INTRODUCTION
The global financial crisis is one of the serious issues, the central point of the world economy in 2008 This crisis is "triggered" by lacking subprime mortgage lending in the
The surge in loans during the US real estate bubble was driven by borrowers' expectations of high returns, attracting banks eager for lucrative profits This led to significant efforts from companies, including Lehman Brothers, to avoid bankruptcy However, Lehman resorted to fraudulent financial reporting to lure investors, ultimately declaring bankruptcy and leaving lasting risks for both the US and global economies As the fourth-largest investment bank, Lehman’s collapse involved fraudulent activities amounting to $50 billion, surpassing other notable cases like Enron and WorldCom Key findings revealed that Lehman employed accounting maneuvers, specifically Repo 105 and Repo 108, to obscure its excessive debt at quarter-end since 2001 This analysis of Lehman Brothers will explore the causes, mistakes, auditor roles, and the responsibilities of involved parties, aiming to draw lessons and recommendations for other companies, while highlighting necessary legal reforms and enhanced audit scrutiny to prevent similar bankruptcies in the future.
COMPANY’S INTRODUCTION
On September 15, 2008, Lehman Brothers, a global financial services firm with over 25,000 employees, declared bankruptcy Founded in the mid-19th century by German immigrant Henry Lehman and his brothers Emanuel and Mayer, the firm grew from a general store to become the fourth-largest investment banking house in the United States Throughout its history, Lehman Brothers navigated significant challenges, including the Civil War, railroad insolvencies in the 1800s, both World Wars, the Great Depression, and various mergers, ultimately facing a lack of capital after being spun off by American Express.
In 1994, the company transitioned from a family-run private organization with over a century of history to a public entity, facing significant challenges such as the Long Term Capital Management collapse and the Russian debt default in 1998.
Lehman Brothers initially facilitated transactions in their general store by accepting cotton as payment, which led to their involvement in the cotton trade for local farmers in Montgomery This arrangement allowed farmers to exchange cotton for essential goods like shirts, shoes, and supplies In 1858, the brothers transitioned from general merchandising to cotton brokerage by opening an office in New York, the hub of commodity trading Mayer Lehman managed the Montgomery store, collaborating with local farmers, while Emanuel engaged with cotton producers and exporters in New York Their reputation was bolstered by positive credit reports from R G Dun and Co., aiding in their expansion In 1862, a partnership with John Wesley Durr further enhanced their trading capabilities, positioning Lehman, Durr and Co among the leading cotton firms in the region.
During the Civil War, President Lincoln implemented a blockade that halted cotton shipments from the South to Northern manufacturers In response, Lehman Brothers developed strategies to circumvent this barrier, such as routing cotton from the South to England before transporting it to New York Despite the Southern economy suffering greatly during the war, Lehman Brothers continued to thrive and expand after 1865.
In 1868, Mayer relocated from the South to New York City, where he partnered with Emanuel The firm subsequently moved from Liberty Street to Pearl Street, strategically positioning itself near Wall Street and Hanover.
Square, where the cotton representatives involved workplaces The two siblings, who looked somewhat like each other, were outstanding figures in the city of New York.
In 1870, Lehman Brothers played a pivotal role in establishing the New York Cotton Exchange, a central hub for over one hundred cotton traders to engage in futures trading This exchange facilitated transactions between buyers and sellers before cotton was harvested or delivered to processing plants Subsequently, Lehman Brothers expanded its operations into various commodities, joining the Coffee, Sugar, and Cocoa Exchange, as well as the New York Petroleum Exchange This expansion helped the firm enhance its reputation and expertise while broadening its customer base.
During its tenure as the Fiscal Agent of Alabama, Lehman Brothers ventured into municipal financing by selling state bonds to support the state's financial obligations The firm also focused on the industrialization of the South, investing in sectors such as railroads, textiles, mining, and real estate However, despite its previous resilience, Lehman Brothers faced collapse due to the downturn in the U.S housing market, which was exacerbated by its aggressive foray into the subprime mortgage sector.
During the housing boom of the early to mid-2000s, Lehman Brothers and other Wall Street firms became heavily involved in debt obligations and mortgage-backed securities Lehman's strategic acquisitions initially seemed visionary, as record profits from its real estate operations led to a remarkable 56% increase in revenues for its capital markets division.
