HISTORY OF LEHMAN BROTHERS

The story of Lehman Brothers takes us back to 1844 when a 23 year old Henry Lehman

emigrated to the United States from Bavaria.  He decided to settle in all places Montgomery

Alabama where he decided to open a dry-goods store.  In 1847 another brother arrived and in

1850 yet another.  The firm changed its name in 1850 to the current Lehman Brothers name.

Cotton had a high market value and seeing a market for this, the 3 brothers started to accept

payment in cotton for goods and also created a secondary market for trading in cotton.  It makes

you wonder how many tranches can be spun from a shipment of cotton?  Seeing the need to be

closer to the liquid market of cotton in New York the firm relocated to New York in 1858.  It

later joined the Coffee Exchange and also the New York Stock Exchange.  It was sometime

before the initial founding of the firm that Lehman Brothers actually underwrote its first public

offering.  In 1899 it underwrote a public offering for the International Steam Pump Company.  It

wasn’t until 1906 that the firm started underwriting some bigger public offerings.  The names of

Sears Roebuck and Company, Woolworth, Macy & Company, and B.F. Goodrich where all part

of their earlier team deals with Goldman Sachs.  It was making a big name for itself on Wall

Street.

During the Great Depression, much of the focus of Lehman went toward venture capital as the

equity markets were being hammered.  In the 1930s Lehman Brothers underwrote the IPO for

DuMont and also helped to provide capital to get RCA going.  It also had its hand in financing

Halliburton.  Like I said, Lehman Brothers has a storied past.

In 1975 the firm merged with Kuhn, Loeb and Company to form at the time the 4 th largest

investment bank.  The merger didn’t go quite as planned and strife arose in the firm.  The firm

was sold to American Express.  AMEX started to break away from banking and brokerage

operations and sold off operations to Primerica which in 1994 was broken off as an IPO for the

current Lehman Brothers ticker.  The firm did exceptionally well purchasing fixed income such

as Lincoln Capital Management and Neuberger Berman which still are profitable today.  Since

the IPO in 1994 Lehman had steadily increased revenues and grew in employees from 8,500 to

approximately 28,000.

BUSINESS OVERVIEW:

Lehman Brothers was founded in 1850 as a commodities trading business by three brothers.

As the company continued to grow throughout the 20th

century, it expanded into several different areas of the

financial services sector. In 1977, Lehman Brothers merged

with Kuhn, Loeb & Co., an investment bank, and continued

its successful growth in the financial services industry for

several more years. A power struggle ensued in the early

1980's between the firm's traders and investment bankers,

which caused many key personnel to leave the company. In

1984, American Express Company (AXP) acquired the

struggling company for $360 million. Later, in the early

1990's, American Express decided to get out of the

investment banking business and spun off the former

Lehman Brothers Kuhn Loeb operations in an initial public

offering.

Annual income data, in

millions[3] FY2003 FY2004 FY2005 FY2006 FY2007 6M2008

Total Revenue $17,287 $21,250 $32,420 $46,709 $59,003 $18,610

Interest Expense $8,640 $9,674 $17,790 $29,126 $39,746 $15,771

Net Revenue $8,647 $11,576 $14,630 $17,583 $19,257 $2,839

Other Operating Expenses $6,111 $8,058 $9,801 $11,678 $13,244 $6,263

Operating Income $2,536 $3,518 $4,829 $5,905 $6,013 -$3,434

Net Income $1,771 $2,393 $3,260 $4,007 $4,192 -$2,408

Investment Banking

Lehman's investment banking operations accounted for just 20% of the company's 2007 revenue.

Nevertheless, this department is seen as an increasingly important factor in Lehman's future

growth plans. Investment banking is split into two key areas: Mergers and Acquisitions (M&A),

or advising companies on how to buy or combine with other firms, and Corporate Finance,

which includes advising companies on IPO's, debt and capital restructuring, etc. Over the past

several years, Lehman has been able to expand its revenue from equity underwriting (guarantees

that Lehman gives to clients that ensure investors will be found to buy newly issued stock) and

M&A advisory businesses (more profitable areas of investment banking), while continuing to

provide many fixed income banking services such as issuing corporate and government bonds

for companies (fixed income underwriting).

