Why Lehman Brothers was allowed to fail By using this website, you consent to our use of cookies. For more information on cookies see our Cookie Policy . X Why Lehman Brothers was allowed to fail In a departure from its strategy on other banks, the US Federal Reserve refused to assume any of the risk faced by potential buyers. That decision had massive repercussions Thu, Sep 12, 2013, 01:00 Updated: Wed, Sep 11, 2013, 17:44 Ciaran Hancock The headquarters of Lehman Brothers in New York on September 15th, 2008, the day the bank filed for bankruptcy. W hen Lehman Brothers filed for bankruptcy on September 15th, 2008, the financial sector shook across the world. The bank was forced to seek Chapter 11 bankruptcy protection, the largest ever such filing in US history. Six months previously, Bear Stearns had faced a similar fate but survived when the US central bank, the Federal Reserve , intervened with the US treasury department’s support. Why did the US government not intervene in the Lehman case?

In the case of Bear Stearns, the Fed engineered a sale to JPMorgan Chase by agreeing to assume $29 billion of the risk of losses from Bear Stearns. When potential purchasers of Lehman sought similar assurances from the Fed, the regulator demurred, and the bank was left with little choice but to file for bankruptcy. According to Lehman’s bankruptcy examiner, Lehman’s business model was not unique. All of the major investment banks of the time had some high-risk model that required the confidence of counterparties. While Lehman’s assets and liabilities of about $700 billion cancelled each other out, it had insufficient hard cash (about $25 billion) to meet its needs. Confidence in the institution was so low that clients were withdrawing funds at a rate the bank couldn’t keep up with. Lehman funded itself through the short-term money markets and had to borrow tens of hundreds of billions of dollars in those markets each day from counterparties to be able to open for business. Confidence was critical. Lehman’s problems began when it embarked on an acquisition spree of subprime mortgage lenders. These were lenders who provided loans to those with impaired credit ratings. Lots of Americans got loans that they couldn’t afford.

In 2006, Lehman made the deliberate decision to embark on an aggressive growth strategy, to take on significantly greater risk. In 2007, as the subprime residential mortgage business progressed from problem to crisis, Lehman was slow to recognise the developing storm and its spillover effect on commercial real estate. ADVERTISEMENT Rather than pull back, Lehman made the conscious decision to double its bet, and significantly and repeatedly exceeded its own internal risk limits. With the implosion and near collapse of Bear Stearns in March 2008, it became clear that Lehman’s growth strategy had been flawed, so much so that its survival was now under threat. The markets were shaken by the Bear Stearns crisis. Lehman, an independent investment bank, was widely considered to be the next bank that might fail. To buy more time, Lehman painted a misleading picture of its financial condition. After Bear Stearns’s near-collapse, the US government sent in teams of monitors from the Securities and Exchange Commission and the New York Federal Reserve Bank. As late as September 2008, Lehman told the markets that it had liquidity of $41 billion.

In fact, the pool of assets it could readily monetise was just $2 billion. Over the weekend of September 12th to 14th, 2008, an intensive series of meetings was conducted, including then US treasury secretary Henry, or Hank, Paulson, senior regulators and the chief executives of 14 leading financial institutions. Insufficient assets Paulson began the meetings by stating the government would do all it could – but that it could not fund a solution. The US government’s analysis on Lehman was that it did not have the legal authority to make a direct capital investment, and Lehman’s assets were insufficient to support a loan large enough to avoid its collapse. Many commentators believe the Bush administration had run out of political capital to rescue Lehman. In addition to facilitating the rescue of Bear Stearns, on September 7th Paulson had nationalised Fannie Mae and Freddie Mac , the world’s two biggest mortgage lenders, with property exposures similar to Lehman’s. On September 14th, it appeared that a last-minute deal had been reached with Barclays Bank in the UK to save Lehman from collapse.

But the Financial Services Authority in the UK had concerns about Lehman’s liquidity and funding, while the British government wasn’t willing to commit taxpayers’ money to the rescue of a US bank. The deal fell apart. Lehman no longer had sufficient liquidity to fund its daily operations and filed for bankruptcy on the following day. As a result of the collapse, the Dow Jones index plunged 504 points on September 15th. Bank of America was enticed to come to the rescue of Merrill Lynch. On September 16th, AIG was on the verge of collapse; the US government was forced to intervene with a financial bailout package that ultimately cost about $182 billion. On October 3rd, 2008, the US Congress passed a $700 billion Troubled Asset Relief Program rescue package for the financial sector. Federal Reserve chairman Ben Bernanke , speaking about the overall economic crisis, has conceded “there were mistakes made all around”. Paulson and the others who made the decision to let Lehman go believed the bank’s implosion could be contained. However, with a balance sheet of $660 billion and extensive derivatives exposures, Lehman’s collapse reverberated through global markets.

Up to that point, the markets implicitly believed that no big bank would be allowed to fail by governments. Many believe that if he had his time over, Paulson would not have allowed Lehman to collapse. We’ll never know. Banking crisis: Lehman Brothers files for bankruptcy protection | Business | The Guardian Lehman Brothers Banking crisis: Lehman Brothers files for bankruptcy protection In a separate development that underlines the tumultuous state of the financial world, Merrill Lynch was taken over by Bank of America for $50bn Monday 15 September 2008 07.45 EDT First published on Monday 15 September 2008 07.45 EDT Share on Messenger Close Lehman Brothers , one of the most prestigious players on Wall Street, filed for bankruptcy protection this morning after a frenzied weekend of negotiations failed to find a way of saving the company. Heralding a tumultuous day in the financial markets, Lehman announced at around 5.30am BST that it will file for Chapter 11 bankruptcy protection, making it the biggest victim so far of the credit crunch and sub-prime crisis . It said it is making the move to "protect its assets and maximise value".

The collapse of Lehman – one of the biggest financial shocks in years - puts tens of thousands of jobs around the world at risk, including over 4,000 in the City and another 1,000 in High Wycombe. It also sent shockwaves around the banking world, with commentators predicting that the damage could be felt across the industry and could help to push the UK into recession . The FTSE 100 plunged by almost 400 points this morning , and the Dow Jones industrial average is tipped to tumble by as much as 4%. Until late last night, Lehman was locked in talks with potential buyers after the last-ditch restructuring plan it announced last week failed to deter investors and trading partners from fleeing . Barclays pulled out of talks on Sunday evening , because it could not win the government guarantees it wanted to protect itself against future losses on Lehman's trading positions - thought to be as large as $300bn (£167bn). It said this morning that a deal would not have been in the best interests of its shareholders.

In a separate development that underlines the tumultuous state of the financial world, Merrill Lynch was taken over by Bank of America for $50bn - a move that will spare it Lehman's fate. Most of Lehman's UK staff are based at its headquarters at Canary Wharf, where the mood was sombre this morning. Employees arriving for work this morning said they did not know anything about what was likely to happen. One worker told the assembled journalists, who were kept away from the building by security staff, that "I'm as much in the dark as you but I can't talk to you. We've been told not to talk." Speaking on BBC Radio 4 this morning, Liberal Democrat Treasury spokesman Vince Cable described the situation as "very grave". "I think the least we are going to have to learn from this is that the whole of the financial sector simply cannot return to where it was before," Cable said. "It is going to have to be much more tightly regulated in the public interest." Howard Archer, chief UK and European economist at Global Insight, warned that Lehman's fate will make the surviving banks even more reluctant to lend to each other.