Between 2004 and 2006, the firm experienced a rapid growth rate surpassing other investment banking and asset management companies In 2006, it securitized $146 billion in mortgages, marking a 10% increase from the previous year Lehman Brothers reported record profits annually from 2005 to 2007, culminating in a net income of $4.2 billion on revenues of $19.3 billion in 2007.
In February 2007, Lehman Brothers' stock reached an all-time high of $86.18, resulting in a market capitalization of approximately $60 billion However, by the first quarter of 2007, signs of distress in the U.S housing market were emerging, with defaults on subprime mortgages hitting a seven-year peak by mid-March.
In 2007, following a significant one-day stock drop due to concerns over rising defaults impacting Lehman's profitability, the firm reported record earnings and profits for its financial first quarter.
In August 2007, the credit crisis was triggered by the failure of two Bear Stearns investments, leading to a significant decline in Lehman Brothers' stock The company cut 2,500 mortgage-related jobs and shut down its BNC unit, as well as closing Aurora's offices in three states Despite a recovery in the U.S housing market, Lehman remained a dominant player in the mortgage sector, issuing more mortgage-backed securities than any other firm that year, resulting in an $85 billion portfolio—eight times its shareholders' equity In the final quarter of 2007, Lehman's stock rebounded alongside global equity markets, but the firm missed the opportunity to reduce its large mortgage portfolio, which ultimately proved detrimental.
The struggling real estate market led to skepticism among speculators and appraisal firms regarding the liquidity of assets, causing a decline in trust towards Lehman Brothers and its investment banking counterparts Bear Stearns, a close competitor, was the first to collapse, narrowly avoiding bankruptcy through a sale to J.P Morgan Chase on March 16, 2008 Following Bear Stearns' sudden failure, rumors began to circulate about Lehman Brothers being the next firm on the brink of collapse.
Lehman Brothers, similar to other speculative banks, heavily relied on short-term financing through repurchase agreements (repos) to secure billions of dollars necessary for daily operations, making it vulnerable to fluctuations in investor and market confidence In an effort to reassure investors, Lehman raised $6 billion in equity in June 2008, despite reporting its first loss since going public in 1994.
On September 10, the firm announced an anticipated $5.6 billion in write-downs for its "toxic" assets and projected a $3.93 billion loss for the third quarter Additionally, Lehman expressed plans to spin off $50 billion of these toxic assets into a separate publicly traded company.
ANALYSIS OF LEHMAN BROTHERS FRAUD
ECONOMIC BACKGROUND
The early twenty-first century marked a significant evolution in the U.S financial marketplace, laying the groundwork for the 2008 economic crisis Key factors contributing to this crisis included the emergence of a high-leverage "shadow banking system," the expansion of the housing market into a real estate bubble, a low interest rate environment, a decline in mortgage quality, and the vast size of the derivatives market Additionally, the prevalence of short-term loans created potential liquidity risks.
The global financial market began to show signs of collapse with the decline in housing prices in 2005, which was exacerbated by a downturn in 2006 Speculators and subprime borrowers, anticipating a continued rise in housing values, responded to falling prices by delaying loan repayments or defaulting By the second quarter of 2007, the value of mortgage-backed securities plummeted, leading to the bankruptcy of two Bear Stearns funds and further weakening the portfolios of shadow banks and major commercial banks The financial crisis reached its peak in September 2008 with the failures of Fannie Mae, Freddie Mac, Lehman Brothers, and other major institutions, resulting in a significant impact on interest rates and a decline in commercial paper market volume as lenders sought safer investments.
In September 2008, Lehman Brothers, the investment bank with the largest assets at the time of bankruptcy, filed for insolvency, reporting $600 billion in assets and $30 billion in equity (Jones & Presley, 2013) Prior to this, the company's stock price had been in decline for several months amid a broader financial crisis triggered by the collapse of the housing bubble and the devaluation of mortgage-backed securities Lehman Brothers' downfall was primarily due to its high-risk business strategy aimed at maximizing revenue, which led to a rapid increase in its balance sheet starting in 2006, heavily relying on short-term borrowing for long-term investments This included significant holdings in residential and commercial mortgage-backed securities, which were central to the 2008 financial crisis (Hines, Kreuze, & Langsam, 2011).
