helped found the New York Cotton Exchange in 1858. Along with
trading other commodities, the brothers started assisting businesses in raising finance on the
bond and equity markets. Lehman Brothers established itself in the trading of securities and laid
the groundwork for the underwriting industry when it joined the New York Stock Exchange in
1887. Lehman Brothers expanded their banking operations in the early 1900s by assisting in the
financing of the burgeoning group of retail, industrial, and transportation behemoths that were
established at this time. Emanuel Lehman's grandson Robert Lehman took over the business in
1925 and ran it until his passing. Lehman Brothers developed into a well-known investment bank
during Robert Lehman's leadership, working with top American and international businesses to
underwrite securities issues, offer financial advice, and support mergers and acquisitions.
Lehman was established as a partnership, and it remained privately owned and family-run until
Robert Lehman, the last member of the Lehman family to work at the company, passed away in
1969.
Lehman Brothers experienced a period of drift after Robert Lehman's passing. In 1973,
the partners hired former U.S. Army Colonel Peter G. Peterson, a former Bell and Howell CEO
and secretary of commerce. Peterson was well-liked by the investment bankers due to his
aristocratic style and extensive network of powerful contacts. Lehman Brothers prospered under
Peterson's direction, turning a profit and growing through acquisitions. Additionally, the
company opened branches abroad and developed into a sophisticated multinational corporation.
The financial services sector was evolving during Peterson's ten years in charge, with
businesses choosing investment banks based on individual transactions rather than long-standing
ties. This led to innovative new products and solutions like commercial paper being created by
traders, who were perceived as being raunchier than their investment banker counterparts.
Deregulation also led to a bigger involvement for mutual and pension funds in the stock market,
allowing investment firms to record enormous profits.
Lewis L. Glucksman, a highly successful trader with 20 years of experience at Lehman
Brothers, challenged Peterson, who in 1983 named him co-CEO. When given the chance,
Glucksman grasped it with speed and within a year, Peterson had announced his retirement and
Glucksman had taken over as the company's only CEO. Glucksman had a simple but engaging
manner that some bankers found naive.
In the early 1990s, the new company acquired a number of companies, including
Neuberger Bremen and Lincoln Capital, to diversify its business operations into banking and
brokerage. In 1993, the company's brand name was ultimately changed back to Lehman
Brothers. Lehman Brothers grew steadily, reportedly growing their revenue base, and saw an
expansion in their personnel from 8,500 to roughly 28,000 in 1994 due to the new line of
business and arrangement. Lehman Brothers incurred severe losses as a result of the terrorist
attack on its World Trade Center building in September 2001, just a year after celebrating its
150th anniversary. In response to this catastrophic calamity, Lehman Brothers relocated to a new
headquarters in Manhattan's midtown in 2002. Lehman Brothers' 158-year existence came to an
end in September 2008 when they filed chapter 11 bankruptcy petitions in the federal court,
which resulted in the distribution of the company's assets to several businesses.