"This increased the risk that the credit crunch will deepen and last for some considerable time to come, which in turn increases the already serious downside risks to growth in the UK and the Eurozone, and heightens the danger of recession," Archer warned. Sub-prime woes Merrill Lynch and Lehman both expanded aggressively into property-related investments, including so called sub-prime mortgages - loans to people on low incomes or with poor credit histories. The bank has lost $14bn in the past 18 months after being forced to take huge write-downs on the value of those investments. The breakdown in talks between Barclays and Lehman came after government officials and senior Wall Street executives gathered for a third day at the US central bank, the Federal Reserve, in lower Manhattan, arriving in a funereal procession of black limos. The Fed, and the US Treasury, had been hoping to secure a saviour for Lehman ahead of the Asian markets opening on Monday. The collapse of Lehman sent traders rushing into government treasury bonds – seen as a safe haven in troubled times. The dollar fell against both the euro and the yen. Peter Kenny, managing director at Knight Equity Markets in New Jersey, said the financial world is on the verge of a complete reorganisation.

"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," he told Reuters. And Bill Gross, chief investment officer at Pacific Investment Management, warned of an "imminent tsunami" as dealers are forced to unwind complicated derivative and swap-related positions. Alan Greenspan, the respected former chairman of the Fed, warned yesterday that other big institutions could yet be vulnerable; a shocking situation for Wall Street where the big investment banks had for so long enjoyed an air of invincibility. Greenspan described the credit crisis as a "once-in-a-century" type of event. "There's no question that this is in the process of outstripping anything I've seen and it still is not resolved and it still has a way to go," he told ABC News. The collapse of Lehman Brothers - Telegraph Financial Crisis The collapse of Lehman Brothers Interactive timeline of the final days of the Lehman Brothers bank, before it filed for bankruptcy on Sept 15, 2008, and the effect this had on the world's economy over the next 12 months.

HIGHLIGHTED BUSINESS VIDEO Examination On The Lehman Brothers Bankruptcy Report Finance Essay Examination On The Lehman Brothers Bankruptcy Report Finance Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. The collapse of Lehman Brothers in 2008 sent ripples across the financial world. From a small shop in Montgomery Alabama started by Henry Lehman in 1844, that became the Lehman Corporation in 1920. Its stocks began trading on the floor of the New York stock exchange in 1994 and posted record revenues in 2007 at which time Richard Fuld was CEO (reuters). On 15th September 2008, Lehman Brothers the 4th largest investment bank in the United States of America filed for bankruptcy protection (BBC). The precipitate of this was the loss of thousands of jobs on both sides of the Atlantic.

According to Mollenkamp, Whitehouse, Hilsenrath and Dugan (2009) some critics look back at the systemic crisis that emerged since the Lehman collapse and conclude that it could have been avoided if the government had stepped in, having committed billions of taxpayers' dollar to keep troubled institutions such as Fannie Mae, Freddie Mac in business. However, they are also quick to lay the bulk of the blame squarely at the feet of investment banking giant: "To be sure, Lehman's downfall was largely of its own making. The firm bet heavily on investments in overheated real-estate markets, used large amounts of borrowed money to supercharge its returns, then was slower than others' to recognize its losses and raise capital when its bets went wrong. The depth of the firm's woes made finding a willing buyer a difficult task, leaving officials with few viable options". (Mollenkamp et al 2009) It is commonplace that managers must take decisions, that is why they are hired to make difficult calls over and over again because they have the skills and the audacity required . Careers are built that way.

Five months later on 19th January 2009 Anton Valukas, chairman of law Chicago Law firm Jenner & Block and a former federal prosecutor was named to lead an independent investigation of the events leading to the Lehman Brothers' bankruptcy (Bloomberg). The report, released in March 2010, would cast long shadows over the management actions, individual and institutional involvement and paths that crossed leading to the downfall of the firm. This paper will draw from the bankruptcy report and other important publications to determine how the investment bank failed. In the course of performing its examination, the paper will identify the notable milestones and analyse the events that led to them. The underpinnings The failure of Lehman Brothers cannot be examined in isolation, the context is in the global financial crises, the fertile ground in which the seeds for Lehman's demise were sown (Zingales 2009).

A number of causes have been advanced for the financial crises such as issues with monetary policy ( Ely2009, Schwratz 2008) lack of transparency (zingales 2009) a complacent market obsessed with high returns (zingales 2009) Flawed financial innovations (shwartz 2008) over promotion of home ownership (Ely 2009). The Lehman collapse however also triggered a shocking meltdown of global finance such was its impact (Hillman 2009) By approximation, the boiling point for the Lehman brothers' debacle the announcement by the one and a half century old bank that it would file for bankruptcy protection following its inability to secure government assistance (the bond buyer 2008). How had it come to this? The starting point could very well have been the firm's decision to take on a more risky growth strategy.

The Lehman Bankruptcy Report notes the sudden growth in the firm's balance sheet as show in the table below All figures in billions Table 1 source examiners report Lehman Brothers p 57 The bankruptcy report describes the phenomenal growth in the firms balance sheet as follows: "Lehman's net assets increased by almost 128 billion or 48% in a little over a year from the 4th quarter of 2006 through the first quarter of 2008" (Valukas 2010 p 57 ) The firm had taken on a monumental amount of risk setting itself up for either breakaway success or mega failure .Some questions arise here, such as why did they adopt the riskier investment strategy? Did Lehman executives fully understand the risks accompanying such a strategy? In addition, from corporate governance perspective was everyone at home with the idea.

The examiner bankruptcy report shed some light regarding the risk appetite of similar institutions to Lehman Brothers : "Lehman's business model was not unique; all of the major investment banks that existed at the time followed some variation of a high-risk, high-leverage model that require the confidence of counterparties to sustain" (Valukas 2010). In the sophisticated world of investment banking, the faint of heart rarely find a place to roost. Perception is everything in fact it is reality once the perception is altered reality changes, moreover such financial institutions are known attract that best people and the most daring people from the best business schools. The examiner's report lends ample support in, mentioning the fact that the investment banking business model puts people under a lot of pressure to take high risk and government agencies on their part are cited are as having fallen short of their full responsibilities (Valukas 2010) This next milestone is the culmination of a series of events or more precisely investment decisions taken by Lehman to pursue a countercyclical business strategy.

Viewing substantial opportunities in the subprime housing market while relaxing Risk controls most notably the single transaction limit, moreover opposition was crowded out and despite obvious warning signs and opposition from some managers about the leveraged loan business and commercial real estate business. The firm figuratively had its head in the sand. The Lehman brothers' journey into the abyss can be chronicled as follows, it makes a strategic decision to pursue aggressive growth by taking on very high risk in addition it would also increase its leverage greatly (Valukas 21010). Shortly afterwards the subâ€prime residential mortgage crises came to critical mass decimating the real estate business, at which point the firm failed to demonstrate the agility critical to its survival its lethargy was exemplified in its sit still attitude with the hope that things would eventually turn around and their hefty wager would pay off. The bank actively walked the fine line by transcending the boundaries of its own risk control mechanisms thus defeating their purpose the growth strategy turned out to be a disastrous malignancy causing the firm to lose direction. According to (. Web nnn..) The collapse of Bear Sterns appeared to many to be a prelude and the collapse of Lehman brothers would most certainly follow.