In 2007, despite early warning signs in the residential mortgage-backed securities market, Lehman Brothers pursued aggressive growth, hoping to capitalize on the impending crisis Executives took on excessive risk by disregarding internal risk models and omitting certain assets from risk assessments, which made it increasingly challenging to sell these investments without incurring substantial losses Selling securities at a loss could have signaled to potential partners that remaining assets were overvalued, eroding confidence at a critical time for Lehman’s heavily leveraged operations Counterparties assessed Lehman based on its leverage ratios, making it crucial for the firm to maintain lower ratios than its competitors Consequently, Lehman’s management employed Repo 105 transactions to enhance the company's financial appearance and maintain acceptable debt ratios, ultimately aiming to mislead investors and stave off bankruptcy.
METHOD OF FRAUD ON FINANCIAL STATEMENT
To handle the financial crisis, Lehman Brothers intended to “window dressing” its financial statement with the aim of deceiving investors and analysts by taking advantages of Repo 105.
A repurchase agreement (Repo) is a financing mechanism frequently utilized by investment banks, where a party offers securities as collateral to secure short-term cash funding Upon reaching the maturity date, typically within seven to ten days, the transferor repurchases the securities by repaying the borrowed amount plus interest Throughout the Repo transaction, the total assets and liabilities on the balance sheet remain unchanged, as both the collateralized investments and corresponding obligations are included, resulting in stable leverage ratios for the company.
Repo 105 transactions resemble standard repos but allow for certain transactions to be classified as sales, as permitted by Statement of Financial Accounting Standards (SFAS) No 140 from the Financial Accounting Standards Board (FASB) This accounting treatment enabled Lehman Brothers to remove securities and associated interest from its balance sheet, using the temporary funds to pay off other debts Consequently, this maneuver reduced the bank's leverage ratios, enhancing its appeal to investors.
The cash inflow from collateralization improved the firm's debt status by allowing it to retire short-term liabilities, enhancing liquidity For instance, receiving $100,000 from collateralizing an investment enabled the firm to pay off current obligations, reducing its debt levels However, if repurchase arrangements occurred after financial statement disclosures, accounting standards would necessitate recognizing a liability on the balance sheet, potentially worsening the debt position This liability, influenced by interest, could exceed the initial cash borrowed, leading to increased leverage ratios Without recognizing these transactions as sales, Lehman would not have benefited from the agreement Consequently, the implementation of Repo 105 provided Lehman with a means to manipulate its financial position by exploiting accounting standards (Jones, B., & Presley, T., 2013, p.60-61).
Requirements satisfying sales transactions under Repo 105 download by : skknchat@gmail.com
As stated in Appendix 17 of Examiner’s report by Valukas in 2010, SFAS No.
140 regulates that a sales transaction under Repo 105 must meet the following three conditions:
“(1) the transaction is a true sale at law (SFAS No 140.9a)
(2) the transferee has the ability to pledge or exchange the transferred assets (SFAS No 140.9b);
(3) the transferor is considered to relinquish control of the securities transferred (SFAS No 140.9c).”
Lehman Brothers met the initial requirement for a "true sale" by obtaining a lawyer's confirmation for a valid sales transaction, which was not possible under US regulations due to attorney limitations (Valukas et al., 2010, Appendix 7, p.4) In contrast, London law permitted attorneys to provide such opinions, particularly for "Repurchase Transactions under a Global Master Repurchase Agreement" (Valukas et al., 2010, Appendix 7, p.4) As a result, Repo 105 transactions were executed by Lehman Brothers International Europe (LBIE), even though most of the collateralized assets involved in these transactions were held by Lehman Brothers in the US.
To meet the requirement that the transferee can pledge or exchange transferred assets, the company utilized "readily obtainable" investments, such as government or treasury securities, for borrowing purposes These assets can subsequently be pledged or traded and replaced with similar options upon the maturity of the repurchase agreement (repo).
