Discuss about the Operation And Governance Of Financial Markets.
One of the largest financial bankruptcy cases in the U.S. was registered to Lehman Brothers where employees lost their jobs, and investors lost their money. This is all because of the financial disaster, which came in 2008 due to which Lehman failed in the commercial real estate investments and not able to manage the operations due to financial issues.
Lehman Brothers Holdings Inc. was one of the fourth financial companies, which was filed for bankruptcy. The corporation was started from a small general store in the 1840s, which was founded by the German immigrant Henry Lehman in Montgomery, Alabama. Later around six years, Henry established Lehman Brothers together with his brothers – Emmanuel and Mayer. A few years later, Lehman incorporates a strong presence in the commodities trading business and a foothold in the financial community. Lehman Brothers were the first investment bank, which hit the London by opening an office and takes the advantage of the booming bond market in whole Europe. Lehman Brothers bank was known for various Mergers and Acquisition like in 1972, Lehman acquires Abraham & Co., in 1975, American express acquires Lehman Brothers and merges it with Shearson, and in 1993, Lehman becomes independent through public stock offerings and thus they started trading on New York and Pacific stock exchanges. In 2002, Lehman Brothers acquire Neuberger Berman and The Crossroads Group (Adu-Gyamf, 2016). One of the things that can impress anyone is the incredible diversification of the Lehman Brothers as they were involved in many activities and in many industries and countries and every investor know that diversification reduces risk and this is the reason that why Lehman lasted for 150 years.
The Lehman Brothers had subsidiaries all over the globe due to their extensive global imprint on the debt, equity, and derivatives markets. Along with it, these worldwide subsidiaries and firms affiliated to the Lehman Brothers also filed for financial insolvency, which leads to pressure on the global economic recession on the financial markets of the world. World Bank states that the economic downturn was come in USA and the World in three phase’s i.e. First Phase includes U.S. – subprime-mortgage-cum-structured-finance catastrophe, phase 2 – Post-Lehman worldwide financial market turmoil, Phase 3- The global economic recession.
The bank also has weak corporate governance and various other weak key areas were – corporate risk management, Board of directors, Remuneration scheme, and Nomination committees. From ten board members, four was over 75 years of age and in them; one of the boards is having the financial sector knowledge. The misbehaviour of the top executives is also a reason for the failure (Allen & Carletti , 2009). The corruption can easily be analysed and can be seen as Lehman Brothers has six committees, which should meet weekly for the discussion for addressing various risk areas and it related activities, it was found that they have only discuss twice in both the year 2006 and 2007.
Lehman Brothers have also adopted new strategies, which can help them to solve their problems, but rather than solving the issues, the problem becomes larger. In the last few years, the clients and lenders have lost the trust and confidence of its lenders and clients due to the insufficient liquidity (Indiviglio, 2010).
Considering the bankruptcy case, it is to be found that Lehman Brothers have changed his financial statement by manipulating its numbers and the study in this case is regarding this only that whether the manipulation is done by miscalculated error or it is done intentionally. (Bankruptcy, 2009) It was revolved around a sale of toxic assets to the outside lenders, which should be treated as a loan, but in the Balance Sheet, it was shown to be as a Sale so that the people and investors trust will be maintained on them.
Later in 2008, their fraud was caught when the company filed a protection claim in the court for the bankruptcy with the assets of $ 639 billion and that makes company force to be bankrupt and was filed as the biggest bankruptcy in the U.S.
It was found that Lehman Brothers used an accounting scheme Repo 105 when 50 billion dollars of assets was manipulated from their balance sheets (Benos, et al., 2014). This Repo 105 help Lehman Brothers to borrow cash short-term deposit from the bank and where the repayment needs to be done in less than the few months. The Bufithis stated that Lehman Brothers removed the inventory and treat is as a sale by making the link with Repo 105. Publicly, they limit and make less down their net leverage and balance sheet. Also, the periodic reports of the Lehman Brothers did not disclose the cash borrowings which were done under repo 105 transaction and this was due to maintaining their goodwill in the eyes in the public.
