Business Ethics-The collapse of Lehman brothers
Business Ethics-The collapse of Lehman brothers
Executive Summary
·
Lehman Brothers became bankrupt
because of CMBS and subprime loans
·
Lehman Brothers
invested in IT despite credit crunch while the bankruptcy
·
Lies told by Chief
Executive Officer Richerd Fuld
·
Concealment endorsed by
Chief Financial Officer Erin Callan
·
Negligence on behalf of
Ernst & Young.
Introduction
Many people believe the beginning of the end
for Lehman Brothers was when Washington repealed the Glass-Steagall Act. This
separate the interests of commercial and investment banks, preventing them from
competing against each other and protecting their balance sheets by allowing
each sector to focus on the business and transactions that it did best. This
allowance will be Repo 105 incident. After some years, because of Richerd
Fuld’s aggressive business model such as CMBS and subprime loans, Lehman
Brothers faced pinch. On Sept.13, 2008,
the United States Treasury made it clear that Lehman Brothers would not be the
recipient of bailout money. On Sept. 15, Fuld filed for Chapter 11 bankruptcy
protection.
Common Ethical Problems Within Corporations
The
problem of Repo 105(standard repurchase agreements) is revealed after the
financial crisis because of subprime loans.
Right after the crisis, Lehman Brothers invested in IT capital to create
a high-speed trading platform for equities called Baikal. However, it is likely
to have a profound spillover effect to the IT industry and it is not only the
information system, they got many IT software to control their complicated
data. To make matters worse, the systems became an obstacle of finding out Repo
105’s problem. Their financial executives conceal their debt in Repo 105 but
the complicated IT system database prevents Repo 105 from the investigation of
attorneys.
The
concealment is not only to remove their securities inventory from balance sheet
but Lehman accounted for Repo 105 transaction as “sales” as opposed to
financing transactions. They also raised cash by selling assets to a behind-the
scenes phantom company called Hudson Castle.
Accounting for Ethical and Unethical Behavior
Richerd
Fuld said, “I don’t know about that at all”, nevertheless, they found the evidence
of E-mail which was attached about Repo 105 information by Valukas report. As a
result, Lehman Brothers paid huge compensation. Fuld had a lot of problems
involving this matter in IT industry, making worldwide financial crisis,
concealment of Repo 105, entrenching in a highly aggressive and leveraged
business model. He was obstinate and he didn’t admit his wrongdoings or take
responsibility for anything that he did.
Lehman
Brothers’ audit company, Ernst&Young which is only third party privy to the
happenings at Lehman Brothers, failed to reveal their wrongdoing in spite of Audit
Company because Lehman Brothers was sizeable and presumably lucrative client of
the firm. This would be the worst case of negligence of any Audit Company in
our history.
Ethical Dilemmas
The importance of leverage ratio
Richerd
Fuld tried to make it better because Rating Agencies like S&P would grade
companies based on leverage ratio. They wanted to keep their approval. If the
ratio is high, the company’s reputation would be down grade. Before the crisis,
Lehman Brother’s leverage ratio was skyrocketing to 39 to 1 in gross bases.
Many people didn’t care about the ratio. After the crisis, when people were
aware of the importance of the ratio and they became curious about ratio,
Richerd Fuld tried to show the ratio more lower and implemented a concealment
by Repo 105. Due to using Repo 105, it could amend its leverage ratio from 13.9
to a far more favorable 12.1 in net bases.
Why Behaving Ethically Is Important for Business
The
Valukas Report was made after the incident. Valukas reviewed the available
universe of Leman’s e-mail and other electronically stored documents which are
estimated at three petabytes of date by web and text mining and so on. He also
hired many attorneys and investigators. Because of large information system
which is invested by Richerd Fuld, Valukas took an amount of time to
investigate about the unethical behaviors. The report found that Leman painted
a misleading picture of its financial conditions using a Repo 105 accounting
strategy that auditors Ernst & Young knew about but didn’t question. This
objective is not to repeat such a huge financial crisis.
More Info
Lehman Brothers’ Perfect Storm: Where Ethical Lapses Met Bad Judgment
The Valukas
Report on the Lehman Brothers collapse: the e-discovery aspects
Lehman Brothers
invested in IT despite credit crunch
The Dearth of
Ethics and the Death of Lehman Brothers
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