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Lehman Brothers Scam

Lehman Brothers was a global investment bank that filed for bankruptcy in 2008, contributing to the global financial crisis. It grew from a dry goods store in the 1800s to become a leading global financial firm. In the 2000s, it profited greatly from the subprime mortgage market but suffered huge losses when that market collapsed. It hid over $50 billion in loans through an accounting scheme and declared strong profits just before filing for bankruptcy with over $600 billion in assets. Its highly leveraged business model, risk-taking culture, exposure to real estate, and complex structures all contributed to its failure, as did leadership issues and a lack of regulatory oversight of systemic risks.

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Anindya Basu
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39 views20 pages

Lehman Brothers Scam

Lehman Brothers was a global investment bank that filed for bankruptcy in 2008, contributing to the global financial crisis. It grew from a dry goods store in the 1800s to become a leading global financial firm. In the 2000s, it profited greatly from the subprime mortgage market but suffered huge losses when that market collapsed. It hid over $50 billion in loans through an accounting scheme and declared strong profits just before filing for bankruptcy with over $600 billion in assets. Its highly leveraged business model, risk-taking culture, exposure to real estate, and complex structures all contributed to its failure, as did leadership issues and a lack of regulatory oversight of systemic risks.

Uploaded by

Anindya Basu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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LEHMAN BROTHERS

SCAM
• Started as a dry goods store founded by Henry
Lehman in 1844 in Montgomery, Alabama.
• Branched out into trading commodities and
brokerage services and became the Leading firm in
Global finances.
• Prior to 2008, It was the fourth-largest investment
bank in United States with 25,000 employees
worldwide.
• It was acquired by American Express in 1984 for
$360 million.
• Attracted more than $3 billion in new capital via
Initial Public Offering(IPO) in 1994.
HISTORY
1.In Mid 2000’s, U.S retail market was on fire fuelled by cheap credit and low interest rates.

2.Investment Banks such as Lehman Brothers sensed an opportunity. They sold these houses to prime
market (qualified and stable income), bundled these mortgage vehicles and sold them as bonds. As and
when mortgage was recovered, the money was given to the investors.

3.Soon, most of the prime candidates had been bundled and sold off, the banks being greedy turned to sub-
prime investors (not-qualified and unstable income) which caused a massive boost to the profits of these
banks.

4.But soon, sub-prime borrowers started defaulting, causing a fall in housing prices with banks finding
themselves with an enormous volume of bad debt.

5.Plenty of big investments banks and real-estate hedge funds either closed shops or were bailed out by the
government.

6.On September 15th, 2008 Lehman Brothers declared America’s biggest bankruptcy causing a global
recession.
ABOUT THE
SCAM
Using the REPO 105 In January 2008, the top
scheme, Lehman Brothers executives at Lehman
manipulated their balance Brothers declared
sheets by hiding over $50- revenues amounting to
60 B of loans by showing $60B with a record
them as sales. earnings of $4B and a
market cap of $30B.

The Repo 105 scheme was


never disclosed to the They also declared
They alsothey
that declared
had that they
billions
investors making them
had in
billions in liquidity
liquidity however
believe that they are at a however had almost negligible.
better position than they had almost negligible.
were.
T I M E L I N E OF THE
SCAM
ANNOUNCED ANOTHER 1,300
1,200 JOBS SLASHED FOLLOWED BY JOB CUTS AND HALT IN
THE CLOSURE OF BNC MORTGAGE MORTGAGE LENDING IN THE US.

FEB SEP MAR


2007 2007 2008

AUG JAN
2007 2008
SHARE PRICE TOUCHED A RECORD REPORTED ITS FIRST QUARTERLY PUT ON A NEGATIVE OUTLOOK BY A
HIGH OF $86. MARKET LOSS IN 5 YEARS OF $700 MILLION BIG CREDIT RATING FIRM,
CAPITALIZATION WAS AT $60 BILLION FROM THE CREDIT CRUNCH COLLAPSE AND SALE OF
BEAR STEARNS
T I M E L I N E OF THE SCAM

30% OF THE MARKET


STARTED LOOKING FOR A BUYER, CAPITALIZATION ERASED, $5
RAISED $6 MILLION AND REDUCED
EXPOSURE OF REAL ESTATE BY 20%
BILLION LOSS WRITTEN OFF AND
LAST $1 BILLION LEFT IN CASH 15
RESERVES
MAY AUG SEP
2008 2008 2008

JUN EARL
2008 YSEP
SLASHED ANOTHER
1,500 JOBS
OFFLOADED $30 BILLION IN ILLIQUID
ASSETS AND COMMERCIAL 2008 THE 158-YEAR-
OLD LEHMAN
MORTGAGE SECURITIES AND SHARES BROTHERS FILED FOR
CRASHED BY 50% WHILE DEBT BANKRUPTCY
ESCALATED BY MORE THAN 60%
BUSINESS FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

SIGNIFICANT A HIGHLY- A CULTURE COMPLICATED REGULATORY


EXPOSURE TO LEVERAGED, OF PRODUCTS GAPS THAT
U.S. SUBPRIME RISK-TAKING EXCESSIVE AND IGNORED THE
MORTGAGES BUSINESS RISK- CORPORATE SYSTEMIC
AND REAL STRATEGY TAKING STRUCTURES RISKS POSED
ESTATE SUPPORTED BY THE
MARKETS BY LIMITED COMPANY
EQUITY
BUSINESS FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