Its managers would thereafter be preoccupied with how to keep the bank from going under. Selling the strategy to internal customers The key to the drift towards this strategy was to the ability of Lehman executives to sell it to the strategy to its internal audience at the highest level; a case of expert internal salesmanship. The foray into commercial real estate investments, leveraged loans and private equity, the foci of the new strategy, was partly the result of meticulously selling the strategy to high-level executives (Valukas 2010 p61). Apparently, most if not all of the top executives at Lehman including CEO Richard Fuld fully understood this strategy; Fuld demonstrated sufficient comprehension or at least had enough information to also give his own presentation (Valukas 2010 p 62). From the corporate governance view, the board apparently gave their blessing to the malignant growth strategy (Valukas 2010, P 76). Furthermore, some directors did not appear overly concerned about omissions from the bank's stress tests, these omissions being the very same investments in the new aggressive growth strategy. (Valukas 2010pp 77).

Lack of liquidity mounts to can cause very serious problems and In the report the liquidity position of the firm is described as precarious occasioned by the its astronomical leverage when weighed against its agressibe growth strategy there was not adequate liaqudfity moreover the asssts on its balance sheet had become noxious its capital had been depleted and the firm had become more vulnerable this accordinmg to the report puts into perspective the riskiness of it growth strategy (62 63 ) the noxious assets posed an even bigers problem it trapped the foirm from almost every angle from the stand pout of raising cash especially inm a difficult period firstly the alliaquid assets will take beating on sale secondly they are unsuitable as collateral for borrowing neither was it possible to reaie hedges to protect such mammoth investment (63) Surge in Risk Appetite The managers of Lehman failed to monitor its risks in their traditional way to as they explored uncharted investment waters and became more exposed. However the managers were willing to back the new strategy to the fullest extent even if it meant slackening their risk controls. In doing this they fuelled the investment strategy.

The report sheds more light to thses action: "Historically, its stress testing had not been designed to encompass the risks posed to the firm by principal investments in real estate and private equity, because those positions previously made up a small portion of Lehman's portfolio. Lehman did not revise its stress testing to address its evolving business strategy. Because of SEC requirement to conduct regular stress testing on its portfolio to quantify the catastrophic loss it could suffer over a defined period of time. Lehman ran a series of stress tests based on 13 or14 different scenarios.

Some of the scenarios were historical events" (Valukas 2010 p 66) To compound matters Lehman managers needed its publics to feel confident about the quality of its stress testing, to that effect the report points out that the firm may have actively deceived the public, it remarks: "Lehman's Managers represented to its external constituents that regular and comprehensive stress tests were performed to evaluate the potential P&L impact on the firm's portfolio of abnormal yet plausible market conditions" (Valukas " 2010) The paper earlier pointed out Lehmans eventual disregard for its own risk management and control infrsstructure these limits or risk measures kept lehman centrered in aits approach to risk . This sophisticated is mechanism had to be very intricate and well tuned as reult of which so called risk appetite usage could be computed for profuvt /business lines, divisions and for the whole firm in addition such values could be obrained omna daily basis (70) This paper briefly pointed out the absence in Lehmans strtraess tests of aggressive growth investmentcommercial realestate and private equity. In its original form the only stocks and bonds ana dother free trading securities were added to the tests .

the reopprt ezxplauns why the the investments in the agrresive growth strategy were exceluded baccordingly: "Because these assets did not trade freely, they were not considered susceptible to stress testing over a short-term scenario. And since Lehman did not then have significant investments in these areas, excluding them from the stress testing did not undermine the usefulness of the results" (67) Risk appetite limit increase for Fiscal 2007 Lehman's higher limits were "harder" and required greater authorization if they were exceeded, the "Risk Committee of the firm was required to consider the proper course of action to take. The Risk Committee was composed of the Executive Committee of the firm, the Chief Risk Officer and the Chief Financial Officer. At the end of 2006, Lehman dramatically increased its risk appetite limits applicable to fiscal 2007. The firm-wide limit increased its risk appetite limits and subsidiary limits also increased significantly, particularly in so far as the principal investing businesses were concerned. At the beginning of each year, Lehman set numerical limits on the risk appetite usage it was willing to take for each such business unit and for the firm as a whole. Management presented the firm-wide limit to the Board.

Under its limit policy, lower-level limits applicable to a single business line or geographic area were relatively "soft" and could be exceeded based on appropriate authority. The following chart illustrates the lag between the beginning of the risk appetite limit averages and the notification of the Board. The straight dotted line represents the firm-wide risk appetite limit and the jagged solid line represents the firm-wide usage:( source} Problems in the subprime market Lehman Brothers decided to shut down its subprime mortgage unit BNC mortgage in August 2007 exiting a hitherto profitable business, it would however continue to focus on Alt- A which were closer to prime mortgages through its Aurora loan services platform standards ( White &Kim 2007). The anticipated turn was yet to arrive and in January 2008 , its Aurora's programme was suspended (Valukas 2010 p 137) According to the Lehman bankruptcy report, the examiner came to the conclusion that under Delaware law, Lehman managers were entitled to pursue the their malignant growth strategy. In conformity with the business judgement rule. Despite disregarding their risk limits, they did not act recklessly.

Though these business decisions they led to failure did not constitute a breach of the duty of care (Valukas 2010 178). These investment decisions ultimately failed but they were just that, business decisions, taken in a traditionally risky industry. In taking these actions, the managers were wagering and expecting to win. Were they unwise? Were they greedy? Did they go into investment overdrive? they made the best decisions they felt possible given the information and time available, neither of which can ever be totally appropriated by anyone. Could timing have played an important role in the outcome of the decisions? The managers made this decisions again with the conviction that they got the timing right. Plainly, they mad bad decisions Reengineering the Balance sheet Banks want to show a good net leverage position that is favourable when compared to industry peers. Large Financial institutions use similar instruments to raise funds for short-term finanancing Like its competitors lehman rating was of utmost importance to its manangers this wsa also necessary to keep stakeh;lder confiders up be they investors or other parties.

The examiner report notes at this point lehaman was at panic stations nothing would work it would have to announce a 2.8 billion in 2nd quarter 2008. Resulting from high stakes ivestmenst gone really bad ( Valukas 2010 exceutive summsry ). bad news gets around very quickly and lehman proceeded to sell the idea it had achieved a significant reduction in its net leverage ratio to less than 12.5 it also claimed to be highly liquid about which it boasted a highly formidable position while reducing net assets on its balance sheet by $60 billion.(Valukas 2010 exectives summsry vol 1) the firm did however express the extreme difficulties faced in that quarter even as they persuaded the market of its liquidity (daily telegraph 10 june 2008) Lehman use of the Repo 105 deveice Leman deployed massive growth strategy which brought the frims risk exposure levels to unprecedentrd proportaions the housing market went down leaving lehman with billions in noxious assets sitting in its balance sheet . needed to delevveeage very quickly.