Fixed income underwriting activities have accounted for 45% of Lehman's investment banking

revenues over the past several years. As long as fixed income products continue to play a large

role in the capital markets division, it is likely that fixed income underwriting will remain

important to Lehman's investment banking business.

Capital Markets

The Capital Markets division consists of the sales, trading, and research divisions within an

investment bank. Equity research involves the study of companies or industries in order to

produce research that aids institutional investors in making investment decisions. Lehman makes

most of its money within capital markets by charging its clients fees for access to its research or

for buying and selling investment securities on their behalf. Lehman's clients in this division are

usually institutional investors, such as pension or hedge fund managers, insurance companies,

and other entities with large amounts of capital to invest.

Fixed Income

Over the last 8 years, roughly 40% of Lehman's net revenues have come from fixed income sales

and trading. Some of the different fixed income investments that Lehman deals with include

derivatives and swaps, which allow investors to enter into agreements to exchange money,

assets, or some other object of value, at a future date in order to minimize their risk; mortgage-

backed securities (MBS), which allow banks to sell off the rights to the income from home

mortgages and thus reduce the bank's exposure to the risk of mortgage defaults; and futures,

which smooth out price fluctuations for commodities like oil and natural gas by allowing

producers or purchasers to lock in a future price today. Lehman Brothers generates most of its

income through its sales and trading division, which acts as an intermediary between the entities

that supply the mortgages, bonds, etc., that make up these fixed income investment products and

the investors who buy them. Lehman salesmen work with traders to find clients (institutional

investors) who are willing to buy derivatives, futures, swaps, MBS, and other financial products.

Key areas for Lehman in the fixed income sales and trading division are:

Mortgage-backed security business: Lehman buys mortgages from originators such as

banks and subprime lenders. The firm then packages these mortgages and sells investors

the rights to the income stream that they produce; these are called a mortgage-backed

securities. Investors will buy these securities to obtain either a high, but risky, income

stream or a low, but relatively safe, income stream. The main risk with these types of

instruments is that the borrowers who hold the loans might default. A substantial portion

of Lehman's Mortgage backed securities are backed by subprime loans, which are more

likely to enter default than ordinary mortgages. This is particularly relevant in light of the

currently unfolding collapse of the subprime mortgage industry.

Derivatives & structured products: This segment includes a variety of financial

instruments in which participants agree to exchange an underlying asset at some future

date, usually at a fixed price. Examples of derivatives include options, futures, and swaps.

Energy and commodities: Lehman just opened its energy trading business in September

2005 and is looking to generate revenues from this area in the coming years.

Investment Management:

The investment management business provides a stable earning base because its fee-based

structure generates revenues based on assets under management rather than the total number of

transactions. In other words, Lehman will still generate relatively steady revenues even if there

are substantially fewer total transactions, as long as its total assets under management don't

decrease significantly. This is viewed as a huge plus for Lehman because it offsets some of the

instability that comes with being heavily reliant on the capital markets division.

In 2003, Lehman acquired the fixed-income asset management business of Lincoln Capital

Management and the asset management company Neuberger Berman. With the two acquisitions,

Lehman raised its investment management revenues to be inline with the percentage of total

revenues that other large domestic investment banks generate from their investment management

divisions.

Lehman's investment management division is composed of two business segments: Asset

Management and Private Investment Management. Asset Management includes revenues from

fees that Lehman generates from its clients of the Neuberger Berman acquisition, as well as

profits it makes from its own small private equity business, which is where Lehman invests in

private companies on the behalf of its institutional investors. Private Investment Management

includes revenues from fees that Lehman generates from high-net-worth clients.

Net Revenue by Division, in

millions FY2007 FY2006 FY2005 FY2004

Capital Markets 12,257 12,006 9,807 7,694

% Total Revenue 64% 68% 67% 66%

Investment Banking 3,903 3,160 2,894 2,188

% Total Revenue 20% 18% 20% 19%

Investment Management 3,097 2,417 1,929 1,694

% Total Revenue 16% 14% 13% 15%

BANKRUPTCY

Aug. 22, 2007: Announces plans to shutter its subprime mortgage business, eliminating

1,200 jobs.