The transferor relinquished control of the transferred securities, as evidenced by the difference between the value of these securities and the received funds, commonly referred to as the "haircut." Lehman Brothers faced limitations, as its secured loans could not exceed 95% of the asset values, hindering its ability to finance comparable assets during the agreement Consequently, Lehman asserted that it had surrendered authorization over the collateralized investments (Hines et al., 2011, p.43).
Usage of Repo 105 at Lehman Brothers
According to the 2010 Examiner's Report by Valukas, Lehman Brothers significantly escalated its Repo 105 activities around quarterly reporting dates to the SEC, indicating potential "window dressing" to manipulate leverage ratios Since the implementation of SFAS No 140 in 2001, the firm increasingly relied on these transactions, especially between 2007 and 2008 By categorizing these agreements as sales, Lehman was able to enhance liquidity through cash borrowings, remove collateralized securities from its financial statements, and recognize a "haircut" as a derivative asset This accounting treatment allowed the bank to overlook financing loans and their obligations in its financial reporting.
Lehman's "haircut" affected asset composition but not total assets, leading to a $105 million increase in cash and derivative assets alongside a $105 million decline in securities To reduce leverage ratios, Lehman utilized collateralization funds to settle other obligations, impacting total assets and liabilities without altering owner’s equity, thus lowering gross and net leverage ratios Shortly after filing its financial statement with the SEC, Lehman secured a loan to address Repo 105 debts and liabilities, repurchasing securities to restore its total asset position on the balance sheet.
Figure 1: Changes in Lehman’s Balance sheet under Repo 105.
Ordinary Repo transactions do not impact leverage ratios, as any reduction in liabilities from financing borrowings is offset by an equal increase in total assets and liabilities In contrast, Repo 105 transactions are treated differently, as illustrated in Figure 2, highlighting the distinct accounting treatments between the two types of repos.
Figure 2: Difference between ordinary Repo and Repo 105 (Hines et al., 2011, p.45).
The 2010 Examiner’s Report by Valukas revealed that between mid-2007 and early 2008, Lehman Brothers significantly increased its use of Repo 105 transactions, leading to a reduction of nearly $50 billion in asset value on its balance sheet to improve its debt ratio This strategic maneuver dramatically altered Lehman's net leverage ratio, as illustrated in Figure 3.
Time Repo 105 (billion Net leverage ratio
USD) With Repo Without Repo Differences
Figure 3: Impact of Repo 105 on Lehman Brothers’ leverage ratio (Valukas et al., 2010). download by : skknchat@gmail.com
Since Lehman Brothers determined materiality as “any item individually, or in the aggregate, that moves net leverage by 0.1 or more (typically $1.8 billion)” (Valukas,
In 2010, it was revealed that the leverage ratio variance attributed to Repo 105 was significant, leading to the exclusion of these transactions from the balance sheet reported to the SEC, thereby concealing the company's actual financial state By utilizing Repo 105, Lehman Brothers effectively reduced its asset figures during the subprime mortgage crisis and preserved its credit rating, as it contended that S&P's evaluation primarily considered the effects of banks' debt ratios.
Repo 105 temporarily benefited Lehman Brothers by reducing leverage ratios, which created a façade of reduced risk for investors However, this strategy failed to contribute to any real economic growth.
The company's financial situation deteriorated due to rising borrowing costs and limited profitability, leading to a misleadingly improved performance on paper Ultimately, this arrangement had adverse effects on its economic standing, and the bank was unable to avoid bankruptcy amid a liquidity crisis.
Lehman Brothers were not the only bank that removed debt off the balance sheet.
As reported by the Wall Street Journal (Rapoport and McGinty, 2010), there were
18 financial companies experiencing current liabilities reduction for ten consecutive quarters in 2010, such as Bank of America Corp., Citigroup, and Deutsche Bank
AG They also classified an enormous number of short-term obligations as sales rather than liabilities, just like the way Lehman used Repo 105.
Following Lehman's bankruptcy, the SEC mandated that large banks provide more detailed information on Repo transactions to address gaps in accounting standards Furthermore, the SEC has implemented stricter and clearer disclosure requirements for quarter-end transactions across all companies (Wall Street Journal, 2010).
On November 3, 2010, the FASB released an exposure draft (ED) seeking stakeholder feedback on Transfers and Servicing (Topic 860), specifically regarding the reconsideration of effective control in repurchase agreements The objective of this ED is to improve the accounting treatment of repo transactions and similar arrangements.