The bankruotcy reort examiners offers details as to how the firm hid its true debt levels through the "Repo 105" device repo is knowmn to mean repourchaing . Lehman brothers were able to trmportatliy take $50b from its balance sheets at key quarterly reporting dates to improve its finanacial leverage ratio. in doing this, lehman misled investors (what repo 105 really mean) . according to ..... lehman exploited wealnessses in US Statement Of Financail Standards (SFAS 140) accounting for transfers and servicing of finanacial assets and extinguishing of liabilitiesallowing it to book repo 105 and 108 transactions as sal;es rather than finanacing transactions according consequently Lehmans rep 105 transactions remobed securities inventory from oitss balance sheet fro the duration of the repo (a week to ten days) lehman receives cash at the mon ment of the transaction . by using borrowed fund from 105 transactions to reduce shoert tern laibilites lehman reduced oits total assets and by that reduced its leverage ratios.

Valukas (2010) finds that the motivae behind conduction big ticket repo 105 transactions very close quarter end in late 2007 and 2008 was to momentarily re move inventories form its balance sheet in order to rep[port lower leverage figures (publiocly dieclosed leverage). According to Valukas (2010 p 762-763) despite konowig that peers were not using devices similar to repo 150 lehman mangers actually oversaw a n escalation in the use of repo 150. The report also notes that bthey were caught betwen a weakedned position unable to risk alerting the narket by raising equirt funds and a potential huge losses should they sell invemntory . (Valukas 2010 763) The Repo programme had another crucial dimension, it required on legal opinion, and the investment bank was not able to persuade its lawyers in the US that the relevant repurchase agreement constituted real sales. So it hired a British law firm Linklaters to use British law to affirm that the transactions counted as sales.

The company exploited the difference in UK and US legal standards. The examiner's report suggests that there are grounds for civil action - that is, people can sue for damages. Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation. Lehman's own accounting personnel described Repo 105 transactions as an accounting gimmick and a lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end. Lehman used repo 105 to reduce balance sheet at the quarter end. The reason being to lower leverage - a critical component of the firm's credit rating. Lehman's approach to risk ultimately create the conditions that led its top managers to use Repo 105 transactions. Lehman maintained approximateky $700 billion of assets, and corresponding liabilities, on capital of approximately $25billion, but the assets were predominantly long-term, while the liabilities were largely short-term.

Lehman funded itself through the short-term repo markets and had to borrow tens or hundreds of billions of dollars in those markets each day from counterparties to be able to open for business.Confidence was critical, the moment that repo counterparties were to lose confidence in Lehman and decline to rollover its daily funding, Lehman would be unable to fund itself and continue to operate. Examiner Valukas also found that there was sufficient evidence to back a claim that Mr. Fuld and executives breached their fiduciary duties by allowing and certifying the filling of financial statement that omitted or misrepresented material information. Further, as discussed in great detail by the examiner, Lehman's own corporate audit group, together with Ernst & Young, investigated allegations about balance sheet substantiation problems made in a whistle blower letter sent to senior management on May 16 2008. During the investigation, E& Y was informed about Lehman's use of Repo 105 transactions in the second quarter of 2008. At a meeting on June 13 2008, E & Y failed to disclose that allegations to the board's audit committee.

Saving the sinking ship Lehaman annomved its filing for bankruptcy protection on the morning of 15th seotember 2008 . how far did the officers go to save the firm and its managers should not allow their company to sink the ought to do every thing in theri power to save it In the light of the above Lehman managers needed to mount the strongest defensive strategies they could to save their dearly beloved investment bank. Helping the institution to survive is a sacred duty. According to Philips (2008 )New york city mayor Michael Bloomberg lamented the cloure of an instoitution that that provided a piece of the American deram. In 20/20 hindsight opinions have varied as to whether Lehman could have indeed been rescued. Macdonald (2009) is quite certain that had cooler heads and some self control prevaiuled the firm might have been rescued but a combination of a CEO who didn't liasten departure of key brilliant lehman readers and sheer obstinacy cost the firm its last chane to be saved.

Despite the intensity of the meetings held that fateful weekend with intention of finding a solution and avoiding the fall it became abundantly clear as the hours slipped by that a deal was not goiung top be reached . the The government analysed that it did not have the legal authority to make a direct capital investment in Lehman, and the company's assets were insufficient to support a loan large enough to avoid its collapse. By early September, a deal had been reached with Barclaysto save Lehman from collapse. But later, the deal fell apart when the parties learned that the Financial Service Authority, the US bank regulator had refused to waive UK shareholder -approval requirements. The extent to which the financial upheaval that followed was the result of the bankruptcy is a thing to ponder on. WHY LEHMAN FAILED It was unable to retain the confidence of its lenders and counterparties and because it did not have sufficient liquidity to meet its current obligations. Lehman was unable to maintain confidence because a series of business decisions nhad left it with heavy concentrations of illiquid assets with deteriorating values such as residential and commercial real estate. Confidence was further eroded when it became public that attempts to form strategic partnerships to bolster its stability had failed.

And confidence plummeted on two consecutive quarters with huge reported losses, $2.8 billion in second quarter 2008 and $3.9 billion in third quarter 2008, without news of any definitive survival plan. The business decisions that brought it to its crisis of confidence may have been in error but were largely within the business judgment rule. Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severelly limited by the illiquidity and depressed prices of the assets it had accumulated. Against this, it turned to Repo 105 transactions to temporarily remove $50 billion of assets from its balance sheet at first and second quarter ends in 2008 so that it could report significantly lower net leverage numbers than reality. Lehman did so despite its understanding that none of its peers used similar accounting at that time to arrive at their leverage numbers, to which Lehman would be compared. Based upon their considerable business experience and successful track record, Lehman's senior managers decided to place a higher priority on increasing profits than on keeping the firm's risk level within the limits arising from its risk management policies and metrics.

They were confident making business judgments based on their understanding of the markets, and did not feel constrained by the quantitative metrics generated by Lehman's risk management system. These decisions raise questions about the role of risk management in a complex financial institution. Lehman defined materiality, for purposes of reopening a closed balance sheet, as "any item individually, or in the aggregate, that moves net leverage by 0.1 or more (typically$1.8 billion). Lehman's use of Repo 105 moved net leverage not by tenths but by whole points: Involvement of the banks auditors The current paper looks briefly at the role of the banks auditors and counter parties in the Lehman brothers collapse according to the report The examiner in charge of investigating the collapse of venerable Wall Street investment house, the most expensive bankruptcy in US history, reported that the senior officials failed to disclose key practices, opening them up to legal claims and that JPMorgan Chase and Citigroup contributed to the firm's collapse. In addition, it concludes that the firm's auditor, Ernst & Young, failed to meet "professional standards".