Sept. 20: Chief Financial Officer Chris O'Meara steps down to head global risk

management division. Erin Callan, head of the investment banking practice for hedge

funds, succeeds him.

Dec. 13: Reports fiscal fourth-quarter profit of $870 million and full-year earnings of

$4.2 billion.

Jan. 17, 2008: Lehman says it will stop originating mortgages through wholesale

channels amid continued weakness in the housing and real estate markets.

March 16: The federal government and JPMorgan Chase & Co. bail out Bear Stearns

Cos. Analysts question whether other investment banks might also collapse.

March 17: Reports suggest Southeast Asian bank DBS Group Holdings Ltd. instructed its

traders to cease working with Lehman, though those instructions were later rescinded.

March 18: Announces it earned $489 million during its fiscal first quarter.

April 1: Raises $4 billion in capital.

April 15: Speaking at the investment bank's annual shareholder meeting, Chairman and

Chief Executive Richard Fuld tells investors that the worst of the credit crisis is behind

Wall Street, but that the environment "will remain challenging."

May 16: Announces it is cutting 1,400 jobs, or about 5 percent of its work force.

June 9: Estimates it lost about $3 billion for the second quarter and that it is raising $6

billion in fresh capital.

June 12: Removes Callan as CFO and Joseph Gregory as chief operating officer. Herbert

McDade replaces Gregory, while Ian Lowitt replaces Callan.

Aug. 29: The New York Times reports Lehman is preparing to cut 1,500 jobs.

Sept. 2: Reports indicate state-owned Korea Development Bank was considering buying

a 25 percent stake in Lehman.

Sept. 8-9: Shares of Lehman plunge 52 percent amid worries the investment bank was

struggling to find new investors and raise capital. Reports say the talks with KDB have

ended.

Sept. 10: Lehman says it lost $3.9 billion during its fiscal third quarter and plans a

number of moves to shore up its balance sheet. The announcement, coming a day after

Lehman shares lost 45 percent, is an attempt to assuage market worries. Fuld says the

firm will consider all "strategic alternatives."

Sept. 11: Lehman shares skid another 42 percent as investors reject the plan, forcing

Lehman executives to scour Wall Street for a financial lifeline.

Sept. 12: Late Friday night Wall Street executives and top U.S. financial officials

convene at the New York Fed to discuss how resolve Lehman's situation before it shakes

investor confidence in the U.S. banking system.

Sept. 13: The group reconvenes at the New York Fed as foreign finance ministers urge a

solution before Asian markets open.

On Saturday, September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve

Bank of New York, called a meeting on the future of Lehman, which included the possibility of

an emergency liquidation of its assets. Lehman reported that it had been in talks with Bank of

America and Barclays for the company's possible sale. However, both Barclays and Bank of

America ultimately declined to purchase the entire company.

The next day, Sunday, September 14, the International Swaps and Derivatives Association

(ISDA) offered an exceptional trading session to allow market participants to offset positions in

various derivatives on the condition of a Lehman bankruptcy later that day. Although the

bankruptcy filing missed the deadline, many dealers honored the trades they made in the special

session.

Shortly before 1:00 am Monday morning (New York time), Lehman Brothers Holdings

announced it would file for Chapter 11 bankruptcy protection citing bank debt of $613 billion,

$155 billion in bond debt, and assets worth $639 billion. It further announced that its subsidiaries

would continue to operate as normal. A group of Wall Street firms agreed to provide capital and

financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to

a swap of lower-quality assets in exchange for loans and other assistance from the government.

The morning witnessed scenes of Lehman employees removing files, items with the company

logo, and other belongings from the world headquarters at 745 Seventh Avenue. The spectacle

continued throughout the day and into the following day.

Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian

subsidiary as a market participant after clearing-houses terminated contracts with the firm.

Lehman shares tumbled over 90% on September 15, 2008. The Dow Jones closed down just over

500 points on September 15, 2008, which was at the time the largest drop in a single day since

the days following the attacks on September 11, 2001.

In the United Kingdom, the investment bank went into administration with

PricewaterhouseCoopers appointed as administrators. In Japan, the Japanese branch, Lehman

Brothers Japan Inc., and its holding company filed for civil reorganization on September 16,

2008, in Tokyo District Court. On September 17, 2008, the New York Stock Exchange delisted

Lehman Brothers.