Background of the Problem

Lehman's problems began with its attempt to enter the real estate market during the US
housing boom in 2003. Initially, their CEO Richard Fuld's choice appears credible. Between
2004 and 2006, revenue in the capital markets segment increased by 56% due to record growth
in Lehman's real estate division. In 2006, the Company securitized $156 billion in mortgages, a
10% increase over 2005. Lehman recorded a record net income of $4.2 billion on revenues of
$19.3 billion for the whole 2007 fiscal year (up from $17.6 billion in the previous year). With an
increasing number of defaults, fractures began to appear in the US housing markets in 2007.
Lehman began to suffer losses and resorted to unlawful methods. Repo 105 authorized Lehman
to employ esoteric accounting techniques to sell toxic assets to Cayman Islands banks with the
expectation that they would be purchased back later. This was accomplished with the assistance
of its auditors. An accounting method was devised to allow Lehman to seem to have $50 billion
less in toxic assets on its books and $50 billion more in cash, so falsely lowering its net debt
level (Valukas, 2010, 42). It came as no surprise when Lehman filed bankruptcy encompasses a
debt of $615 billion.
In September 2008, the downfall of Lehman Brothers revealed the already weakened
financial system. The issue arose when Lehman's subprime mortgages began to accumulate and
eventually led to a catastrophe that caused the investment bank to collapse. Investors and
financial companies are worried since they did not know exactly where the risk of subprime
mortgages is coming, since mortgages were bundled together to create mortgage-backed
securities (MBS), which were then sold to investors (Yale Program on Financial Stability 2019).
By the time that Lehman’s bankruptcy is about to happen, it revealed the risky take of the
company in mortgage market. Big portion of it was put in housing loans. Lehman's long-term
assets were financed by short-term debt (such as commercial paper and repo agreements), and in
order to function, Lehman had to borrow billions of dollars daily from the overnight wholesale
funding markets. This has resulted for other firms to limit Lehman’s securities as collateral.
Causes of Lehman's failure
Following the demise of Lehman Brothers, several causes were attributed to the failure
after thorough studies by financial and non-financial researchers (Kimberly, 2011). None of
these analysts specified a single cause to their collapse (Azadinmin, 2012), although they did
identify a number of factors. The factors that accounted for this failure were Subprime Mortgage
Crisis, Repeal of the Glass-Steagall Act, Unethical Management practices, Liquidity crisis,
Collateralized Debt obligation and Derivative crisis, Leveraging, Complex Capital Structure,
Unsuccessful bail-out and takeover attempts, Poor risk and asset management, Complex
structure and managerial issues, and Low ethical standards.
Subprime Mortgage Crisis
By the mid-2000s, Lehman Brothers had made significant investments in mortgage-
backed securities (MBSs). Because of the housing boom, there was an excess of both MBSs and
collateral debt obligations (CDOs), and Lehman was the largest MBS holder by 2007. Lehman
Brothers' deep plunge into loan origination in 2003 was the cherry on top. The corporation
bought out a number of lenders, many of which were focused on supplying the subprime loans
that the US government had been promoting since the turn of the century. Lehman Brothers'
demise was brought about by its huge holdings in mortgage-backed securities, many of which
contained subprime mortgage loans.By 2007, and into 2008, the market had been overwhelmed
by extremely hazardous and hastily designed subprime loan bundles. In actuality, the first stages
of the crash began in 2006. Home loan defaults increased simply because the housing market
slowed.The sheer volume of subprime mortgages could not be sustained. Lehman Brothers, on
the other hand, expanded their engagement in the housing market and mortgages, acquiring a
significant portion of the real estate business in 2007 with a receipt for over 100 billion dollars in
mortgage-backed securities and assets. Lehman was already in a critical position after being
dependent on repos as a daily fund of the company. In the early summer of 2008, the corporation
sought to boost market confidence through stock fundraising. However, the move was less
encouraging when Lehman announced an expected third-quarter loss of roughly $4 billion in
September. In addition, it recorded a $5.6 billion loss in toxic asset write-downs.
Repeal of the Glass-Steagall Act
The proponents of the Glass-Steagall Act of 1933 blamed the entire US financial crisis on
the passage of the Gramm-Leach-Biley Act of 1999, which was intended to replace the Glass-
Steagall Act. Following the Great Depression, the Glass-Steagall Act of 1933 was adopted to
separate commercial banking from investment banking in order to eliminate or mitigate potential
conflicts of interest. 9,000 banks were reported to have failed during the Great Depression
(Lartey, 2012). This Act was updated and replaced in 1999 to allow commercial banks to engage
in investment banking. Following the repeal of the Glass-Steagall Act of 1933, numerous
commercial banks merged with investment banks. Financial analysts blamed the shift on the fall
of Lehman Brothers. Lehman merged and bought many investment and commercial banks in
order to compete with commercial banks with significant leverage situations. The improper
merging actions exposed them to several hazards, eventually resulting to bankruptcy (Boot,
2008).
Unethical Management practices
Managers at Lehman chose to exploit various suspicious processes, arrogant accounting
procedures, and a clear disrespect for good corporate governance norms in order to achieve their
expansion strategy and other objectives (Caplan et al, 2012). According to Greenfield (2010),