The examiner also found out that parties have claims to pursue Chase and Citibank in connection with their behaviour regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman's final days these demands had a "direct impact" on Lehman's diminishing its cash on hand which was a prime reason behind the firm's demise. The issue giving rise to these potential claims was the company's creative use of repurchase conclusions On January 29, 2008, Lehman Brothers Holdings Inc. ("LBHI"1) reported record revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending Lehman failed to disclose that by June 2008 significant components of its reported liquidity pool had become difficult to monetize. As late as September 10, 2008 it publicly announced that its liquidity pool was approximately $40 billion, but a substantial portion of that total was in fact encumbered or otherwise illiquid.

From June on it continued to include in its reported liquidity substantial amounts of cash and securities it had placed as "comfort" deposits with various clearing banks; Lehman had a technical right to recall those deposits, but its ability to continue its usual clearing business with those banks had it done so was far from clear. By August, substantial amounts of comfort deposits had become actual pledges. By September 12, two days after it publicly reported a $41 billion liquidity pool, the pool actually contained less than $2 billion of readily monetized assets. Months earlier, on June, it had pre-announced its second quarter results and reported a lossof $2.8 billion, its first ever loss since going public in 1994. Despite that announcement, Lehman was able to raise $6billion of new capital in a public offering on June 12, 20008, knowing that their new capital was not enough. The Treasury Secretary Henry M. Paulson, Jr. privately told Fuld that Lehman was forced to report further losses in the third quarter without having a buyer or a definitive survival plan in place, Lehman's existence would be in jeopardy.

On September 10, 2008, Lehman announced that it was projecting a $3.9 billion loss for the third quarter of 2008. Although it had explored options over the summer, it had no buyer in place, its only announced survival plan was to spin off troubled assets into a separate entity. By the close of trading on 12th September 2008, its stock price had declined to $3.65 per share, a 94% drop from the $62.19 January 2, 2008 price. Lehman Sues US Bank Over Terminated Interest Rate Swap - Law360 Lehman Sues US Bank Over Terminated Interest Rate Swap By Carmen Germaine Law360, New York (September 21, 2015, 4:57 PM EDT) -- An affiliate of Lehman Brothers Holdings Inc. has filed an adversary case in New York bankruptcy court claiming U.S. Bank Trust NA falsely terminated an interest rate swap agreement and pocketed the termination fee after Lehman went bankrupt in 2008. Lehman Brothers Special Financing Inc.

alleged in a suit filed Friday that U.S. Bank Trust NA, as the trustee for a $25 million trust, unlawfully terminated an interest rate swap in September 2008 when Lehman Brothers Holdings filed for Chapter 11 bankruptcy. LBSF also said that,... To view the full article, register now. List of biggest bankrupt companies in 2008 – PinoyMoneyTalk.com 1,637 Source: BankruptcyData.com Bankruptcy leads to layoff and unemployment, snowballing into reduced consumer spending and, ultimately, slower economic growth. If bankruptcies continue indefinitely, then this current financial recession we are experiencing will probably last for some more time. So be ready. Sponsored Links Short description of bankrupt companies 1. Lehman Brothers Holdings Inc. A global financial-services firm that did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. Its bankruptcy filing is the largest in US history, involving debt amounting to $613 billion and assets worth $639 billion. 2. Washington Mutual, Inc.

A savings bank holding company and former owner of Washington Mutual Bank, then the largest savings and loan association in the US. 3. IndyMac Bancorp, Inc. Holding company of IndyMac Bank, the largest savings and loan association in the Los Angeles area and seventh largest mortgage originator in the US during its time. 4. Downey Financial Corp. Holding company for Downey Savings and Loan Association which provides various financial services to individual and corporate customers. 5. Tribune Company Second-largest newspaper publisher in the US which owns the Chicago Tribune, Los Angeles Times, Hartford Courant, Orlando Sentinel, South Florida Sun-Sentinel and The Morning Call, among others. Through other subsidiaries, the Tribune Company also owns Tribune Broadcasting, Tribune Entertainment, Tribune Media Services, and the Chicago Cubs baseball team. 6. Fremont General Corporation A financial services holding company that owns, among others, a California bank subsidiary, Fremont Investment & Loan, which provides various financial services. 7. SemGroup Energy Partners, L.P. Provides terminalling, storage, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil. 8. Franklin Bank Corp.

Bank holding company for Franklin Bank, S.S.B., a savings bank that provided community banking products and services, and commercial banking services to corporations and other business clients, and originates single family residential mortgage loans primarily in Texas. 9. Luminent Mortgage Capital Inc. A real estate investment trust (REIT) in the United States. 10. PFF Bancorp Inc. A diversified financial services firm. 11. Pilgrim’s Pride Corporation Producer of poultry products. 12. LandAmerica Financial Group, Inc. Insurance underwriter. 13. Circuit City Stores, Inc. Retailer of consumer electronics. Homebuilding and real estate services company. 15. TOUSA, Inc. Hi Yvon, unfortunately, no. The SEC website does not have this information. I’m sure though that they have this report prepared internally but whether it can be made public, I don’t know. abercrombie hat Hiya, I had been reading a lot more thing about this on additional blog page. Helpful. Your perspective on it truly is diametrically contradicted from what I read earlier. I’m nevertheless pondering of the opposite items of view, but I’m leaning to a extremely incredibly good extent toward yours.

And irrespective, which is what’s so ideal about modern day democracy and also the marketplace of ideas on the web. hi.. do you have a lists of company that closed..last year? Kuhu hi anybody has list of consumer services bankrupt companies in US? Joren_p17 ONE Philippine CREDIT CARD company acquired by another / group of company went bankrupt just recently. May I know the name of the company that went bankrupt? Thanks! BPI Examination Of Lehman Brothers Bankruptcy Report Finance Essay Examination Of Lehman Brothers Bankruptcy Report Finance Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. The collapse of Lehman Brothers in 2008 sent ripples across the financial world. From a small shop in Montgomery Alabama started by Henry Lehman in 1844, that became the Lehman Corporation in 1920. Its stocks began trading on the floor of the New York stock exchange in 1994 and posted record revenues in 2007 at which time Richard Fuld was CEO (reuters).

On 15th September 2008, Lehman Brothers the 4th largest investment bank in the United States of America filed for bankruptcy protection (BBC). The precipitate of this was the loss of thousands of jobs on both sides of the Atlantic. According to Mollenkamp, Whitehouse, Hilsenrath and Dugan (2009) some critics look back at the systemic crisis that emerged since the Lehman collapse and conclude that it could have been avoided if the government had stepped in, having committed billions of taxpayers' dollar to keep troubled institutions such as Fannie Mae, Freddie Mac in business. However, they are also quick to lay the bulk of the blame squarely at the feet of investment banking giant: "To be sure, Lehman's downfall was largely of its own making. The firm bet heavily on investments in overheated real-estate markets, used large amounts of borrowed money to supercharge its returns, then was slower than others' to recognize its losses and raise capital when its bets went wrong. The depth of the firm's woes made finding a willing buyer a difficult task, leaving officials with few viable options".