On March 16, 2011 some three years after filing for bankruptcy and following a filing in a

Manhattan U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek

creditor approval of its reorganization plan by October 14 followed by a confirmation hearing to

follow on November 17.

REASON FOR COLLAPSE

In 2003 and 2004, with the U.S. housing boom well under way, Lehman acquired five mortgage

lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized

in Alt-A loans (made to borrowers without full documentation). Lehman's acquisitions at first

seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the

capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other

businesses in investment banking or asset management. The firm securitized $146 billion of

mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from

2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3

billion.

Lehman's Colossal Miscalculation

In February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of

close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market

were already becoming apparent as defaults on subprime mortgages rose to a seven-year high.

On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns

that rising defaults would affect Lehman's profitability, the firm reported record revenues and

profit for its fiscal first quarter. In the post-earnings conference call, Lehman's chief financial

officer (CFO) said that the risks posed by rising home delinquencies were well contained and

would have little impact on the firm's earnings. He also said that he did not foresee problems in

the subprime market spreading to the rest of the housing market or hurting the U.S. economy.

A March 2010 report by the court-appointed examiner indicated that Lehman executives

regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances

appear less shaky than they really were. This practice was a type of repurchase agreement that

temporarily removed securities from the company's balance sheet. However, unlike typical

repurchase agreements, these deals were described by Lehman as the outright sale of securities

and created "a materially misleading picture of the firm’s financial condition in late 2007 and

2008.

SUBPRIME MORTGAGE CRISIS

In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions

in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in

goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a

substantial reduction in its resources and capacity in the subprime space".

In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis.

Lehman's loss was a result of having held on to large positions in subprime and other lower-rated

mortgage tranches when securitizing the underlying mortgages; whether Lehman did this

because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold

them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities

throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was

forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its

value as the credit market continued to tighten. In August 2008, Lehman reported that it intended

to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in

September.

In September 2007, Joe Gregory appointed Erin Callan as CFO. On March 16, 2008, after rival

Bear Stearns was taken over by JP Morgan Chase in a fire sale, market analysts suggested that

Lehman would be the next major investment bank to fall. Callan fielded Lehman's first quarter

conference call, where the firm posted a profit of $489 million, compared to Citigroup's $5.1

billion and Merrill Lynch's $1.97 billion losses which was Lehman’s 55th consecutive profitable

quarter. The firm's stock price leapt 46 percent after that announcement.

On June 9, 2008, Lehman Brothers announced US$2.8 billion second-quarter loss, its first since

being spun off from American Express, as market volatility rendered many of its hedges

ineffective during that time. Lehman also reported that it had raised a further $6 billion in capital.

As a result, there was major management shakeup, when Hugh "Skip" McGee III (head of

investment banking) held a meeting with senior staff to strip Fuld and his lieutenants of their

authority. Consequently, Joe Gregory agreed to resign as President and COO, and afterward he

told Erin Callan that she had to resign as CFO. Callan was appointed CFO of Lehman in 2008

but served only for six months, before departing after her mentor Joe Gregory was demoted. Bart

McDade was named to succeed Gregory as President and COO, when several senior executives

threatened to leave if he was not promoted. McDade took charge and brought back Michael

Gelband and Alex Kirk, who had previously been pushed out of the firm by Gregory for not

taking risks. Although Fuld remained CEO, he soon became isolated from McDade's team.

On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the

state-controlled Korea Development Bank was considering buying the bank. Most of those gains

were quickly eroded as news came in that Korea Development Bank was "facing difficulties

pleasing regulators and attracting partners for the deal." It culminated on September 9, when

Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm

had put talks on hold.

On September 17, 2008 Swiss Re estimated its overall net exposure to Lehman Brothers as

approximately CHF 50 million.

Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed

the S&P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on

investors' concerns about the security of the bank. The U.S. government did not announce any

plans to assist with any possible financial crisis that emerged at Lehman.

The next day, Lehman announced a loss of $3.9 billion and its intent to sell off a majority stake

in its investment-management business, which includes Neuberger Berman. The stock slid seven

percent that day. Lehman, after earlier rejecting questions on the sale of the company, was

reportedly searching for a buyer as its stock price dropped another 40 percent on September 11,

2008.

Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail

memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million

dollar bonuses to "send a strong message to both employees and investors that management is

not shirking accountability for recent performance."

Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the

proposal, going so far as to actually apologize to other members of the Lehman Brothers

executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry

team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."

SHORT-SELLING ALLEGATIONS

During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the

House Committee on Oversight and Government Reform, former Lehman Brothers CEO

Richard Fuld said a host of factors including a crisis of confidence and naked short-selling

attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman

Brothers. House committee Chairman Henry Waxman said the committee received thousands of

pages of internal documents from Lehman and these documents portray a company in which

there was “no accountability for failure".

An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling

contributed to the demise of both Lehman and Bear Stearns. A study by finance researchers at

the University of Oklahoma Price College of Business studied trading in financial stocks,

including Lehman Brothers and Bear Stearns, and found "no evidence that stock price declines

were caused by naked short selling".

The Beginning of the End

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds,

Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related

jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in

three states. Even as the correction in the U.S. housing market gained momentum, Lehman

continued to be a major player in the mortgage market. In 2007, Lehman underwrote more

mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four

times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock rebounded, as global

equity markets reached new highs and prices for fixed-income assets staged a temporary

rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio,

which in retrospect, would turn out to be its last chance. 

Hurtling Toward Failure

Lehman's high degree of leverage - the ratio of total assets to shareholders equity - was 31 in

2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to

deteriorating market conditions. On March 17, 2008, following the near-collapse of Bear

Stearns - the second-largest underwriter of mortgage-backed securities - Lehman shares fell as

much as 48% on concern it would be the next Wall Street firm to fail. Confidence in the

company returned to some extent in April, after it raised $4 billion through an issue of preferred

stock that was convertible into Lehman shares at a 32% premium to its price at the time.

However, the stock resumed its decline as hedge fund managers began questioning the valuation

of Lehman's mortgage portfolio.

On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss since being

spun off by American Express, and reported that it had raised another $6 billion from investors.

The firm also said that it had boosted its liquidity pool to an estimated $45 billion, decreased

gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by

20%, and cut down leverage from a factor of 32 to about 25.

LIQUIDATION

Barclays acquisition

On Tuesday, September 16, 2008, Barclays plc announced that they would acquire a "stripped

clean" portion of Lehman for $1.75 billion, including most of Lehman's North America

operations. On September 20, this transaction was approved by U.S. Bankruptcy Judge James

Peck.

On September 20, 2008, a revised version of the deal, a $1.35 billion (£700 million) plan for

Barclays to acquire the core business of Lehman (mainly its $960-million headquarters, a 38-

story office building in Midtown Manhattan, with responsibility for 9,000 former employees),

was approved. Manhattan court bankruptcy Judge James Peck, after a 7-hour hearing, ruled: "I

have to approve this transaction because it is the only available transaction. Lehman Brothers

became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit

markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be

deemed precedent for future cases. It's hard for me to imagine a similar emergency."

Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, the creditors committee

counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative.

We did not support the transaction because there had not been enough time to properly review

it." In the amended agreement, Barclays would absorb $47.4 billion in securities and assume

$45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal &

Manges, said "the purchase price for the real estate components of the deal would be

$1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for

two New Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion

but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays

will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers

Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment

Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of

securities assets in Lehman Brothers Inc that are not being transferred to Barclays.[87] Barclays

acquired a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain

some Lehman employees beyond the guaranteed 90 days.

Nomura acquisition

Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman

Brothers for $225 million and parts of the European division for a nominal fee of $2. It would

not take on any trading assets or liabilities in the European units. Nomura negotiated such a low

price because it acquired only Lehman's employees in the regions, and not its stocks, bonds or

other assets. The last Lehman Brothers Annual Report identified that these non-US subsidiaries

of Lehman Brothers were responsible for over 50% of global revenue produced.

Sale of Asset Management Businesses

On September 29, 2008, Lehman agreed to sell Neuberger Berman, part of its investment

management business, to a pair of private-equity firms, Bain Capital Partners and Hellman &

Friedman, for $2.15 billion. The transaction was expected to close in early 2009, subject to

approval by the U.S. Bankruptcy Court, but a competing bid was entered by the firm's

management, who ultimately prevailed in a bankruptcy auction on December 3, 2008. Creditors

of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known

as Neuberger Berman Group LLC.