ROLES OF AUDITOR (EY)
In 2008, the investigation led by Anton Valukas, the examiner for the Lehman bankruptcy, raised significant concerns about the role and accountability of EY auditors The Valukas report identified three key auditing malpractices committed by EY, highlighting the critical issues in their auditing processes.
(1) failure to communicate with Lehman’s Audit Committee about the company’s use of Repo 105,
(2) lack of professional standard of care in investigating the Whistleblower Letter and Lee’s complaint about Repo 105, and
Negligence in auditing Lehman's public financial report filings raises significant concerns While extended auditing periods can enhance the efficiency of auditors, they also pose a risk to the independence and objectivity of the auditing process.
To examine its failure to report to Lehman’s Audit Committee, EY’s awareness of Repo
William Schlich, the lead partner of EY's Lehman audit team, acknowledged during an interview that EY had been aware of the Repo 105 policy and its associated transactions used by Lehman Brothers for several years (Valukas, A., 2010, Vol 3, p 948).
Lehman Brothers' improper use of Repo 105 spanned from 2001 to 2008, yet Ernst & Young (EY) failed to report this violation or any associated risks to the Audit Committee during that time (Valukas, A., 2010, Vol 3, p 949) This oversight highlights significant lapses in auditing practices and compliance.
Our group analyzes the breach of professional care by EY in managing the Whistleblower Letter (Appendix A) by reviewing the procedures undertaken to address the allegations concerning Lehman's accounting errors.
On May 16, 2008, Matthew Lee, Senior Vice President of Global Balance Sheet at Lehman, sent a whistleblower letter to senior Lehman officials, raising concerns about accounting errors and irregularities This letter was subsequently provided to Lehman's Audit Committee and Ernst & Young (EY) to initiate an investigation into the allegations made by Lee.
On June 12, 2018, Schlich conducted an interview with Lee, during which Lee discussed the increasing utilization of Repo 105 by Lehman and its impact on the company's balance sheet.
• On June 13, 2008, Lehman management and Schlich organized a meeting with the Audit Committee to discuss second quarter financial reports of the company.
• On July 2, 2008, Schlich again met the audit committee to review and evaluate the final statements.
• On July 10, 2008, EY issued an unqualified report for the second quarter Form 10-Q, despite having the Whistleblower Letter.
• On July 22, 2008, Schlich attended a full board meeting at which the Whistleblower Letter was delivered by a Lehman officer’s presentation, but this presentation did not mention the wrong use of Repo 105.
Despite multiple meetings, EY failed to inform Lehman’s Audit Committee about the improper use of Repo 105, which violated the Sarbanes-Oxley Act (SOX) and the Committee's request for updates on allegations made by Lee This negligence, as noted by Valukas (2010), significantly breached the due care rule outlined in the principles of professional conduct for auditors.
In analyzing EY's responsibilities regarding the evaluation of Lehman's financial statements, it is evident that the firm exhibited negligence, particularly in 2007 when Lehman employed Repo 105 to enhance its balance sheet and reduce its net leverage ratio EY failed to seek further information regarding Lehman's use of Repo 105, despite auditing numerous documents and reviewing the company's accounting policies The lack of professional skepticism and inquiry into this unusual funding mechanism, especially when Lehman's peers had abandoned it, highlights a significant oversight Furthermore, EY's conclusion that Lehman's financial statements were free from material misstatements and in conformity with GAAP, leading to the issuance of unqualified audit reports for 2007, serves as clear evidence of their negligence in assessing Lehman's public financial filings.
CONSEQUENCES – RESPONSIBILITIES
ASSESS THE CONSEQUENCES OF THE LEHMAN BROTHERS
On September 15, 2008, Lehman Brothers, a 150-year-old financial institution and the fourth largest investment bank in the U.S., filed for bankruptcy protection, shocking the U.S economy and global financial markets This event resulted in significant losses, leading to the unemployment of 25,000 employees and the evaporation of vast amounts of assets Consequently, only two of the five major Wall Street investment banks, Goldman Sachs and Morgan Stanley, remain operational.
