lehman brothers
The business model is risky because Lehman doesn’t have significant fixed income like other investment banks. The loss of capital support made it depend on the repos in the mortgage business. It has high possibility to violate the principle of repo 105 to perfect balance sheet.
Lehman uses Repo 105 to lower its leverage ratio to keep its balance sheet looking good and I can’t agree with this method of disclosure. Leverage makes profits when the return is larger than borrowing costs, otherwise companies will lose collateralized assets. So it brings high profits in the economic prosperity and high risks in the economic recession. During the 2000s, Lehman chose an aggressive strategy (high-risk activities) to expand. Actually, from 2007 the market is concentrating on the high leverage of investment bank. If Lehman’s net leverage continues to be higher than the level of the same industry, it will be very dangerous and lose the repo chance. The repo transaction will reflect on the balance sheet through accounts of cash and collateralized assets, but the repo 105 helps gloss over Lehman’s statement. Through repo 105, Lehman considers transaction as “sale” by higher haircut, and then uses the cash to pay liabilities, making total assets and equity unchanged. That is a severe misleading way of disclosure and external investors can’t discover the financial risk of the company. If all the companies adopt repo 105, the stock market will be damaged, not only the effect of 2009 crisis.
During the bankruptcy of Lehman, I think three institutions should be responsible. Firstly, the management department of Lehman itself. It overrides venture management, putting profits at first place rather than considering venture level. The company should diversify the power internally and let the two departments restrict each other because risk control and forecast are the most important factors for investment banks. Secondly, the audit of E&Y exists significant oversight, allowing
Lehman uses Repo 105 to lower its leverage ratio to keep its balance sheet looking good and I can’t agree with this method of disclosure. Leverage makes profits when the return is larger than borrowing costs, otherwise companies will lose collateralized assets. So it brings high profits in the economic prosperity and high risks in the economic recession. During the 2000s, Lehman chose an aggressive strategy (high-risk activities) to expand. Actually, from 2007 the market is concentrating on the high leverage of investment bank. If Lehman’s net leverage continues to be higher than the level of the same industry, it will be very dangerous and lose the repo chance. The repo transaction will reflect on the balance sheet through accounts of cash and collateralized assets, but the repo 105 helps gloss over Lehman’s statement. Through repo 105, Lehman considers transaction as “sale” by higher haircut, and then uses the cash to pay liabilities, making total assets and equity unchanged. That is a severe misleading way of disclosure and external investors can’t discover the financial risk of the company. If all the companies adopt repo 105, the stock market will be damaged, not only the effect of 2009 crisis.
During the bankruptcy of Lehman, I think three institutions should be responsible. Firstly, the management department of Lehman itself. It overrides venture management, putting profits at first place rather than considering venture level. The company should diversify the power internally and let the two departments restrict each other because risk control and forecast are the most important factors for investment banks. Secondly, the audit of E&Y exists significant oversight, allowing