Lehman used the window dressing strategy to manipulate their financial statements in order to
attract investments and present a distorted picture of the company. This was confirmed by the
Attorney General's filing of charges against its auditors Ernst & Young for assisting Lehman
Brothers in committing financial statement fraud (Valukas, 2010). Lehman also employed Repos
105 transactions to strengthen the company's financial position at the end of the fiscal year.
Kimberly (2011) claims that the Lehman financial sheet in June 2008 was made using the
window-dressing process known as Repos 105. As a result, many accounting scandals were
dubious transactions, and Lehman employed (Repos 105 to alter the company's financial
statement. This action resulted in the withdrawal of a pledge of $50 billion from their financial
statement (Mensah, 2012). Despite Lehman's unethical usage of Repos 105, banks can conduct
Repos 105 transactions (Wilchins & DaSilva, 2010). Essentially, repurchase agreements have
traditionally been used by banks to manage their short-term cash liquidity (Mensah, 2012). This
involves the pledging of short-term low risk instruments or government bonds in exchange for
short-term funds. Traditional repos comprise an agreement involving multiple financial
institutions in which one of these institutions decides to sell its short-term security for cash on
the condition that the seller would purchase it back at a predetermined rate and date after an
agreed time (Mensah, 2012).
The seller's perceived security acts as security (Jeffers, 2011). These short-term securities
will subsequently be returned to the seller after the cash received, plus interest, has been paid. If
the seller fails to pay by the due date, the buyer may sell the pledged securities to recover the
money (Casu et al, 2006). In a nutshell, Repos 105 is a measure used by businesses to raise
short-term capital by pledging long-term financial assets in order to enhance their liquidity
situation. The bank pledging its securities for cash records Repos 105 as a loan with security
(Jeffers, 2011). To justify their unethical behavior. Instead, Lehman failed to report Repos 105
using the proper accounting method, neglecting to disclose it to credit agencies, investors, the
government, and its own board of directors. According to Wilchins and DaSilva (2010), Lehman
extended this strategy by obtaining government bonds from another bank in the United States
through one of its special entities. Just before the quarter's end. These bonds are transferred by
Lehman to their London affiliates (Lehman Brothers International). The London affiliate
subsequently sells the bonds for cash to another banks with the agreement to repurchase them at
a higher price (105% of the original price). The cash obtained is then moved to Lehman Brothers
US to pay down a huge number of obligations, decreasing the firm's liabilities and allowing it to
present stronger quarterly reports to investors, equivalent ratios, regulators, and the general
public.
Prior to the following quarter. Lehman Brothers will then borrow extra money from other
lending institutions in order to buy back the securities from their London affiliates for 105% of
the original price. After these actions have harmed Lehman, the financial statement will revert to
its original unfavorable state because they want their financial situation appear sound in the view
of the government, investors, and regulators. This amounted to financial statement fraud and was
one of the elements that contributed to Lehman's demise. As a result, Lehman's external auditors
cannot be absolved of this heinous crime (Valukas, 2010).
Liquidity crisis
The failure of Lehman to meet its short-term obligations was essential to their collapse
(Valukas, 2011). Despite its substantial asset base. Lehman was dealing with irregular liquidity
issues. As a result of this, Lehman was losing market confidence, and most banks withdrawn
loans and services from the company (D'Arcy, 2009). Customers' and lenders' confidence
dropped at this stage, making Lehman unappealing to investors and prospective investors
(Mensah, 2012). To address this problem, Lehman reduced their gross asset base by $147 billion,
resulting in a $45 billion increase in liquidity (Valukas, 2011).Their liquidity redemption strategy
reduced their commercial mortgage exposure by 20% and reduced leverage from a factor of 32
to around 25 (Lartey, 2012). Unlike Bear Beach Stearns, which suffered the same fate in March
2008, Lehman’s liquidity crisis was not helped by their proposed plan and rescue. JPMorgan
Chase rescued Bear Beach Stearns in order to alleviate their liquidity crisis (D'Arcy, 2009).
Collateralized Debt obligation and Derivative crisis
Prior to the collapse Lehman Brothers was said to have made several needless and
dangerous investments in order to capitalize on real estate opportunities. RLWs (Residential
Whole Loans) were also reported to have contributed to Lehman Brothers’ failure, according to
Kimberly (2011). RWLs are residential mortgages that are exchanged and pooled prior to being
converted into RMBS (Residential Mortgage Backed Securities) (Lartey, 2012).Lehman's
aggregate market value of RWI.'s across its subsidiaries was approximately $8.3 billion as of
May 2008 (Valukas, 2010). Murphy (2008) asserts. Lehman lacked a healthy product control
procedure to account for residential entire loans, which along with asset misrepresentation
worsened their situation. Lehman entered the derivative market to capitalize on speculative
opportunities while lowering its exposure to credit risk in the financial sector. This is done to
manage the volatility of their assets and risk. As they were filing for bankruptcy. Lehman's
derivative portfolio was estimated to be worth $35 trillion (Kimberly, 2011), with over 900,000
derivative contracts held globally (Valukas, 2010).
Firms can derive the value of their investments from changes in the price and value of
other underlying assets such as stocks or commodities using derivative instruments. The majority