The FTC also analyses and monitors the firm’s financial transaction including the Repo 105. Later, it was found that the top executives and the management use unethical judgment and mislead the whole firms. The top management of the Bank also violated various internal codes of ethical conducts by misleading the investors and manipulating with the actual value of the firm’s assets which was also said under the statement made by the Vice President of the bank finance division, Matthew Lee (Chadha, 2016). The government officials and regulators know that there was something wrong or mistaken but due to the market goodwill, they did not pressurize the Bank but later on, they go against Lehman in the Court.
For every bank, the finance and accounting is a very important and integral part. The backbone of a very company is also drive through finances. The management helps in identifying various risks in this integral part and practices and thus takes down the business to the success (Dumontaux & Pop, 2012). A business firm needs various essential tools, systems, and networks that can help it to achieve their financial goals and objectives. While researching the topic, it is also found that a consultant firm in Manhattan runs and managed by the CEO Richard Fuld. Emest Young the accountant firm is also being sued in the New York due to the fraud, and Matthew Lee who is on the sky and blowing the whistle is still looking for the work.
For every firm, there is a need for standard rules and regulations that will keep a company safe from risk and failures. Here, Ethics also plays a major role which is required in every type of company or firm whether a business enterprise or banks (Dumontaux & Pop, 2012). Ethics teaches the behaviour to the people which are required in daily transactions and it is different for every individual positively or negatively. In an organization, developing and implementing ethical practice can prove to be a complex task but considering long-term purpose, it will teach a person how to behave in a legal and ethical manner. Developing and maintaining these ethical standards will also help the organization in maintaining their reputation and goodwill in the eyes of their customers and employees.
Therefore, the reason why Lehman Brothers fell was the corruption, which erupted due to the manipulation in the balance sheets as in spite of the support of the accounting schemes are with the firm from almost two centuries (Haas & Horen, 2012). In my opinion, Richard Fuld mind has changed due to too much power, which led them to the corruption. He assumes himself as god and this make changes in the accounting records for the benefit of him and the company.
For every organization, the CEO is responsible for every action held in the company, as he knows what is going in the company and he had the power to stop these unlawful and ethical implications being done in a company (Stevens & Buechler , 2013).
Fuld, the CEO of Lehman Brothers have a power which is also extended outside the company and also consists a political influence as when the Bankruptcy came in Lehman brothers bank, he knocks the door of the United States president. The Lehman Brothers were also bailed through the political influence of Fuld. However, in the end, Fuld was so obsessed with his power that he prefers the unethical way and pays no attention to the rules (Dutta, et al., 2010). When Lehman Brothers filed for bankruptcy, their estimated worth was $639 billion and they were debt in $613 billion in debt (Mishkin, 2011).
Considering the condition of Lehman Brothers on September 14th, it can be said that their liquidity was pathetic which was majorly assumes by various clearing and commercial banks. These banks were few in numbers like JP Morgan bank and Federal bank (Jeffers, 2011). The Federal Reserve was lending them with various conditions and allowing only investment grade securities. This is all happening because the confidence in Lehman Brothers was lost by all bankers and firms and thus some of them are pulling themselves away from Lehman Brothers due to the tremendous losses for a continuous period (Johnson & Mamun, 2012). Due to very vast and significant operations in the London, Bank of America and Barclays were suggested as buyers of the Lehman.
The Board of Directors of the Lehman Brothers also did not work effectively in responding to the crises and thus kept them under the unwise decision. At the first stage only, the warning signs are blooming due to the investment made in sub-prime mortgages and the board of directors perceives them as a profitable situation and so makes it continued (Joines, 2010).