Before its bankruptcy in September 2008, Lehman Brothers was the fourth-largest investment bank in the United States, following Goldman Sachs, Morgan Stanley, and Merrill Lynch A significant player in the sub-prime mortgage market, Lehman underwrote more home loans than any other bank in 2006 and 2007, reaching a peak of one in ten US home loans The collapse of the US housing market ultimately led to its downfall.
A year ago, the financial landscape faced a significant downturn, with losses amounting to $830 million (£469 million) The collapse of Lehman Brothers was largely attributed to its substantial exposure to subprime contracts, stemming from its ownership of firms that guaranteed mortgages and its issuance of mortgage-backed securities (MBS) containing these risky loans The company's bankruptcy filing in September 2008 marked a critical turning point in the financial crisis, eroding trust in financial institutions and triggering a rush to redeem investments in money market funds This loss of confidence permeated various markets and countries, leading banks to hoard cash and exacerbating losses in the subprime mortgage sector.
The collapse of Lehman Brothers marked a catastrophic turning point in the global economy, triggering widespread financial turmoil According to The Street, the aftermath was disastrous, with ABC News reporting that countries like Latvia and Hungary experienced significant economic decline, resulting in approximately 6 million job losses Additionally, Pakistan sought assistance from the International Monetary Fund (IMF) to navigate the crisis Iceland faced its own challenges, as officials revealed a lack of funds to support major banks, leading to a broader financial crisis Paul Hickey, founder of Bespoke Investment Group, emphasized that Lehman's bankruptcy will forever be linked to the financial crisis and the resulting wealth destruction.
The collapse of Lehman Brothers profoundly affected the U.S economy, prompting President George Bush to implement a $700 billion bailout plan to stabilize the financial sector In response to the 2008 financial crisis, the Dodd-Frank Act was enacted to enhance financial regulation Meanwhile, in the UK, Lloyds Bank was tasked with rescuing HBOS, supported by government sponsorship for both Lloyds and the Royal Bank of Scotland.
The collapse of Lehman Brothers marked a pivotal moment in financial history, eroding public trust in the financial market and raising numerous questions about the stability of "too big to fail" institutions Many investors and employees, who had previously placed their faith and resources in such companies, became increasingly skeptical of the global economy This bankruptcy not only signified a loss of confidence in major financial foundations but also resulted in nearly 250,000 employees losing their jobs, highlighting the far-reaching consequences of this financial disaster.
The collapse of Lehman Brothers in 2008 marked a turning point for many professionals, including a former HSBC chief executive who left her prestigious role for a brief stint at Lehman, only to lose her savings A lawyer reminisces about the vibrant atmosphere of Lehman, while an executive assistant, after a decade with the bank, struggles to find stable employment amid ongoing uncertainty The sudden bankruptcy on September 15, 2008, left approximately 25,000 employees jobless, eroding trust in American capitalism Renee Spero, a former vice president's assistant, reflects on how her life was irrevocably changed, expressing a longing for her previous full-time position in New York City's financial sector, humorously wishing to wear a shirt that proclaims, "I used to have a great job."
THE RESPONSIBILITIES OF LEHMAN BROTHERS’S BANKRUPTCY
After many years of witnessing Lehman's collapse and bankruptcy, thousands of questions were raised about the responsibility but there was no official answer.
The responsibility of Lehman's core managers, particularly CEO Dick Fuld, is crucial in understanding one of the largest bankruptcies in U.S history and its global implications Their insights and comments shed light on the factors that led to this significant financial collapse.
In 2008, Erin Callan served as the Chief Financial Officer of Lehman Brothers, although she was dismissed just before the company's collapse Richard Fuld, who led Lehman for 14 years, received nearly $500 million in compensation during his tenure before the bank declared bankruptcy Often referred to as "chimpanzee," Fuld attributed Lehman's downfall to the US government, lawmakers, and unfounded rumors, while accepting minimal responsibility This blame game culminated in a US congressional hearing where a congressman labeled Fuld as a "scammer." Erin Callan, a former lawyer who joined Lehman in 1995, rapidly ascended the ranks to become CFO by late 2007.
