The fall of the Lehman Brothers
The fall of the Lehman Brothers and their bankruptcy is one of the largest case of its kind ever to be witnessed in the United States. Lehman Brothers filed their bankruptcy case in the year 2008, but this was only to unfold the deep-seated problem in failed internal regulations and compromised corporate governance. Extensive research and non-ending debates have ensued after the company collapsed. Many could hardly believe how a company that was founded in the year 1854 could come to such unceremonious end after all those years of operation. This paper, therefore, is going to look at what led to the bankruptcy of the firm, if the company could have avoided the bankruptcy, and examine if the business made the right decision to dissolve the business.
From the unfolding events after the bank filed bankruptcy, it emerged that indeed the executives of the firm were the main perpetrators the firm’s failure. Firstly, the company decided to use repurchase agreements as a form of cheap financing. However, the company did not report the use of these repurchase agreements on their balance sheet so as to make their firm look financially healthier. The company position also seemed not to use prudence when it came to borrowing. When the company was going into liquidation, its leverage ratio was at 30 percent. Such a high leverage position resulted from the corporation holding assets that are illiquid and significantly impaired. The company also failed to report in the year ended 30th June 2008 that it was facing liquidity issues though most of the assets the company said were liquid had a considerable illiquid portion. The decision to hide the liquidity problems facing the firm could be attributed to the fact that the company CEO was too proud to accept that fact(Lewis 6).
Secondly, the failure of Lehman Brothers could also be attributed to failed system of corporate governance. It emerged that the Company’s Board of Directors lacked independence due to vested interest in the company’s undertakings. Some directors had brokerage accounts with the bank; others had investments in investment partnerships, and others were members of the board that provided funding to Lehman Brothers. This vested interest of directors resulted to them losing their independence to the company’s CEO hence supporting all his decisions(Lewis 4). The audit committee of the firm also failed in executing its mandate as it did not deal with the financial irregularities that were being committed by the bank.
Lehman Brothers could have avoided bankruptcy by acknowledging the importance of using prudence in business practices. The administration of the company could have averted the failure of the bank if they were proactive in risk management. The company’s risk management was rather reactive since they tried to react when the company was almost down. Additionally, the company could have adhered to ethical business practices ensuring they disclosed all required items in the financial statements. Another action that could have saved Lehman was to ensure that their auditors, both internal and external were independent(Mensah 5). The fact that the company collapsed due to misinformed financial decisions and practices in the watch of an audit firm like Ernst and Young indicates the length of auditing compromising by the bank.
In the light of the circumstance surrounding dissolution of the bank, there was no other option apart from dissolving the bank. The federal government did not indicate any possibility of bailing out the bank. Even the Chairman of the Federal Reserve maintained that it would have been illegal to bail out the bank. With no promising support, then the management had to dissolve the bank.
In conclusion, it can be seen that many events surrounded Lehman and Brothers failure, the bankruptcy could have been avoided by following wiser business practices and that the bank made the right decision to dissolve the bank. Therefore, companies should strive to follow regulations set by the government for they are there to ensure their success.
Lewis, Mark A. ‘The Fall Of The Lehman Brothers Could IT Have Been Avoided?’.SSRN Journal n. 1-18. Web.
Mensah, John M. Kwaku. ‘Why Lehman Brothers Failed: ‘Preventive Measures and Recommendations”. SSRN Journal n. 1-7. Web.