The Bankruptcy of Lehman Brothers
THE BANKRUPTCY OF LEHMAN BROTHERS
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The Bankruptcy of Lehman Brothers: Causes of Failure & Recommendations Going Forward
Amirsaleh Azadinamin
Doctorate of Finance Candidate
March 6, 2012
Electronic copy available at: http://ssrn.com/abstract=2016892
THE BANKRUPTCY OF LEHMAN BROTHERS Abstract This paper looks at the failure of Lehman Brothers as the biggest bankruptcy case in the US history and the events that followed. The first part of the paper reviews factors that led to the failure and consequently the bankruptcy event. Some of the causes leading to the crisis, namely the market for Credit Default Swaps (CDOs), misrepresentation of financial statement, complex structure of the company, low standards, and unethical behavior of top managers are reviewed in the paper as the essential causes. In misrepresentation of financial statements there is an extra emphasis on the misuse of the Repo 105 procedure and how Lehman used it to make its financial statements appear healthier than what they were in actuality. Many also suggest that the misrepresentation by the top managers also violated the Sarbanes-Oxley Act. The second part of the paper reviews whether the failure could have been prevented before the crisis was spiraled out of control with devastating consequences. Numerous analyses and their conclusion suggest that there were many signs suggesting the coming of a crisis, but numerous people, whether analyst, auditors, or even employees, failed to recognize them or deliberately turned a blind eye to the warning signs. The most prominent sign is mentioned as the net negative cash flows that Lehman was running three years prior to the crisis despite healthy looking balance
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sheets as well as income statements. The last part of the paper offers solutions for going forward and ways to avoid another failure of a giant financial institution. As for solutions going forward, paper recommends companies to abandon dubious and wrongful accounting
1
The Bankruptcy of Lehman Brothers: Causes of Failure & Recommendations Going Forward
Amirsaleh Azadinamin
Doctorate of Finance Candidate
March 6, 2012
Electronic copy available at: http://ssrn.com/abstract=2016892
THE BANKRUPTCY OF LEHMAN BROTHERS Abstract This paper looks at the failure of Lehman Brothers as the biggest bankruptcy case in the US history and the events that followed. The first part of the paper reviews factors that led to the failure and consequently the bankruptcy event. Some of the causes leading to the crisis, namely the market for Credit Default Swaps (CDOs), misrepresentation of financial statement, complex structure of the company, low standards, and unethical behavior of top managers are reviewed in the paper as the essential causes. In misrepresentation of financial statements there is an extra emphasis on the misuse of the Repo 105 procedure and how Lehman used it to make its financial statements appear healthier than what they were in actuality. Many also suggest that the misrepresentation by the top managers also violated the Sarbanes-Oxley Act. The second part of the paper reviews whether the failure could have been prevented before the crisis was spiraled out of control with devastating consequences. Numerous analyses and their conclusion suggest that there were many signs suggesting the coming of a crisis, but numerous people, whether analyst, auditors, or even employees, failed to recognize them or deliberately turned a blind eye to the warning signs. The most prominent sign is mentioned as the net negative cash flows that Lehman was running three years prior to the crisis despite healthy looking balance
2
sheets as well as income statements. The last part of the paper offers solutions for going forward and ways to avoid another failure of a giant financial institution. As for solutions going forward, paper recommends companies to abandon dubious and wrongful accounting
References: 18 Abdullah, K., Al-Jafari, M., & Kourabi, F. (2011). The Effect of Sarbanes- Oxley Act (SOX) on Corporate Value and Performance. European Journal Of Economics, Finance & Administrative Sciences, (33), 42-55. Dutta, S. K., Caplan, D., & Lawson, R. (2010). Lehman 's $hell Game. (cover story). Strategic Finance, 92(2), 23-29. Greenfield, H. (2010). The decline of the best: An insider 's lessons from Lehman Brothers. Leader To Leader, 2010(55), 30-36. Johnson, M., & Mamun, A. (2012). The failure of Lehman Brothers and its impact on other financial institutions. Applied Financial Economics, 22(5), 375-385. doi:10.1080/09603107.2011.613762 Le Maux, J., & Morin, D. (2011). Black and white and red all over: Lehman Brothers ' inevitable bankruptcy splashed across its financial statements. International Journal Of Business & Social Science, 2(20), 39-65. Lehman Brothers Holdings, Inc. SWOT Analysis. (2008). Lehman Brothers Holdings, Inc. SWOT Analysis, 1. Masyitoh, O., & Adhariani, D. (2010). The analysis of determinants of going concern audit report. Journal Of Modern Accounting & Auditing, 6(4), 26-37. Snowdon, C., Steinberg, D., & Lippman, M. (2009). Managing the bankruptcy of Lehman Brothers. International Tax Review, (49), 3-6. THE BANKRUPTCY OF LEHMAN BROTHERS Verleun, M., Georgakopoulos, G., Sotiropoulos, I., & Vasileiou, K. Z. (2011). The SarbanesOxley Act and Accounting Quality: A Comprehensive Examination. International Journal Of Economics & Finance, 3(5), 49-64. doi:10.5539/ijef.v3n5p49 Wilchins, Dan & DaSilva, Silvio (2010). Graphic: How “Repo 105” Worked, blogs.reuters.com/reutersdealzone/2010/03/12/graphic-how-repo-105-worked/ 19