In a brief period, her flexible and proactive approach reassured investors, yet Fuld chose to terminate her just two months prior to Lehman's collapse Following her dismissal, Callan faced significant criticism, with accusations of her inability to manage Lehman's financial affairs due to insufficient accounting knowledge Additionally, the court's indictment harshly criticized her for overlooking critical warning signs and employing deceptive practices to manipulate Lehman's financial balance sheet, inflating it by as much as $50 billion.
Managers of the US Government
Ben Bernanke, the President of the US Federal Reserve in 2008, faced criticism for overlooking the early signs of the financial crisis leading up to Lehman's collapse Despite this, he applied the lessons learned from the previous Great Recession by taking decisive actions post-Lehman, including reducing interest rates to 0% and collaborating with other central banks His measures, which involved a series of monetary easing strategies and significant capital injections, aimed to avert a second Great Depression and stabilize the economy during a tumultuous period.
In 2008, US Treasury Secretary Henry 'Hank' Paulson faced intense pressure as Lehman Brothers approached bankruptcy Despite the looming crisis, Paulson resisted calls to bail out the bank, asserting he did not want to be seen as "the savior." His stance drew criticism, especially as the US Treasury had already provided support to several failing financial institutions during the turmoil.
Tim Geithner, the former President of the Federal Reserve Bank of New York in 2008, played a crucial role in the decision to allow Lehman Brothers to file for bankruptcy, despite previously criticizing Treasury Secretary Henry Paulson for disclosing the plan Following Barack Obama's election as President in November 2008, Geithner was appointed as the Secretary of the US Treasury, further solidifying his influence in the financial crisis management.
4 years here, he was criticized for his overly close relationship with firms in WallStreet and setting a target to cut the deficit to reduce unemployment.
IMPLICATIONS AND CONCLUSION
IMPLICATIONS
Maintaining transparency in financial statements is crucial to prevent misleading potential investors and creditors Prioritizing the principle of "substance over form" in accounting practices ensures that all companies present their financial situations clearly This transparency allows stakeholders to make informed investment decisions Additionally, both entities and auditors share the responsibility of accurately presenting financial information Discrepancies between public expectations and auditors' adherence to established standards can lead to significant financial failures, as seen in cases like Lehman Brothers.
CONCLUSION
The collapse of Lehman Brothers, one of the largest investment banks in the U.S with a history spanning over 150 years, sent shockwaves through the economy, primarily due to a lack of transparency in financial statements that had been ongoing since 2001 Ernst and Young (E&Y), the auditing firm responsible for Lehman's financial oversight, faced criticism for its negligence during audits William Schlich, the director of E&Y, acknowledged that the firm was aware of and had discussions regarding Lehman's controversial accounting practice known as Repo 105 This situation underscores the critical importance of independence and fairness in auditing; had E&Y adhered to proper audit standards, Lehman Brothers might have avoided declaring bankruptcy with losses amounting to $50 billion This serves as a cautionary tale for other entities, emphasizing that while short-term financial manipulation may seem beneficial, it ultimately jeopardizes long-term stability.
In summary, former Lehman Brothers employees refer to the company's tactics as "accounting techniques" or "a lazy way to beautify the balance sheet," highlighting the controversial practices that contributed to the firm's downfall Additionally, readers of The Economist have responded with satirical commentary, further emphasizing the questionable nature of these strategies.
"accountants, focus on calculations and devote creativity to Apple!". download by : skknchat@gmail.com
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Ký ức kinh hoàng của những nhân viên Lehman Brothers bỗng nhiên trắng tay vì khủng hoảng tài chính 10 năm về trước (2019) Retrieved 5 August
Vào năm 2019, bài viết trên cafef.vn đã khắc họa những ký ức kinh hoàng của nhân viên Lehman Brothers khi họ phải đối mặt với khủng hoảng tài chính cách đây 10 năm Những trải nghiệm đau thương này đã để lại dấu ấn sâu sắc trong tâm trí của nhiều người, phản ánh sự bất ổn và những thay đổi lớn trong ngành tài chính.
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The collapse of Lehman Brothers in 2008 marked a significant turning point in the global financial landscape Many individuals who played crucial roles during that tumultuous time have since moved on to various paths in their careers This article explores the current whereabouts and endeavors of those key figures from that fateful year, shedding light on how they have navigated the aftermath of the financial crisis Their stories reflect resilience and adaptation in a rapidly changing economic environment.