of these derivatives were credit default swaps; clearly, property prices fell in the financial market
during the global economic crisis, resulting in asset seizure. Lehman was alleged to have issued
$2.5 billion in credit default swaps (CDS) (D'Arcy, 2009). The fundamental underlying assets of
CDS are credit derivatives such as mortgages, loans, and other types of loans. During the 2007
global financial crisis, CDOS (Collateralized Debt Obligations) also accounted for securities
market losses (Lang & Jagtiani, 2010). According to Wilks (2008), CDOS are derivative
instruments that entail the accumulation of both prime and subprime assets with the objective of
selling them to a special purpose vehicle in a low-tax country. The buyer then repackages the
loans and sells them to other investors as bonds or equity. By November 2008, half of Lehman's
CDOs totaling $431 billion had defaulted between 2006 and 2007 (Valukas, 2010). The drop in
the value of CDOs had a crucial role in the failure of Lehman Brothers.
Leveraging
Lehman's aggressive borrowing strategy to finance their assets resulted in a significant
leverage position (Lartey, 2012). A company's financial leverage is its ability to finance a portion
of its assets with fixed-rate securities with the expectation of improving the final returns to
equity shareholders. Lehman's excessive debt ratio grew from 20 in 2004 to 44 to 1 shareholders'
equity in 2007 (D'Arcy, 2008).In effect, for every $1 of cash and other available financial
resources, Lehman would lend $44, which was an unsustainable leverage ratio (Valukas, 2010).
The impact of the global financial crisis, which saw prices fall and interest rates rise, had a
negative influence on Lehman's financial condition, leading to its bankruptcy (D'Arey, 2009).
Complex Capital Structure
Lehman Brothers encountered capital structure challenges as a result of needing to
conduct business in over 3,000 different legal companies (D'Arcy, 2009). As a result of their
development plan, which culminated in enormous growth, the increase was said to have led to
the high degree of capital structure complexity. Many financial analysts saw this tendency as a
major cause in Lehman's collapse.
Unsuccessful bail-out and takeover attempts
According to the circumstances leading up to its collapse, Lehman Brothers tried various
methods to redeem their business. This was necessitated by their significant losses in 2008 and
their failed attempt to divest several of their companies. The corporation recorded $2.8 billion in
losses in their second fiscal quarter alone, hastening the sale of $6 billion in assets due to the
poor rated mortgage in their subprime position (Anderson, 2008). By September 10, 2008, the
company had disclosed a $3.9 billion loss in its attempt to sell off majority stakes in most of its
subsidiaries, including Neuberger Bremen. As a result, investors' trust continued to diminish as
their stock prices fell by nearly half. The S&P 500 fell 3.4%. This incident also resulted in the
Dow Jones dropping roughly 300 points at the same time due to investors' impression of the
bank's security. Their predicament became worse by the US government's announcement that it
would not support any financial catastrophe that arose at Lehman (Anderson, 2008). Lehman
Brothers reported a probable takeover proposal with Barclays Bank and Bank of America in their
enactment to turn-around the fortunes of Lehman after the government's declaration (Caplan et
al, 2012).
Poor risk and asset management
Lehman failed to establish a stronghold in the mortgage sector. Lehman took on
enormous debt and spent the proceeds entirely in the mortgage market (Latifi, 2012). Even when
the subprime mortgage business issue grew and Lehman was forced to move quickly, it
displayed the same naiveté. Unlike those mentioned above, Lehman was tactically delayed to
identify the crisis and its multiplier effect on commercial real estate and the financial industry as
a whole (Gakpo, 2012), and when it did, Lehman's management saw it as an opportunity to
aggressively pursue their strategy. Finally, when Lehman understood that this strategy had
already brought the company to the edge of insolvency, it engaged in a series of erroneous acts,
including misrepresenting its liquidity and financial condition.
Complex structure and managerial issues
Lehman's complex structure, coupled with numerous other flaws, contributed
significantly to the firm's failure. Their company setup was riddled with flaws. For example, the
board of directors, which consisted of ten members, was insufficient in comparison to the global
commercial companies. This is because Lehman Brothers was conducting global business
through around 3000 legal entities, making the situation extremely convoluted. Furthermore, the
managerial system was ineffectual. According to Azadinamin (2013), the Lehman Board of
Directors included certain members who lacked the necessary financial background to oversee
such a globally oriented system. The majority of them were retired or lacked the necessary
experience and competence for credit institutions.
Low Ethical standards
Ethical decisions are viewed as having a sole impact on the corporate environment.
Jeanette (2008) observed the ethical quandary of financial accountants in managing earnings and
concentrated on destructive (i.e., accounting figure manipulation) and non-damaging behaviors.
Such quandaries should have arisen in the case of Lehman's financial reporting. It is understood
that external auditors and the internal business finance department play distinct roles. Employees
are responsible for preparing financial statements, while external auditors are responsible for
commentary and evaluation. As a result, in Lehman's case, the external auditors were responsible
for failing to detect or report flaws in the financial reporting process, while Lehman's
management bears ultimate responsibility for creating and deploying Repo 105 in order to
manipulate its balance sheet. (Dutta et al., 2010)

