Ethics-The concealment of Lehman brothers
To make matters worse, the
problem of Repo 105 is
revealed after the financial crisis which is derived from subprime loans. Right
after the global financial
crisis, Lehman Brothers invested in Information systems
to create a high-speed trading technology for dealing of equities called
Baikal. Moreover, it
has been
brought about
profound spillover effect to the IT industry and it is not only the information
infrastructure,
they got also many
IT software to control their complicated data. Then, 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.
Richerd
Fuld tried to make their leverage
ratio look
better. The reason is
that 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 extraordinary high. Many
people didn’t care about the ratio because it is not famous and not focused from investors.
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 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.
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.
Reference
Lehman Brothers
invested in IT despite credit crunch
The Dearth of
Ethics and the Death of Lehman Brothers
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