(Mollenkamp et al 2009) It is commonplace that managers must take decisions, that is why they are hired to make difficult calls over and over again because they have the skills and the audacity required . Careers are built that way. Five months later on 19th January 2009 Anton Valukas, chairman of law Chicago Law firm Jenner & Block and a former federal prosecutor was named to lead an independent investigation of the events leading to the Lehman Brothers' bankruptcy (Bloomberg). The report, released in March 2010, would cast long shadows over the management actions, individual and institutional involvement and paths that crossed leading to the downfall of the firm. This paper will draw from the bankruptcy report and other important publications to determine how the investment bank failed. In the course of performing its examination, the paper will identify the notable milestones and analyse the events that led to them. The underpinnings The failure of Lehman Brothers cannot be examined in isolation, the context is in the global financial crises, the fertile ground in which the seeds for Lehman's demise were sown (Zingales 2009).

A number of causes have been advanced for the financial crises such as issues with monetary policy ( Ely2009, Schwratz 2008) lack of transparency (zingales 2009) a complacent market obsessed with high returns (zingales 2009) Flawed financial innovations (shwartz 2008) over promotion of home ownership (Ely 2009). Accordingly Lehman brothers was a casualty of the economic downturn not the cause. By approximation, the boiling point for the Lehman brothers' debacle the announcement by the one and a half century old bank that it would file for bankruptcy protection following its inability to secure government assistance (the bond buyer 2008). How had it come to this? The starting point could very well have been the firm's decision to take on a more risky growth strategy.

The Lehman Bankruptcy Report notes the sudden growth in the firm's balance sheet as show in the table below All figures in billions Table 1 source examiners report Lehman Brothers p 57 The bankruptcy report describes the phenomenal growth in the firms balance sheet as follows: "Lehman's net assets increased by almost 128 billion or 48% in a little over a year from the 4th quarter of 2006 through the first quarter of 2008" (Valukas 2010 p 57 ) The firm had taken on a monumental amount of risk setting itself up for either breakaway success or mega failure .Some questions arise here, such as why did they adopt the riskier investment strategy? Did Lehman executives fully understand the risks accompanying such a strategy? In addition, from corporate governance perspective was everyone at home with the idea.

The examiner bankruptcy report shed some light regarding the risk appetite of similar institutions to Lehman Brothers : "Lehman's business model was not unique; all of the major investment banks that existed at the time followed some variation of a high-risk, high-leverage model that require the confidence of counterparties to sustain" (Valukas 2010). In the sophisticated world of investment banking, the faint of heart rarely find a place to roost. Perception is everything in fact it is reality once the perception is altered reality changes, moreover such financial institutions are known attract that best people and the most daring people from the best business schools. The examiner's report lends ample support in, mentioning the fact that the investment banking business model puts people under a lot of pressure to take high risk and government agencies on their part are cited are as having fallen short of their full responsibilities (Valukas 2010) This next milestone is the culmination of a series of events or more precisely investment decisions taken by Lehman to pursue a countercyclical business strategy.

Viewing substantial opportunities in the subprime housing market while relaxing Risk controls most notably the single transaction limit, moreover opposition was crowded out and despite obvious warning signs and opposition from some managers about the leveraged loan business and commercial real estate business. The firm figuratively had its head in the sand. . The Lehman brothers' journey into the abyss can be chronicled as follows, it makes a strategic decision to pursue aggressive growth by taking on very high risk in addition it would also increase its leverage greatly (Valukas 21010). Shortly afterwards the subâ€prime residential mortgage crises came to critical mass decimating the real estate business, at which point the firm failed to demonstrate the agility critical to its survival its lethargy was exemplified in its sit still attitude with the hope that things would eventually turn around and their hefty wager would pay off. The bank actively walked the fine line by transcending the boundaries of its own risk control mechanisms thus defeating their purpose the growth strategy turned out to be a disastrous malignancy causing the firm to lose direction. According to (. Web nnn..) The collapse of Bear Sterns appeared to many to be a prelude and the collapse of Lehman brothers would most certainly follow.

Its managers would therrefater be preoccupied with how to keep the bnak from going under. Selling the strategy to internal customers The key to the drift towards this strategy was to the ability of Lehman executives to sell it to the strategy to its internal audience at the highest level; a case of expert internal salesmanship. The foray into commercial real estate investments, leveraged loans and private equity, the foci of the new strategy, was partly the result of meticulously selling the strategy to high-level executives (Valukas 2010 p61). Apparently, most if not all of the top executives at Lehman including CEO Richard Fuld fully understood this strategy; Fuld demonstrated sufficient comprehension or at least had enough information to also give his own presentation (Valukas 2010 p 62). From the corporate governance view, the board apparently gave their blessing to the malignant growth strategy (Valukas 2010, P 76). furthermore, some directors did not appear concerned about omissions from the bank's stress tests, these omissions being the very same investments in the new aggressive growth strategy. (Valukas 2010pp 77).

The strategy was risky in light of the firm's high leverage and small equity base. This strategies consumed more capital, entailed more risk, and required more liquidity than Lehman's traditional lines of business. The lack of liquidity increased the risk to the firm in several ways. Having a large volume of illiquid assets made it much more difficult for the firm to accomplish three important goals in a difficult financial environment: To raise cash hedge risks or sell assets to reduce the leverage in its balance sheet. Surge in Risk Appetite The managers of Lehman failed to monitor its risks in their traditional way to as they explored uncharted investment waters and became more exposed. However the managers were willing to back the new strategy to the fullest extent even if it meant slackening their risk controls. In doing this they fuelled the investment strategy. The report sheds more light to thses action: "Historically, its stress testing had not been designed to encompass the risks posed to the firm by principal investments in real estate and private equity, because those positions previously made up a small portion of Lehman's portfolio. Lehman did not revise its stress testing to address its evolving business strategy.

Because of SEC requirement to conduct regular stress testing on its portfolio to quantify the catastrophic loss it could suffer over a defined period of time. Lehman ran a series of stress tests based on 13 or14 different scenarios. Some of the scenarios were historical events" (Valukas 2010 p 66) To compound matters Lehman managers needed its publics to feel confident about the quality of its stress testing, to that effect the report points out that the firm may have actively deceived the public, it remarks: "Lehman's Managers represented to its external constituents that regular and comprehensive stress tests were performed to evaluate the potential P&L impact on the firm's portfolio of abnormal yet plausible market conditions" (Valukas " 2010) Lehman had a series of "risk appetite limits" that it considered the "centre of its approach to risk". Risk appetite was a measure that aggregated the market risk, credit risk and event risk faced by Lehman. It had an elaborate set of procedures designed to calculate the "risk appetite usage" in each of its business lines, each of its divisions and for the firm as a whole. These risk appetite usage figures were calculated every day.

When Lehman first adopted stress testing in about 2005, it applied the testing only to its tradable instruments such as stocks, bonds and other securities; it did not include its un-traded assets such as its commercial real estate or private equity investments. Because these assets did not trade freely, they were not considered susceptible to stress testing over a short-term scenario. And since Lehman did not then have significant investments in these areas, excluding them from the stress testing did not undermine the usefulness of the results. Risk appetite limit increase for Fiscal 2007: Lehman's higher limits were "harder" and required greater authorization if they were exceeded, the "Risk Committee of the firm was required to consider the proper course of action to take. The Risk Committee was composed of the Executive Committee of the firm, the Chief Risk Officer and the Chief Financial Officer. At the end of 2006, Lehman dramatically increased its risk appetite limits applicable to fiscal 2007. The firm-wide limit increased its risk appetite limits and subsidiary limits also increased significantly, particularly in so far as the principal investing businesses were concerned.