Financial fallout

Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham

Lambert collapsed amid fraud allegations 18 years prior. Immediately following the bankruptcy

filing, an already distressed financial market began a period of extreme volatility, during which

the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000

points) and largest daily point gain. What followed was what many have called the “perfect

storm” of economic distress factors and eventually a $700bn bailout package (Troubled Asset

Relief Program) prepared by Henry Paulson, Secretary of the Treasury, and approved by

Congress. The Dow eventually closed at a new six-year low of 7,552.29 on November 20,

followed by a further drop to 6626 by March of the next year. Durvexity spiked, due to funding

issues at the major investment banks.

The fall of Lehman also had a strong effect on small private investors such as bond holders and

holders of so-called Minibonds. In Germany structured products, often based on an index, were

sold mostly to private investors, elderly, retired persons, students and families. Most of those

now worthless derivatives were sold by the German arm of Citigroup, the German Citibank now

owned by Crédit Mutuel.

Ongoing litigation

On March 11, 2010, Anton R. Valukas, a court-appointed examiner, published the results of its

year-long investigation into the finances of Lehman Brothers. This report revealed that Lehman

Brothers used an accounting procedure termed repo 105 to temporarily exchange $50 billion of

assets into cash just before publishing its financial statements. The action could be seen to

implicate both Ernst & Young, the bank's accountancy firm and Richard S. Fuld, Jr, the former

CEO. This could potentially lead to Ernst & Young being found guilty of financial malpractice

and Fuld facing time in prison.

According to the Wall Street Journal, in March 2011, the SEC announced that they weren't

confident that they could prove that Lehman Brothers violated US laws in its accounting

practices.

In October 2011 the administrators of Lehman Brothers Holding Inc. lost their appeal to overturn

a court order forcing them to pay 148 million pounds into their underfunded pensions plan.

Conclusion

The failure of Lehman Brothers was contributed to numerous factors that went in parallel to

contribute to the biggest bankruptcy in the US history. They went hand in hands because no

single factor could have brought this disaster by itself. Dubious and doubtful accounting

practices could not be possibly practiced in the long run if not for low ethical standards held by

top managers as well as the auditors. It seems as if auditors mainly tried to shield themselves

from legal action just by executing the minimum requirements expected from them. The Repo

105 procedure is nothing but an ordinary and legal practice for short-term financing that was

taken out of its context by unethical accounting practices in order to please investors and lenders.

The complex structure of Lehman also provided a window of opportunity for the same unethical

managers to abuse the trust that was placed in them, the organization, and management by

investors and shareholders. It can also be concluded that the Sarbanes-Oxley Act was violated

because top managers deliberately tainted the financial statements to falsely show the health of

the company to be better than what it really was at the time. Once these managers were incapable

of reaching their growth and expansion rate they had to inflate their financial statements to keep

the appearance of a company with high rate of growth.

For Lehman, the mistake lay in putting too much faith in an outmoded culture and failing to see

how its very strength undermined the business. For companies that confidently set out to change

their cultures, the Lehman experience offers a lesson about the nature of corporate culture itself

—it can be much stronger, more deeply embedded, and far less malleable.

The main signal of deficiency in the organization came from the net negative statements of cash

flows, nevertheless, auditors failed to recognize the lack of correlation between the statements of

cash flow with balance sheet and income statements. Auditors failed to recognize that the net

negative statements of cash flows reflected the financial standing of the company.

This highlights yet another conclusion that is drawn from the paper. The current analytical and

rating methods have sufficient shortcomings and the case of Lehman is prominent evidence.

Studies show that the Altman’s z-score test may be complementary in predicting the crisis in the

making.

At the end, Lehman’s failure had an impact beyond expectations. The consequences did not just

leave its negative print on the economy but also on the society with the lost confidence in

institutions and corporate culture. One must wonder when businesses and their executives will

realize that their activities can significantly impact the very fabric of human society. In any

event, holding higher standards and ethical culture by auditors, managers, and rating agencies are

essential in avoiding this sort of disaster.