Solution and Intervention

 The failure of Lehman Brothers exemplifies the link between legislation and action
management systems.Company regulators should have warned and guided Lehman to engage
and operate within the boundaries of business authority; yet the regulators were reported on
multiple instances to have turned a blind eye to the illegal and unethical acts of Lehman's
executivesThe bankruptcy of Lehman Brothers revealed inadequacies in various models used to
predict company failure or sustainability. As an instance, while examining a firm's financial
health, areas of performance such as profitability, liquidity, solvency, and efficiency indicators
are taken into account (Mensah, 2012), but little consideration is placed on those firms' cash
flows. A comprehensive emphasis of cash flow indicators could have prevented the firm's
financial troubles.
Therefore, in order to prevent another occurrence of the Lehman bankruptcy, the
auditors, accountants, and top managers should practice high ethical standard and policymakers
such as the International Financial Reporting Standards, the SEC, and others must implement
strict regulations to address the deficiency and failure. Furthermore, the collapse of Lehman
Brothers could have been avoided if the senior management had taken proactive measures to
ensure adequate risk management in their operations. Internal control is an essential aspect for
every business to implement its risk management properly. Internal control should be utilized by
Lehman’s management to safeguard assets, enhance operational efficiency, ensure reliable,
accurate financial statements, and act in accordance with legal requirements to avoid public
scandals. Therefore, having good internal control is critical for ensuring that goals and objectives
are achieved. They give trustworthy financial reporting to help managers make fact-based
decisions. In addition, adequate proactive and following rational business strategies and
enforcing rigorous regulatory measures are also vital aspects. Governments should have used
innovative measures, such as actively investing in the capital of their banks, to bail out banks in
times of financial distress. For instance, on October 8, 2010, the British government announced
that it will invest 400 billion pounds directly into its capital of their banks which is a faster
method of strengthening banks rather than by buying up their hazardous assets (Swedberg,
2010).
External auditors also played an enormous role in the collapse of Lehman Brothers, they
should carefully and equally perform the auditing process and analyze and consider all the
financial statements to address the accurate financial health of the company. While examining
financial information, external auditors must show an outstanding degree of independence and
objectivity  statements. There should be guarantee that external auditors would fully disclose the
accused financial statement fraud committed by Lehman's management. They should be
accountable for planning and carrying out the audit in order to get reasonable assurance that the
financial statements are free of material misrepresentation, whether caused by fraud or error.
Financial institution regulators should eliminate the deficiencies in their financial regulatory
structure that allow complex, massive, linked firms like Lehman to flourish without strong
centralized supervision. Nevertheless, to restore investor confidence, Lehman must also be
obliged to follow sound corporate governance practices. They must adhere to and duplicate
sound ethical norms and procedures.
Furthermore, agency problems have also been one of the reasons for Lehman’s failure.
The agency problem occurs in a circumstance wherein an agent, the director, will not comply in
the benefits and best interests of a principal, a shareholder. Therefore, regulators should be aware
of the agency problem and try to safeguard the company by requiring them to comply with
numerous measures designed to promote the independence of the board of directors. Lehman
should have discovered more efficient ways to reduce agency expenditures while increasing
shareholder rewards, rather than depending solely on compliance with government laws.
Directors must remember that they have a fiduciary obligation to administer the company in the
best interests of the company and its shareholders, not themselves, which includes the duty of
care and the duty of loyalty to the firm.