At the beginning of each year, Lehman set numerical limits on the risk appetite usage it was willing to take for each such business unit and for the firm as a whole. Management presented the firm-wide limit to the Board. Under its limit policy, lower-level limits applicable to a single business line or geographic area were relatively "soft" and could be exceeded based on appropriate authority. The following chart illustrates the lag between the beginning of the risk appetite limit averages and the notification of the Board. The straight dotted line represents the firm-wide risk appetite limit and the jagged solid line represents the firm-wide usage:( source} Problems in the subprime market Lehman Brothers decided to shut down its subprime mortgage unit BNC mortgage in August 2007 exiting a hitherto profitable business, it would however continue to focus on Alt- A which were closer to prime mortgages through its Aurora loan services platform standards ( White &Kim 2007).

The anticipated turn was yet to arrive and in January 2008 , its Aurora's programme was suspended (Valukas 2010 p 137) According to the Lehman bankruptcy report, the examiner came to the conclusion that under Delaware law, Lehman managers were entitled to pursue the their malignant growth strategy. In conformity with the business judgement rule. Despite disregarding their risk limits, they did not act recklessly. Though these business decisions they led to failure did not constitute a breach of the duty of care (Valukas 2010 178). These investment decisions ultimately failed but they were just that, business decisions, taken in a traditionally risky industry. In taking these actions, the managers were wagering and expecting to win. Were they unwise? Were they greedy? Did they go into investment overdrive? they made the best decisions they felt possible given the information and time available, neither of which can ever be totally appropriated by anyone. Could timing have played an important role in the outcome of the decisions? The managers made this decisions again with the conviction that they got the timing right.

Plainly, they mad bad decisions Reengineering the Balance sheet Like its competitors it rating was of utmost importance Lehman required favourable rating from the principal rating agencies to maintain investor and counter party confidence; while the agencies looked at many things I arrivibng st their conclusions on; it was clear that they require net leverage and liquidity as key ratios,. Lehman knew it could not meet up this. So, at the end of the second quarter of 2008, as it was forced to announce a quarterly loss of $2.8 billion resulting from a combination of write-down on assets, sales of assets at losses, decreasing revenues, and losses on hedges - it sought to cushion the effect of the bad news by trumpeting the it had significantly reduced its net leverage ratio to less than 12.5, that it had reduced the net assets on its balance sheet by $60 billion, and that it had a strong and robust liquidity pool sufficient to weather any foreseeable economic downturn Banks want to show a good net leverage position favourable when compared to peers.

Large Financial institutions use similar instruments to raise funds for short-term finanancing testimony report detailed the effort to conceal Lehman's true debt levels through the so called "Repo 105" structure which is short for repurchasing. It found "credible evidence" to back the claim that the failure of Dick Fuld, Lehman chief executive, to disclose the transactions was "grossly negligent". Lehman brothers were able to trmportatliy take $50b from its balance sheets at key quarterly reporting dates to improve its finanacial leverage ratio. in doing this, lehman misled investors (what repo 105 really mean) . according to ..... lehman exploited wealnessses in US Statement Of Financail Standards (SFAS 140) accounting for transfers and servicing of finanacial assets and extinguishing of liabilitiesallowing it to book repo 105 and 108 transactions as sal;es rather than finanacing transactions according consequently Lehmans rep 105 transactions remobed securities inventory from oitss balance sheet fro the duration of the repo (a week to ten days) lehman receives cash at the mon ment of the transaction .

by using borrowed fund from 105 transactions to reduce shoert tern laibilites lehman reduced oits total assets and by that reduced its leverage ratios. The report finds that the motivae behind conduction big ticket repo 105 transactions very close quarter end in late 2007 and 2008 was to momentarily re move inventories form its balance sheet in order to rep[port lower leverage figures (publiocly dieclosed leverage). According to Valukas (2010 p 762-763 despite konowig that peers were not using devices similar to repo 150 lehman mangers actually oversaw a n escalation in the use of repo 150. The report also notes that bthey were caught betwen a weakedned position unable to risk alerting the narket by raising equirt funds and a potential huge losses should they sell invemntory . Valukas 2010 763 The Repo scheme had another edge to it depended on legal opinion, and the investment bank was not able to persuade its lawyers in the US that the relevant repurchase agreement constituted real sales.

So it hired a British law firm Linklaters to use British law to affirm that the transactions counted as sales. The company exploited the difference in UK and US legal standards. The examiner's report suggests that there are grounds for civil action - that is, people can sue for damages. Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation. Lehman's own accounting personnel described Repo 105 transactions as an accounting gimmick and a lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end. Lehman used repo 105 to reduce balance sheet at the quarter end. The reason being to lower leverage - a critical component of the firm's credit rating. Lehman's approach to risk ultimately create the conditions that led its top managers to use Repo 105 transactions. Lehman maintained approximateky $700 billion of assets, and corresponding liabilities, on capital of approximately $25billion, but the assets were predominantly long-term, while the liabilities were largely short-term.

Lehman funded itself through the short-term repo markets and had to borrow tens or hundreds of billions of dollars in those markets each day from counterparties to be able to open for business.Confidence was critical, the moment that repo counterparties were to lose confidence in Lehman and decline to rollover its daily funding, Lehman would be unable to fund itself and continue to operate. Examiner Valukas also found that there was sufficient evidence to back a claim that Mr. Fuld and executives breached their fiduciary duties by allowing and certifying the filling of financial statement that omitted or misrepresented material information. Further, as discussed in great detail by the examiner, Lehman's own corporate audit group, together with Ernst & Young, investigated allegations about balance sheet substantiation problems made in a whistle blower letter sent to senior management on May 16 2008. During the investigation, E& Y was informed about Lehman's use of Repo 105 transactions in the second quarter of 2008. At a meeting on June 13 2008, E & Y failed to disclose that allegations to the board's audit committee.

Saving the sinking ship Lehaman annomved its filing for bankruptcy protection on the morning of 15th seotember 2008 . how far did the officers go to save the firm and its managers should not allow their company to sink the ought to do every thing in theri power to save it In the light of the above Lehman managers needed to mount the strongest defensive strategies they could to save their dearly beloved investment bank. Helping the institution to survive is a sacred duty. Over the weekend an intensive meeting was conducted to find a solution to avoid its collapse. The government analysed that it did not have the legal authority to make a direct capital investment in Lehman, and the company's assets were insufficient to support a loan large enough to avoid its collapse. By early September, a deal had been reached with Barclaysto save Lehman from collapse. But later, the deal fell apart when the parties learned that the Financial Service Authority, the US bank regulator had refused to waive UK shareholder -approval requirements. The extent to which the financial upheaval that followed was the result of the bankruptcy is a thing to ponder on.