Lehman is requiring billions of dollars from the repo market each day so that to open up their business. As Lehman, goes with the wrong business model and so failed in diversifying their risk, and operate primarily on short-term high-risk loans. In addition to this, they try to protect those bad loans and thus borrow tons of money, which leads to an increase in the average. Even after creating the crises, they decided to plummet themselves into a black hole dig by themselves.
Lehman did nothing to protect themselves during the crises and even not supported by anyone. They can seek various opportunities held during the crises but they are marked with the over-confidence and thought they can back the situation again which was not a proactive solution.
As of 15th September 2008, Lehman Brothers filed for bankruptcy, which shocks the financial sector in the world (Kim & Song, 2017). This forced the bank to seek bankruptcy protection, which is the largest ever in the U.S. sector. This situation was also faced by Bear Stearns but the US central bank intervened and supports them through the US treasury. This raises the question that why the US government not intervened in the Lehman case (Swedberg, 2010).
The case of Bear Stearns, the Fed engineered a sale to JPMorgan Chase in $29 billion of the risk of losses and when potential purchasers of Lehman ask for the same assurance, they were denied for the same and this makes the bank to file for bankruptcy (Kwaku & Mawator, 2010). Lehman also focused on aggressive growth strategy in the year 2006, which also includes higher risks, and when in 2007, when the subprime residential mortgage business goes towards the problem to crises, Lehman was not able to perceive the developing storm, which drives the various issues including that of the case of the commercial real estate (Latif, 2012). It also pulls more capital than the before. This leads to an infinite cycle, which creates difficulty for the bank to borrow capital and cover up the risk.
The employees and management of the bank made a fortune during the peak period when the bank is making huge profits and on that time only, the mortgage crises started in the United States, which is resulted by the decline in the prices of the real states (Stromfeld, et al., 2009). This makes those loans very risky which was made by the bank in the form of housing loans. The bank also raised the interest rate and then those borrowers were not able to repay Lehman. The Lehman Brothers Inc. suffers huge losses due to this and causes for a loss of around $60 billion in real states loans (Maux & Morin, 2011). The one reason that can be added here for this loss or downfall was the poor relationship with a top bank in the United States. Ethics are no more concern for the executives of Lehman Brothers and they did everything that was bad for the business and later on realized that it now very hard to cover up all (Maux & Morin, 2011).
Lehman Brothers bankruptcy forced the whole market to readdress risk, which was previously overlooked. On money market funds, there was dramatic impact when the Lehman filed for bankruptcy.
Conclusion
The Lehman Brother case was an unfortunate financial crisis and this affects many shareholders and financial institution around the globe. The main cause of the crises was the leadership and the corruption inside the internal functions of the organizations. The company culture was also not ethically framed and these ethics are not seen in any of the internal person or perspective.
The CEO of Lehman Brother Inc. got overconfident due to the continuous hike in the profits and this makes Lehman in creating a bad relationship with others banks. Later on, Barclays and Bank of America also refused the offer of acquisition laid down by the Lehman brothers due to the big-debt of $639 billion. The financial market is also affected by Bear Stearns crises and at that time Lehman Brothers Inc. was the only next independent bank, which was failed.
Lehman made huge mistakes by significantly increasing their internal risk limits and thus doubles their debt. In March 2008, it was clear that Lehman’s growth strategy was imperfect and their survival was surrounded by high threat. It was related with the collapse of Bear Stearns.
Therefore, later on, Lehman Brother Inc. announced in the market that they have a liquidity of $41 billion, in comparison with assets value to just $2 billion.
Before also, Lehman Brothers have gone with various challenges like surviving the railroad bankruptcies of the 1800s, the Great Depression of the 1930s and the two world wars.
Despite its ability to survive numerous past disasters, the collapse of the U.S. housing market ultimately brought Lehman Brothers to its knees. If the government supports Lehman Brothers by injecting capital -like in the same case as Bear Sterns and AIG. Lehman Brother failure spawns a new wave of corporate governance reforms. In addition, from this case various lessons can be learned i.e., Big need not mean mighty although their credit rating are credible.
References
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