Discussion/Recommendation

The relationship between rules and action management systems is amply illustrated by
the failure of Lehman Brothers. Failures revealed regulatory system flaws, necessitating
immediate stringent oversight of certain performance measures like solvency, liquidity position,
and profitability. To address the Lehman catastrophe and avoid a repeat, rigorous laws must be
implemented by policy makers such the International Financial Reporting Standards, SEC, etc.
To regain the trust of investors, companies must also be forced to follow sound corporate
governance practices. Every organization needs to uphold and emulate sound ethical standards
and practices.

Important lessons can be learned from Lehman's failure. First and foremost, those in
charge of overseeing financial institutions should close the loopholes in their system of financial
regulation that let Lehman and other intricate, big, interconnected businesses run unchecked. No
government agency had the necessary power to order Lehman to conduct its business in a way
that was safe, sound, and did not endanger the entire financial system in September 2008. There
is also a need for a new resolution framework, similar to the one already established for failing
banks, to prevent having to decide in the future whether to save a failing, systemically important
corporation or allow its disorderly bankruptcy. Many worldwide banking industry professionals
believe that such a system would guarantee that the failing company's creditors and shareholders
suffer losses and that its management is changed, protecting the economy while also enhancing
market discipline.Lehman managed its financial statements using financial instruments, as was
already mentioned. The collapse of Lehman Brothers, however, demonstrates how corporate
governance can be improved across many industries and is not just relevant to the financial
services sector. Additionally, failures should teach us a lot of lessons, especially when they affect
a significant institution in US history (Azadinamin, 2013). Both macroeconomic and
microeconomic lessons could be characterized as lessons learned. From a macro perspective, it
demonstrates the potentially disastrous consequences for the rest of the financial system of an
institution that is too big and too unified, while from a micro one, numerous lessons that revolve
around the moral hazard problem need to be taught (Latifi, 2012). If financial system
breakdowns are to be prevented in the future, the following tactics might prove useful.

Be proactive and adhere to logical business strategies Lehman made a crucial choice to
pursue a higher-growth company strategy in 2006. It struggled to establish a monopolistic
position in the mortgage industry and changed their business model from a capital-intensive
banking model to a low-risk brokerage model. According to Azadinamin (2013), there were two
ways to continue this high growth trend: either aim for high revenue growth or even quicker
growth in the company's balance sheet and overall capital base. Enforce regulatory measures One
of the key lessons from the Lehman case study is the necessity for stringent measures to ensure
that investment banks will operate in accordance with their true financial capabilities, rather than
allowing them to deceive people in order to obtain money (McKibbin & Stoeckel, 2009).

Especially when it's the biggest institution failure in US history, there are numerous
lessons to be learned from failure. Two lessons that stand out are the need to change accounting
procedures and incorporate new catastrophe prediction techniques. A few suggestions for the
future were made by Caplan et al. (2010) after studying the Lehman Brothers catastrophe.