SIGNIFICANT A HIGHLY- A CULTURE COMPLICATED REGULATORY


EXPOSURE TO LEVERAGED, OF PRODUCTS GAPS THAT
U.S. SUBPRIME RISK-TAKING EXCESSIVE AND IGNORED THE
MORTGAGES BUSINESS RISK- CORPORATE SYSTEMIC
AND REAL STRATEGY TAKING STRUCTURES RISKS POSED
ESTATE SUPPORTED BY BY THE
MARKETS LIMITED COMPANY
EQUITY
BUSINESS FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

SIGNIFICANT A HIGHLY- A CULTURE COMPLICATED REGULATORY


EXPOSURE TO LEVERAGED, OF PRODUCTS GAPS THAT
U.S. SUBPRIME RISK-TAKING EXCESSIVE AND IGNORED THE
MORTGAGES BUSINESS RISK- CORPORATE SYSTEMIC
AND REAL STRATEGY TAKING STRUCTURES RISKS POSED
ESTATE SUPPORTED BY THE
MARKETS BY LIMITED COMPANY
EQUITY
BUSINESS FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

SIGNIFICANT A HIGHLY- A CULTURE COMPLICATED REGULATORY


EXPOSURE TO LEVERAGED, OF PRODUCTS GAPS THAT
U.S. SUBPRIME RISK-TAKING EXCESSIVE AND IGNORED THE
MORTGAGES BUSINESS RISK- CORPORATE SYSTEMIC
AND REAL STRATEGY TAKING STRUCTURES RISKS POSED
ESTATE SUPPORTED BY THE
MARKETS BY LIMITED COMPANY
EQUITY
BUSINESS FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

SIGNIFICANT A HIGHLY- A CULTURE COMPLICATED REGULATORY


EXPOSURE TO LEVERAGED, OF PRODUCTS GAPS THAT
U.S. SUBPRIME RISK-TAKING EXCESSIVE AND IGNORED THE
MORTGAGES BUSINESS RISK- CORPORATE SYSTEMIC
AND REAL STRATEGY TAKING STRUCTURES RISKS POSED
ESTATE SUPPORTED BY THE
MARKETS BY LIMITED COMPANY
EQUITY
ETHICAL FACTORS CONTRIBUTING TO
LEHMAN
BROTHERS SCAM
COMPANY LEADERSHIP
• Stifled information • Utilitarian approach
and knowledge • Conflict of interest
sharing • Omnipotent view of
• Poor Internal Control management
policy • Lack of accountability
• No engagement in
CSR
• Philanthropy
• Lack of transparency
ETHICAL FACTORS CONTRIBUTING TO
LEHMAN BROTHERS SCAM

COMPANY LEADERSHIP
• Stifled information • Utilitarian approach
and knowledge • Conflict of interest
sharing • Distortion of
• Poor Internal Control consequences
policy • Omnipotent view of
• No engagement in management
CSR • Lack of accountability
• Philanthropy
• Lack of transparency
01 02 03

Who are
involved
RICHARD FULD ERIN CALLAN CHRISTOPHER M.
CHIEF EXECUTIVE CHIEF FINANCIAL O'MEARA
OFFICER OFFICER CHIEF RISK OFFICER

04 05

IAN T. LOWITT ERNST &


FORMER CHIEF FINANCIAL YOUNG
OFFICER FIRM
Whistle
Blower
Matthew Lee
SVP, Finance
STAKEHOLDERS
03
INVESTO 05
RS AND ERNST
01 CREDITO AND
EMPLOYE YOUNG
RS
ES

02 04
EXECUTI HUDSON
CASTLE
VES
IMPACT OF LEHMAN BROTHERS’ SCAM ON
STAKEHOLDERS
1. 26.3 Billion the total shareholders' equity reported before bankruptcy.

2. Creditors of the LHB estate will receive roughly $0.18 on the dollar(2016).

3. Stocks fell across Europe & Asia. The US stock fluctuated with over $300 Billion in
market value. The dollar lost the most against the yen in a decade & as a result treasuries
surged.

4. Depreciation in the price of commercial real estate was to be noticed.

5. Liquidity prospect of Lehman’s $4.3 Billion in mortgage securities started a selloff process
in the commercial mortgaged-backed securities market.

6. An atmosphere of fear started to sell securities in commercial real estate.

7. The pension funds of the employees which holds bond in the firm, had lost most of their
values causing a risk of losing their pensions.
AFTERMATH OF LEHMAN BROTHERS
SCAM
Financial Crisis - Lehman Brothers Bankruptcy Shook the Financial market, made the
Dow Jones industrial Average Fell 5000 points and resulted in losses to many investors
and kicked off the 2008 Financial Crisis followed by recession.

Unemployment – Over 6 million people lost their jobs with 26,000 laid off from
Lehman Brother after the scam. Unemployment rate rose to 10% affecting the young
people who were about to enter the corporate world.

Distrust among investors – This Largest bankruptcy in US History resulted in huge


losses to Millions of investors which resulted in distrust among public. The public, who
had previously placed so much trust(Money) was now having Trust issues because of
that.
ETHICS
LESSON
S
LEARNE
Building a strong
moral culture
1
Following deontological
Philosophy 2
D
Transparency in Accountability
operations 3 for your actions 4

Engagement in Effective
Corporate Social communication and
Responsibilities 5 implementation of 6
ethical issues

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