LESSON FROM

LEHMAN BROTHERS:

WILL WE
EVER LEARN?

C A S E A P P L I C AT I O N 1
PA G E 1 7 5
PRESENTED BY :
INDU KIRANA 1161002003
I N TA N S U RYA N I 1161002040
I R M A R A H AY U F. S . 1161002062
L A R A S N A S YA N D A 1161002070
J E I N I TA M A 1161002039
J U L I A N I R O K H M AT U L 1161002008
INTRODUCTION
Largest Bankruptcy in U.S. History
Lehman Brothers - US$690 billion
800
690
700
In billion dollars

600
500
400 327
300
200
103 82
100
0
Lehman Washington Worldcom, General
Brothers Mutual Inc. Motors
Holdings, Inc
 Global
Lehman financial
Brothers services
firm

Was a the fourth-largest

investment bank in the
United States (behind
Goldman Sachs, Morgan
Stanley, and Merrill Lynch.
 DOING BUSINESS IN
Equity and fixed-
Investment income sales and
trading.

investment
Lehman was research, management,
founded in 1850.
Has operational
for 158 years. private
private banking.
equity,
Declaring
bankruptcy
in 2008
LEHMAN
BROTHER
 CASE APPLICATION 1 (PAGE 175)
LESSON 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 filing 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 the new one,
as we’ve seen in the stories of Enron, WorldCom, and others. In a report released by
bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the
firm’s auditor, Ernst & Young, we’re lambasted for actions that led to firm’s collapse. He
said, “Lehman repeatedly exceeded its own internal risk limits and controls, and a
wide range of bad cells by its management led to the bank failure.” Let’s 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 decision was often ignored or
overruled. For instance, Oliver Budde who served as an associate general counsel
at Lehman for nine years, was responsible for preparing the firm’s public fillings on
the executive compensation. Infuriated by what the felt was the firm’s “Intentional
under-representation of how much top executive 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 accounting firm had proposed to
lower medical insurance costs saying, “My gut feeling was that this was just
reshuffling some papers to get an expense off the balance sheet. It was not the
right thing and I told them.” However, Budde’s bosses disagreed and okayed the
deal.
• Another problem at Lehman was the firm’s top leadership, Valukas’s
report was highly critical of Lehman’s executives who “should have done more,
done better.”
• He pointed out that the executives made the company’s problems worse by
their conduct, which ranged from “Serious but nonculpable errors of business
judgement to actionable balance sheet manipulation.”
• Valukas went to say that “former chief executives 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
loss.
• The examiner’s report “included e-mail from Lehman’s 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.”
Lehman auditor was aware of the use of Repo 105 but did not
challenge or question it.
• Sufficient evidence indicated that Fuld knew about the use of it as well;
however, he signed off on quarterly reports that made no mention of it.
• Fuld’s attorney said, “Mr. Fuld did not know what these transactions were – he
didn’t structure or negotiate them, nor was he aware of their accounting treatment.”
• A spokesperson of Ernst & Young (the auditor) said that, “Lehman’s
bankruptcy was the result of a series of unprecedented adverse events in the
financial markets.”
“Greed” and “crooks” are
sampling of comments
recorded on a rendering of
Lehman's chief executive
Richard Fuld by artist
Geoffrey Raymond, who
placed his painting outside
of Lehman's New York City
offices and handout
markers to employees and
pedestrians regarding the
firm's announcement that
it was filing for bankruptcy.
DISCUSSION QUESTIONS
2) WHAT WAS THE CULTURE AT LEHMAN
BROTHERS LIKE? HOW DID THIS CULTURE
CONTRIBUTE TO THE COMPANY’S DOWNFALL?
ANSWER :
a. Excessive risks taken by employees and those risks were rewarded.

b. Questionable deals were rewarded like heroes.

c. Individuals who question risks were ignored and dismissed.

d. Company’s managers made numerous business mistakes.

The culture at Lehman Brothers was to take risks at all costs. Lehman auditor ignore the warning
signal to them. This eventually led to shady deals which eventually lead to the company’s downfall. Repo 105
is a good example of how Lehman misused this device to get some $50 billion of undesirable assets of its
balance sheet at the end of the first and second quarter of 2008, instead of selling those assets at a loss.
They continued to take lots of risks which caused them to lose a lot of money. These culture contribute
the company’s downfall because it make an enormous amount of business problems and provided a culture
that produced bad judgment and poor decisions making.
3) WHAT ROLE DID LEHMAN’S EXECUTIVES PLAY IN
THE COMPANY’S COLLAPSE? WERE THEY BEING
RESPONSIBLE AND ETHICAL? DISCUSS.
ANSWER :
• Executives took risks and were rewarded beyond reason when there was a good outcome. Oliver Budde
who was an associate general counsel spoke up and tried fighting this but this was unsuccessful.
Executives were making bad calls. The executives also wrote up misleading reports and manipulated them.
By moving assets away from balance sheet was intended to create the illution of a company that was
stable and secure. If they saw an asset on a report they didn’t like, they wrote them off instead of selling
them at a loss. It sounds like they didn’t want to take less money if this is being understood correctly.
People have lost confidence in the market because of these executives doing wrong things, and have no
regard for how their actions will affect other people.
• Unethical culture by senior executives of the company Lehman Brothers is one of the main contributions
to the downfall of this organization. The Lehman brothers did not act ethically. Lehman’s executive act as
Top Management. As a role model to employees and have a big social responsibility to the stakeholders.,
they should show a good habit instead of being greedy and manipulate the balance sheet.