Lehman's top managers made the decision to utilize questionable or maybe dishonest
accounting procedures to achieve the goal as it became clear that implementing the intended
strategy of high growth would be impossible.One of the many unethical tactics employed by
Lehman to present better financial results was the unusual use of Repo 105. Despite the fact that
the Repo 105 procedure is legal—as was already mentioned—Lehman utilized it in an
unorthodox and immoral manner to secure fresh loans by making assertions that were more
optimistic than they actually were. Accounting standards give unethical managers the
opportunity to abuse them and put them into effect in a way that supports their unethical actions.
To prevent unethical and illegal acts that can endanger people's wealth, accounting standards
must be changed.According to Caplan et al. (2010), substance should take precedence over form,
and the fairness and viability of an organization should be assessed using the statements' content
rather than just the ratios that may be deduced from it.According to auditing standards, the
auditor's decision should take into account, among other things, whether (1) the accounting
principles chosen and applied have general acceptance, (2) the accounting principles are
appropriate given the circumstances, and (3) the financial statements, including the related notes,
are informative about matters that may affect their use, understanding, and interpretation.

Conclusion
This failure can be attributed to a variety of factors,subprime mortgage crisis, repeal of
the glass-steagall act, unethical management practices, liquidity crisis, collateralized debt
obligation and derivative crisis, leveraging, complex capital structure, unsuccessful bail-out and
takeover attempts, poor risk and asset management, complex structure and managerial issues,
low ethical standards.External auditors also played a large part in this failure by failing to
uncover these accounting irregularities by Lehman's managers. The main signs of fraud seem to
have been found in the annual accounts. External auditors are not able to identify this activity.
However, it should be noted that the Lehman shock affected not only the U.S. economy, but the
world as a whole. Firms should avoid unnecessary business strategies, closely monitor existing
regulations, change reporting standards to prevent questionable accounting practices, and
implement practical and alternative regulations to anticipate financial failures and derivatives
market models. must be formulated. 

With regard to Lehman's response to the subprime crisis and other economic events,
some of Lehman's management's previous decisions, while falling under business judgment
rules, were questionable. Most of the valuation techniques used by Lehman were inadequate for
the purposes of bankruptcy solvency analysis. Lehman's inability to report the use of repo 105
accounting techniques was sufficient proof that their accounting system was questionable. Full
disclosure must be ensured by an external auditor regarding allegations of fraud in accounts
maintained by Lehman's management. While examining financial information, external auditors
must show an outstanding degree of independence and objectivity statements. There should be
guarantee that external auditors would fully disclose the accused financial statement fraud
committed by Lehman's management. Regulators of financial institutions must address the flaws
in financial regulatory structures that allow complex and large affiliates like Lehman's to thrive
without strong centralized oversight. But to restore investor confidence, Lehman must also strive
to maintain sound corporate governance practices. Sound ethical standards and procedures must
be adhered to and reproduced. 

Again, Ernst & Young's failure to fulfill professional standards in relation to the inability
to disclose financial and accounting statement breaches or frauds was strongly charged. The
Lehman's Lenders' requests for collateral seemed to have a significant effect on the liquidity pool
at Lehman. Various people were questioning whether Lehman's dealings with the government
bodies that governed and oversaw Lehman contributed to the bankruptcy, even though the
majority of Lehman's mistakes came from within the company's own operations. Several analysts
anticipated that the bankruptcy of Lehman Brothers had caused a fear that would ultimately
damage not just the U.S. financial system as well as the entire global financial system. Several
questions about what caused the bankruptcy of Lehman Brothers, historically the top business
finance company in the United States, were addressed in the aftermath of the company's fall
down. The real thing is that these issues are challenging to address right now for a variety of
reasons, including the lack of accurate evidence and information about what supposedly
happened after Lehman went bankrupt.

