Lessons from Lehman Brothers: Will We Ever Learn
1. Describe the situation at Lehman Brothers from an ethics perspective. What’s your opinion of what happened here?
The collapse of Lehman Brothers was the results of ethical failures which were rooted in its corporate culture.
Lehman Brothers’ risk-oriented culture encouraged unethical decision for financial gain, therefore the risk-taking ideal and the overlook of questionable behaviors. Professional ethics was put behind profit, with employees ‘making questionable deals hailed and treated as conquering heroes” (Robbins & Coulter, 2011). Such reward system affected employees’ morale and bred misconduct. The huge risk appetite drove Lehman to repeatedly exceed its internal risk control limits and make the decision to follow aggressive growth strategy, pushing the leverage ratio to the uncontrollable peak of 44-1 even amid the subprime mortgage crisis in 2007.
There also existed a culture of corruption in Lehman. The lack of transparency had led to ethical failure starting from top management and being passed down the organization. Repo 105 is a typical example. By using repurchase agreement to secure cash loan, Lehman appeared in a good shape on the balance sheet. However, ethical and legal issues surfaced when Lehman deliberately described this repurchase agreement as outright sale of security and misled investors into believing Lehman’s potential. By closing one eye to illegal and unethical behavior, Lehman’s top management set a tone for the overall operation, and creates a culture of corruption.
2. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.
Greed is the main culprit for Lehman’s demise. The profit-driven bank put its benefits first and creates an egocentric culture which sets the momentum for the entire operation. Top management used Repo 105 to make amendment to the accounting figure. At lower level, decisions were made regardless of tremendous risks involved. The egocentric thinking might have
The collapse of Lehman Brothers was the results of ethical failures which were rooted in its corporate culture.
Lehman Brothers’ risk-oriented culture encouraged unethical decision for financial gain, therefore the risk-taking ideal and the overlook of questionable behaviors. Professional ethics was put behind profit, with employees ‘making questionable deals hailed and treated as conquering heroes” (Robbins & Coulter, 2011). Such reward system affected employees’ morale and bred misconduct. The huge risk appetite drove Lehman to repeatedly exceed its internal risk control limits and make the decision to follow aggressive growth strategy, pushing the leverage ratio to the uncontrollable peak of 44-1 even amid the subprime mortgage crisis in 2007.
There also existed a culture of corruption in Lehman. The lack of transparency had led to ethical failure starting from top management and being passed down the organization. Repo 105 is a typical example. By using repurchase agreement to secure cash loan, Lehman appeared in a good shape on the balance sheet. However, ethical and legal issues surfaced when Lehman deliberately described this repurchase agreement as outright sale of security and misled investors into believing Lehman’s potential. By closing one eye to illegal and unethical behavior, Lehman’s top management set a tone for the overall operation, and creates a culture of corruption.
2. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.
Greed is the main culprit for Lehman’s demise. The profit-driven bank put its benefits first and creates an egocentric culture which sets the momentum for the entire operation. Top management used Repo 105 to make amendment to the accounting figure. At lower level, decisions were made regardless of tremendous risks involved. The egocentric thinking might have