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Appendix A: Mathew Lee “Whistleblower” Letter Text Copy (From Wall Street Journal)
Mr Gerard Reilly, Head of Capital Markets Product
Control Ms Erin Callan, Chief Financial Officer
Mr Christopher O’Meara, Chief Risk Officer
Lehman Brothers Holdings, Inc and subsidiaries 745 7th Avenue
I have been employed by Lehman Brothers Holdings, Inc and subsidiaries (the
Since May 1994, I have served as Senior Vice President at the Firm, overseeing the consolidated and unconsolidated balance sheets for over a thousand legal entities globally Throughout my tenure, I have demonstrated unwavering loyalty and dedication, consistently prioritizing the Firm's best interests.
I feel it is my duty to report certain behaviors and practices that may violate the Firm’s Code of Ethics, as amended on February 17, 2004 As a Firm employee, I am obligated to inform management about any actions I perceive as unethical or unlawful This report is essential for fostering a culture of honesty and accountability within the organization.
The second to last section of the Code is captioned “FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE” That section provides, in relevant part, as follows:
It is essential for all financial records and statements of the Firm to accurately and promptly reflect transactions and asset dispositions Employees must ensure that any information filed with the SEC or disclosed to the public is presented in a clear, fair, and timely manner Furthermore, those involved in preparing the Firm’s financial statements must adhere to Generally Accepted Accounting Principles (GAAP) and relevant accounting standards to ensure that the financial statements fairly represent the Firm’s financial position, operational results, and cash flows.
It is essential that financial statements and disclosures remain free of significant errors Employees and directors must not knowingly provide or allow others to provide misleading, incomplete, or false information to accountants or attorneys during audits or regulatory filings Additionally, no individual should attempt to coerce, manipulate, mislead, or fraudulently influence the Firm’s internal or independent auditors, especially if they are aware that such actions could lead to materially misleading financial statements.
During my responsibilities at the Firm, I have observed actions by senior management that may breach the Code of Conduct I feel it is my duty, in accordance with the Code, to highlight these concerns for your consideration.
1 Senior Firm management manages its balance sheet assets on a daily basis On the last day of each month, the books and records of the Firm contain approximately five
The Firm's senior management appears to lack adequate control over its assets, as evidenced by approximately $5 billion in net assets unaccounted for at the end of each month This situation raises concerns about the accuracy and timeliness of the Firm's financial statements presented to the public and governmental agencies Consequently, there is a risk of these assets being subject to potential write-offs To address these discrepancies, a significant investment in personnel and improved control systems is necessary Currently, the Firm's reporting practices may mislead stakeholders and could potentially violate regulatory codes.
2 The Firm has an established practice of substantiating each balance sheet account for each of its worldwide legal entities on a quarterly basis While substantiation is somewhat subjective, it appears to me that the Code as well as Generally Accepted
To comply with accounting principles, the Firm must substantiate account balances in a manner that aligns with its policy of providing valuations that are full, fair, accurate, and timely Currently, the Firm has tens of billions in unsubstantiated balances, which raises concerns about the accuracy of its financial reporting Senior management may lack the necessary insight to ensure these accounts meet the required standards Therefore, it is crucial for the Firm to invest in additional personnel and systems to effectively address this significant issue.
3 The Firm has tens of billions of dollar of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded current market values, particularly when dealing in assets of this nature in the volume and size as the positions the Firm holds I do not believe the manner in which the Firm values that inventory is fully realistic or reasonable, and ignores the concentration in these assets and their volume size given the current state of the market’s overall liquidity. download by : skknchat@gmail.com
4 I do not believe the Firm has invested sufficiently in the required and reasonably necessary financial systems and personnel to cope with this increased balance sheet, specifically in light of the increased number of accounts, dollar equivalent balances and global entities, which have been created by or absorbed within the Firm as a result of the Firm’s rapid growth since the Firm became a publicly traded company in 1994.
5 Based upon my experience and the years I have worked for the Firm, I do not believe there is sufficient knowledgeable management in place in the Mumbai, India Finance functions and department There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office.