WHY LEHMAN FAILED It was unable to retain the confidence of its lenders and counterparties and because it did not have sufficient liquidity to meet its current obligations. Lehman was unable to maintain confidence because a series of business decisions nhad left it with heavy concentrations of illiquid assets with deteriorating values such as residential and commercial real estate. Confidence was further eroded when it became public that attempts to form strategic partnerships to bolster its stability had failed. And confidence plummeted on two consecutive quarters with huge reported losses, $2.8 billion in second quarter 2008 and $3.9 billion in third quarter 2008, without news of any definitive survival plan. The business decisions that brought it to its crisis of confidence may have been in error but were largely within the business judgment rule. Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severelly limited by the illiquidity and depressed prices of the assets it had accumulated.

Against this, it turned to Repo 105 transactions to temporarily remove $50 billion of assets from its balance sheet at first and second quarter ends in 2008 so that it could report significantly lower net leverage numbers than reality. Lehman did so despite its understanding that none of its peers used similar accounting at that time to arrive at their leverage numbers, to which Lehman would be compared. Based upon their considerable business experience and successful track record, Lehman's senior managers decided to place a higher priority on increasing profits than on keeping the firm's risk level within the limits arising from its risk management policies and metrics. They were confident making business judgments based on their understanding of the markets, and did not feel constrained by the quantitative metrics generated by Lehman's risk management system. These decisions raise questions about the role of risk management in a complex financial institution. Lehman defined materiality, for purposes of reopening a closed balance sheet, as "any item individually, or in the aggregate, that moves net leverage by 0.1 or more (typically$1.8 billion).

Lehman's use of Repo 105 moved net leverage not by tenths but by whole points: Involvement of the banks auditors The examiner in charge of investigating the collapse of venerable Wall Street investment house, the most expensive bankruptcy in US history, reported that the senior officials failed to disclose key practices, opening them up to legal claims and that JPMorgan Chase and Citigroup contributed to the firm's collapse. In addition, it concludes that the firm's auditor, Ernst & Young, failed to meet "professional standards". The examiner also found out that parties have claims to pursue Chase and Citibank in connection with their behaviour regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman's final days these demands had a "direct impact" on Lehman's diminishing its cash on hand which was a prime reason behind the firm's demise. The issue giving rise to these potential claims was the company's creative use of repurchase FACTORS RESPONSIBLE FOR THE FAILURE On January 29, 2008, Lehman Brothers Holdings Inc.

("LBHI"1) reported record revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending Lehman failed to disclose that by June 2008 significant components of its reported liquidity pool had become difficult to monetize. As late as September 10, 2008 it publicly announced that its liquidity pool was approximately $40 billion, but a substantial portion of that total was in fact encumbered or otherwise illiquid. From June on it continued to include in its reported liquidity substantial amounts of cash and securities it had placed as "comfort" deposits with various clearing banks; Lehman had a technical right to recall those deposits, but its ability to continue its usual clearing business with those banks had it done so was far from clear. By August, substantial amounts of comfort deposits had become actual pledges. By September 12, two days after it publicly reported a $41 billion liquidity pool, the pool actually contained less than $2 billion of readily monetized assets. Months earlier, on June, it had pre-announced its second quarter results and reported a lossof $2.8 billion, its first ever loss since going public in 1994.

Despite that announcement, Lehman was able to raise $6billion of new capital in a public offering on June 12, 20008, knowing that their new capital was not enough. The Treasury Secretary Henry M. Paulson, Jr. privately told Fuld that Lehman was forced to report further losses in the third quarter without having a buyer or a definitive survival plan in place, Lehman's existence would be in jeopardy. On September 10, 2008, Lehman announced that it was projecting a $3.9 billion loss for the third quarter of 2008. Although it had explored options over the summer, it had no buyer in place, its only announced survival plan was to spin off troubled assets into a separate entity. By the close of trading on 12th September 2008, its stock price had declined to $3.65 per share, a 94% drop from the $62.19 January 2, 2008 price.

Lehman Collapse: Six Years on India Still Feels After-Effects – NDTV Profit Home | Economy | Lehman Collapse: Six Years on India Still Feels After-Effects Within three months of Lehman's collapse, the BSE Sensex crashed to 8,535 in the wake of global finance crisis, plunging 60 per cent from around 21,000 levels in January 2008. Written by Varun Sinha | Last Updated: September 16, 2014 15:00 (IST) Varun Sinha EMAIL COMMENTS September 15, 2008 is etched in the memories of investors worldwide. On that Monday, Lehman Brothers - then the fourth largest investment bank in the US - filed for bankruptcy protection after failing to find a buyer. Lehman Brothers had assets and debt of over $1 trillion (nearly half of India's current GDP) and it went down as the biggest bankruptcy case in history. The Dow Jones indexin the US plunged over 500 points (over 4 per cent) on September 15 in its worst point drop since the September 2001 terrorist attacks.

There was mayhem across global markets, too. Within three months of Lehman's collapse, the BSE Sensex crashed to 8,535 in the wake of global finance crisis, plunging 60 per cent from around 21,000 levels in January 2008. Among Indian corporates, ICICI Bank was the hardest hit. Though ICICI Bank's exposure to Lehman Brothers was miniscule, customers rushed to withdraw money on rumors that the bank was in trouble. Six years on, some of the legacies of Lehman's collapse still remain in the economic system: 1) Short-term interest rates in the US continue to be near zero and the US Federal Reserve continues to buy billions of dollars' worth of bonds. This liquidity has fuelled a record-setting rally in Indian stocks. 2) India's GDP growth fell sharply to 6.72 per cent in 2008-09 from 9.32 per cent in the preceding financial year. India has not been able to achieve 9 per cent GDP growth since the Lehman collapse. 3) Since 2008, the government resorted to massive increases in public outlays to push growth.

It also cut taxes, widening the deficit. This resulted in higher stimulus-fuelled growth in the short term but could not be sustained in later years. After growing at 8.6 per cent in 2009-10 and 8.9 per cent in 2010-11, India's growth slowed down to a decade-low of 4.5 per cent in 2012-13 as stimulus measures and tax incentives were rolled back. Last fiscal, growth improved to just 4.7 per cent. 4) The tax cuts and higher spending in late 2008 led to a worsening of public finances. India's fiscal deficit climbed to 6 per cent of GDP in 2008-09 and 6.5 per cent of GDP in 2009-10. In April 2012, global ratings agencies Standard & Poor's and Fitch cut their outlook on India to negative citing high deficit. While Fitch Ratings returned India's sovereign outlook back to stable from negative in 2013, S&P continues to retain its negative outlook on India.

5) India's current account deficit also worsened progressively, in part because of the economic policies pursued between 2008 and 2011. This pressured the rupee, which hit a record low of 68.85 per dollar in August 2013. The rupee has since recovered, but it continues to trade above 60 per dollar, a far cry from 45-46/dollar in the pre-Lehman era. 6) The Reserve Bank cut interest rates six times between October 2008 and April 2009 in a bid to boost liquidity in the Indian economy. But the RBI tightened slowly, not raising its policy rates until March 2010. This artificially buoyed demand and stoked inflation. Retail inflation has constantly remained between 8 per cent and 12 per cent since 2008-09 forcing the central bank to adopt a hawkish policy since September 2013 even at the cost of hurting growth. (Data from Planning Commission)

Question: Which US bank filed for bankruptcy on September 15th 2008?
Answer: LEHMAN BROTHERS