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Collapse of Lehman Brothers - Term Paper Example

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Name Tutor College Date Collapse of Lehman Brothers Introduction Following a $620 billion estimated debt, Lehman Brothers Holdings Inc. filed for bankruptcy protection under the auspices of Chapter 11 of the U.S Bankruptcy Code in September 2008. According to Cramer, Lehman’s predicament was perpetuated by corporate malfeasance, shadow banking, naked short selling, high risk lending and the untimely subprime mortgage crisis…
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Collapse of Lehman Brothers
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Download file to see previous pages The company was experiencing a mass exit by clients, dramatic fall in stock value and asset devaluation. Their bid for bankruptcy protection was the largest in the world history. Corporate Malfeasance Corporate malfeasance is a legal concept that denotes the art of falsely manipulating accounts such that the financial position of a company appears stable and progressive. Following their collapse, top executives of former corporate giants, such as WorldCom, Enron and AIG, faced civil suits and criminal charges with allegations of corporate malfeasance. Corporate malfeasance was one of the leading causes for the collapse of Lehman in light of the financial crisis of the late 2000. James Cramer calls the Lehman’s malfeasance case ‘financial engineering’ (Cramer 2). He believes that with the knowledge of top officials, CFOs and CEO Dick Fuld, the accounting department manipulated the financial records in a bid to make the company appear more venerable to attract investors and retain clients. Lehman’s financial engineering had gone on for a few years amid growing worries among top officials that the company was over-leveraged. The advice of chief financial officers and other top officials spearheaded the ‘financial engineering’ gimmick through counterfeit records to hide Lehman’s vulnerability to collapse (Taibbi 98). Sources retrieved from the Wall Street Journal indicate that CEO Fuld was aware of the imminent collapse. He was manipulated by a clique of shadowy bankers and top investors who wanted to be overnight billionaires by urging him to make money-losing decisions. Corporate malfeasance did not go far. The truth eventually emerged and Lehman’s estimated $619 billion debt was exposed. This was after the audit report of a court-appointed financial examiner was released. Fuld had admitted in writing that he had commissioned the financial engineering gimmick as a systematic ploy of buying the company more time. This was by creating “a materially misleading picture of the firm’s financial condition in late 2007 to 2008” (Cramer 2). Lehman’s accounting gimmick dubbed ‘repo 105’ allowed the sale of company securities through a signed obligation to re-purchase them after a while so that they can do so at a lower price. This would temporarily remove such asset securities from the balance sheet. Likewise, the untimely sale of securities allowed the influx of liquid cash into the bank thus effectively lowering financial coverage ratios. These subtle and corrupt financial gimmicks were done behind closed doors keeping investors and other stakeholders in the oblivion (Sorkin 8). The US Housing/ Subprime Mortgage Crisis Economic experts link Lehman’s predicament to the bursting the housing or real estate market bubble in the U.S in the summer of 2008. The untimely subprime mortgage crisis was another leading cause for the collapse of Lehman Brothers Inc. In 2007, the real estate market in the U.S had registered a remarkable progress amid the housing bubble. Housing prices soared, reached the elastic limit and Wall Street began to experience a huge increase in home foreclosure rates and equally high subprime mortgage delinquencies. Subsequently, securities backed by mortgages declined significantly. The steep decline made re-financing very difficult. ...Download file to see next pagesRead More
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