References

Caesar K. Simpson (2016). What Caused the Failure of Lehman Brothers? Could it have been
prevented? How? Recommendations for going forward.
https://www.ijrrjournal.com/IJRR_Vol.3_Issue.11_Nov2016/IJRR003.pdf?
fbclid=IwAR0y6qupUrQasgSywY7NEZ-0Dch4H1m7aMcBCjVI-
k1TYPax2aFMqJA3Eec

D’Arcy, C. (2009). Why Lehman Brothers collapsed. Retrieved May 11, 2012 from
http://www.lovemoney.com/news/the-economy-politics-and-your-job/the-economy/
3909/why-lehman-brothers-collapsed

Freifeld, K. (2015). Ernst & Young settles with N.Y. for $10 million over Lehman auditing.
https://www.reuters.com/article/us-ernst-lehman-bros-idUSKBN0N61SM20150415

Harrison, W., Horngern, C., Thomas, C. &Suwardy, T. (2011). Financial Accounting.

International Financial Reporting Standards. 8th ed. Pearson Education South
Asia.Singapore.

Jane Mancino (1997). The Auditor and Fraud.

https://www.journalofaccountancy.com/issues/1997/apr/mancino.html?
 fbclid=IwAR21Jlp1cdQMPamu7Y4GPW9mhPcTPpff6c8sf63MNpwkp0og5ENDsvF0la
s

Kimberly, S. (2011). Misconceptions about Lehman Brothers' Bankruptcy and the role of
derivatives played. Retrieved from
http://www.stanfordlawreview.org/online/misconceptions-about-lehman-brothers-
bankruptcy

Lartey, R. (2012). What part did derivative instrument play in the financial crisis of 2007-2008?
Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444270

Lioudis, N. (2023). The Collapse of Lehman Brothers: A Case Study.

https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

Mensah, K., M., J. (2012). Appraisal and improvement of organizations' performance: A case
study of Accra University of Business. Retrieved from: http://ssrn.com/author-1761405
Murphy, A. (2008). An analysis of the financial crisis of 2008: Causes and solution:
Retrieved from: http://ssrn.com/abstract-1295344

Mensah, K., M., J. (2014). The Failure of Lehman Brothers: Causes, Preventive Measures and
Recommendations https://www.studocu.com/row/document/botswana-accountancy-
college/association-of-chartered-certified-accountants/the-failure-of-lehman-brothers-
causes-pr/40081066

Swedberg, R. (2010). The structure of confidence and the collapse of Lehman Brothers.Retrieved
June 2, 2012 from
http://www.soc.cornell.edu/faculty/swedberg/2010%20The%20Structure%20of
%20Confidence%20and%20the%20Collapse%20of%20Lehman%20Brothers.pdf.
 Republic of the Philippines
Bulacan State University
Bustos Campus
Poblacion, Bustos, Bulacan

CASE STUDY:

LEHMAN BROTHERS

In partial fulfillment of the requirements in Monetary Policy

and Central Banking (PCFM303)

Submitted by:

Agtarap, Rainer Irvin S.

Albiz, Vanessa
Bernardo, Marielle SM.
Buenzalida, Dante T.
Dela Cruz, John Mhiko C.
De Leon, Diane DJ.
Evangelista, Briamae C.
Flores, Caitlin Joyce M.
Rabino, Mary Elizabeth C.
 Raya, Ivy Grace M.
Trinidad, Charmaine Joyce DP.
Velasco, Marielle V.

BSBA FM-3E

Submitted to:
Mr. Laurence C. Espino, MBA
Professor
General Documentation

 The first thing we did was set up a group conversation using the Messenger app to make
communication easier. The group leader assigned each member a task that they are all
responsible for completing. Each participant reported the results of their investigation
into the difficulties that were raised and which required analysis.
 For the references these are the problems that the members need to analysed:
1) Introduction (Dante/Miko)

2) Background (Marielle V/ Dianne)

3) Problem Statement (Caitlin, Vanessa and Charmaine)

4) Solution (Caitlin, Vanessa and Charmaine)

5) Discussion/ Recommendation (Elizabeth and Marielle B.)

6) Conclusion (Ivy and Bria)

7) Documentation (Rainer)
 The assigned members in their designated topics shared their research about the Lehman

Brothers controversy. This is our conversation looks like.

• Based on the data gathered, the group members deliberate and decide how they would

seek solutions to the following issues.

  After

 The group has completed their duty, the

material is subsequently categorized and

filed for the overall documentation.

 Groups are assigned the duty of supplying the information for our PPT.

 After we finish all the assigned task, we conducted a quick dry-run for us to be aware of
the flow of our presentation.