Lessons From Lehman Brothers

Lessons from Lehman Brothers:
Will We Ever Learn?

On September 15, 2008, financial services firm lehman Brothers filed for bankruptcy
with the U.S Bankruptcy Court in the Southern District of New York. That action - the
largest Chapter 11 filling in financial history unleashed a crisis of confidence that
threw financial markets worldwide into turmoil, sparking the worst crisis since the
Great Depression. The fall of this Wall Street icon is, unfortunately, not a new one,
as weve seen in the stories of Enron, WorldCom, and others. In a report released by
bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the
firms auditor, Ernst and Young, were lambasted for actions that led to the firms
collapse. He said, Lehman repeatedly exceeded its own internal risk limits and
controls, and a wide range of bad calls by its management led to the banks failure.
Lets look behind the scenes at some of the issues.
One of the major problems at Lehman was its culture and reward structure.
Excessive risk taking by employees was openly lauded and rewarded handsomely.
Individuals making questionable deals were hailed and treated as conquering
heroes. On the other hand, anyone who questioned decisions was often ignored or
overruled. For instance, Oliver Budde, who served as an associate generals counsel
at Lehman for nine years, was responsible for preparing the firms public filings on
executives were paid, Budde argued with his bosses for years about that matter, to
no avail. Then, one time he objected to a tax deal that an outside reshuffling some
papers to get an expense off the balance sheet. It was not the right thing, and told
them. However, Buddes bosses disagreed and Okayed the deal.
Another problem at Lehman was the firms top leadership. Valukas report
was highly critical of Lehmans executives who should have done more, done
better. He pointed out that the executives made the companys problems worse by
their conduct, which ranged from serious but nonculpable errors of business
judgment to actionable balance sheet manipulation. Valukas went on to say that
former chief executive Richard Fuld was at least grossly negligent in causing
Lehman to file misleading periodic reports. These reports were part of an
accounting device called Repo 105. Lehman used this device to get some $50
billion of undesirable assets off its balance sheet at the end of the first and second
quarters of 2008, instead of selling those assets at a loss. The examiners report
included e-mails from Lehmans global financial controller confirming that the only
purpose or motive for Repo 105 transactions was reduction in the balance sheet,
adding that there was no substance to the transaction. Lehmans auditor was
aware of the use of it as well; however, he signed off on quarterly reports that made
no mention of it. Fulds attorney said, Mr. Flud did not know these transactions
were he didnt structure or negotiste them, nor was he aware of their accounting
treatment. A spokesperson from Ernst & Young (the auditor) said that, Lehmans
bankruptcy was the result of a series of unprecedented adverse events in the
financial markets.
audacious
Discussion Questions
1. Describe the situation at Lehman Brothers from an ethics perspective. Whats
your opinion of what happened here?
2. What was the culture at Lehman Brothers like?? How did this culture contribute
to the companys downfall?
3. What role did Lehmans executives play in the companys collapse? Where they
being responsible and ethical? Discuss.
4. Could anything have been done differently at Lehman Brothers to prevent what
happened? Explain.
5. After all the public uproar over Enron and then the passage of the Sarbanes-Oxley
Act to protect shareholders, why do you think we still continue to see these types of
situations? Is it unreasonable to expect that businesses can and should act
ethically?
Chapter 11 (Rehabilitation Bankruptcy) allows the firm the opportunity to reorganize

its debts and try to reemerge as a healthy organization.
Chapter 7 (Liquidation Bankruptcy) past the stage of rehabilitation and must sell off
assets to pay creditors
Repo 105 the assets were worth at least 105% of what Lehman was getting for
them where it took slightly less cash than the asset was worth. For example: If
Lehman owned a bond that was worth $105, it would "sell" it on the repo market for
$100. is a repurchase agreement that results in the manipulation of financial
statements. Under repo 105, short term loan is recorded as a sale and the cash
obtained through this "sale" is used to pay down debt to bring lower leverage on the
company's balance sheet.
Ethics refers to the principles, values, and beliefs that define right and wrong
decisions and behavior. The factors that affect ethical and unethical behavior
include an individuals level of moral development (preconventional,
conventional, or principled), individual characteristics (values and personality
variablesego strength and locus of control), structural variables (structural
design, use of goals, performance appraisal systems, and reward allocation
procedures), organizational culture (shared values and cultural strength), and
issue intensity (greatness of harm, consensus of wrong, probability of harm,
immediacy of consequences, proximity to victims, and concentration of effect).
The behavior of managers is the single most important influence on an individuals decision
to act ethically or unethically. Some specific ways managers can encourage ethical behavior
include paying attention to employee selection, having and using a code of ethics,
recognizing the important ethical leadership role they play and how what they do is far more
important than what they say, making sure that goals and the performance appraisal
process dont reward goal achievement without taking into account how those goals were
achieved, using ethics training and independent social audits, and establishing protective
mechanisms
Managers can manage ethical lapses and social irresponsibility by being strong
ethical leaders and by protecting employees who raise ethical issues. The example
set by managers has a strong influence on whether employees behave ethically.
Ethical leaders also are honest, share their values, stress important shared values,
and use the reward system appropriately. Managers can protect whistle-blowers
(employees who raise ethical issues or concerns) by encouraging them to come
forward, by setting up tollfree ethics hotlines, and by establishing a culture in which
employees can complain and be heard without fear of reprisal. Social entrepreneurs
play an important role in solving social problems by seeking out opportunities to
improve society by using practical, innovative, and sustainable approaches. Social
entrepreneurs want to make the world a better place and have a driving passion to
make that happen. Businesses can promote positive social change through
corporate philanthropy and employee volunteering efforts.

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Lessons from Lehman Brothers:

Will We Ever Learn?

Chapter 11 (Rehabilitation Bankruptcy) allows the firm the opportunity to reorganize

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