The Collapse of

BY: ROHIT
Roll No. 232
Tutorial: M-63
Section: M

FACTS & FIGURES

BACKGROUND

The foundation for Lehman Brothers was laid

by the German immigrant Henry Lehman and
his brothers in the 1850s. For the first decades
the company traded cotton, but in the
beginning of the 20th century it started with
banking and securities trading, eventually
becoming an investment bank. . The main
business areas of Lehman before the collapse
was typical investment banking as well as
equities, fixed income, capital markets and
investment management.

MERGERS & ACQUISITIONS

Acquired Abraham & Co. in 1975 and merged with Kuhn, Loeb & Co. to
form Lehman Brothers, Kuhn Loeb Inc. becoming countrys 4th largest
investment bank.
Acquired by American Express in 1984 and merged the financial
institution with its unit Shearson.. Nine years later, Shearson was spun
off.
Acquired PCS of Cowen & Co. in 2001
Acquired Crossroads Group of Lincoln Capital Management and
Neuberger Berman in 2003.

PERFORMANCE GLIMPSE

COLLAPSE
In the beginning of 2008 Lehman Brothers made a quarterly loss of over $2.5
billion, mostly concentrated in the mentioned areas. The fact that Lehman
Brothers were losing money combined with their high debts and a balance
sheet filled with weak, illiquid assets had disastrous consequences for the
banks reputation. Lenders and other interdependent parties successively lost
confidence in the bank which lead to increasing capital costs and difficulties in
getting short-term funding to maintain liquidity. Lehman Brothers announced a
quarterly loss of $3.9 billion in September 2008.
Lehman Brothers fell on 15 September, 2008, it was the largest bankruptcy
ever, and it still is. The bank had assets of $639 billion, which is about as much
as the five subsequently largest bankruptcies combined. The size of the
bankruptcy could also be described as more than one and a half time the gross
domestic product of Sweden in 2009.

REASONS FOR COLLAPSE

Complacenc
y of rating
agencies

Excessive
leverage

Greed

Intricate
accounting
rules

Complex
derivatives

AUDITORS ROLE
New York Attorney Generals
Say
E&Y helped Lehman Brothers Holding, Inc.
engage in an accounting fraud involving the
surreptitious removal of tens of billions of
dollars of fixed income securities from
Lehman's balance sheet in order to deceive
the public about Lehman's true liquidity
condition.
During that time, E&Y reportedly earned
more than $150 million in fees from Lehman
Brothers.

E&Ys Say
The transactions in question were recorded in
accordance with Generally Accepted Accounting
Principles (GAAP), and the clean audit opinion was
therefore justified. When the Repo 105
transactions happened, the firm was not required
under the accounting rules to disclose them. The
auditors contend they did nothing wrong, and the
collapse of Lehman was not their fault.
E&Y personnel claimed that they only agreed to
the accounting treatment applied to the
transactions, but didn't actually look at the
transactions themselves, their overall impact on
the financial statements, and the real reason why
they were used.

RECOMMENDATIONS

Stress
Tests

Leverag
e Ratio

Diverse
Portfolio

Risk
Taking

QUESTIONS?

REFERENCES
1. https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_B
rothers
Wikipedia: Bankruptcy of Lehman Brothers
2. https://en.wikipedia.org/wiki/Lehman_Brothers
Wikipedia: Lehman Brothers
3. https://goo.gl/psCzOK Case study of Lehman Brothers
by Robin Feng & Niklas Fredriksson
4.
https://www.imd.org/research/challenges/upload/TC03
9-10PDF.pdf
Lehman Brothers case study by Professor Arturo Bris

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