The Collapse of Lehman Brothers Bank 2008 - Case Study Example

? The Collapse of Lehman Brothers Bank - 2008 Table of Contents Introduction 3 Corporate Risk Management and Corporate Governance failure 3 Role of Dick Fuld 5 Impact on Employees 7 Economic Fallout 8 Conclusion 8 References 10 Introduction The history of Lehman Brothers can be a topic of discussion. Organizations such as American Airlines, B.F. Goodrich, Campbell soup and Macy’s have obtained sufficient level of financing through Lehman Brothers. Lehman Brothers started its business operation in the year 1844 as a dry good and small grocery store. The organization was established by Henry Lehman. After several events, the organization became the fourth largest investment banks in America. The organization filed for bankruptcy protection on September 15, 2008. Due to several reasons and controversies Lehman Brothers collapsed. Global financial crisis, inadequate management style and poor performance of the chairman and managing director, Dick Fuld are the major reasons behind the collapse. Objectively, the reasons behind the collapse can be divided into two groups, such as corporate governance failures and technical issues (Wearing, 2005, p.121). The organization was following very inadequate corporate governance arrangements. Corporate governance is an important and effective system that helps an organization to direct and control (Solomon, 2007, p.52). It helps to determine the activities of the board of an organization. Effective corporate governance practices help an organization to set and address the organizational value. Lack of effective corporate governance practices, lack of transparency, Dick Fuld’s inadequate leadership strategy and neglecting the significance of effective corporate governance drove the organization towards bankruptcy. Corporate Risk Management and Corporate Governance failure Risk was part of Lehman Brothers day-to-day business. Financial market is very much uncertain and full of several risk factors such as liquidity risk, reputation risk, credit market risk, operational risk and legal market risk. An effective risk management can be considered as the base of the operation in an organization. Overall risk management and risk limit policies were developed by the executive committee of Lehman Brothers. It is important for such kind of organizations to conduct a meeting in every week regarding policy development. In reality, the executive committee of Lehman Brother’s met only twice before the bankruptcy in the year 2006 and 2007 respectively (Choudhury, 2012, p.147). Moreover, the organization started to practice high risk business operations before its collapse. In this particular period the organization had to focus on the aggressive growth strategies in order to overcome the challenges. During 2006-2007, Lehman Brothers developed exposures to structured products, risky subprime lending, high-risk lending for leveraged buyout and commercial real estate but it did not considered the fact that the loans were not liquid. In addition, Lehman Brothers exceeded their internal risk limits and higher earning pursuit control. These facts are considered as the beginning of the collapse (Rosenberg, 2012, p.244). It is evident that the top level executives and officers of the organization violated their duties and responsibilities by exposing their firm to potential liability by wrong financial statements. Repo 105 was the specialty of the misleading transactions of Lehman Brothers. Through Repo 105 the organization could remove more than billions of liabilities from the balance sheet. The misuse and existence of Repo 105 is huge controversial and it goes beyond the corporate governance. The specific corporate governance structure of Lehman Brothers can be considered as the pre-programmed plan to collapse. Over mighty CEO, inefficient executive team, power struggle between the key players and top lieutenant exposed the risk factors. The board of the directors was filled with inexperience and non-executive individuals. This was a toxic combination. The major individual in the middle was the Chairman and Managing Director, Dick Fuld who could not monitor the issues effectively. Role of Dick Fuld Mr. Dick Fuld joined the organization in the year 1969. He had never worked before for any other organization. He spent more than 40 years in Lehman Brothers. The organization promoted Mr. Fuld from trading to executive floor within quick period of time. He was such kind of individual who likes to take risk for better reward (McDonald and Robinson, 2009, p.22). He was one of the classic personalities in Wall Street. Mr. Fuld’s solo management and leadership style was the major reason behind the collapse of Lehman Brothers. The major target audience of the organization was high net individuals, institutions, federal and state governments. Lehman Brothers generally focused on the equity, research, trading, investment banking, asset management and fixed income products. According to the organizational value and business aim or objective, retail business was never considered as a major target product line of Lehman Brothers. But the organization allowed Mr. Fuld to control and take decision independently (Williams, 2010, p.71). It affected the organization’s business performance. According to Mr. Fuld, the organization should consider retail business firms as one of their major target product segments. The organization decided to enter in this never tapped business market under the leadership of M. Dick Fuld in the year 2005. During this point of time, Mr. Fuld avoided and ignored the warning and advices of government and analysts regarding the volatility of US housing market (LaRocco, 2009, p.148). Moreover, Mr. Dick Fuld was totally aware of the critical risk associated with vast real estate property holdings. During the board meeting in the year 2007, the executives of Lehman Brothers critically evaluated the risk. Moreover, they presented a crystal clear overview of the risk involved in the real estate market. At this point of time inadequate performance of sub-prime loan borrowers became major course of concern (Ferrell, Fraedrich, Ferrell, 2009, p.401). Despite of important advices and critical warnings Mr. Fuld still tended to undertake the risk factors in the decision making process. CFO and Mr. Fuld refused an offer to invest in Lehman Brothers made by a bank of China. It could be effective if the organization would grab the opportunity. However, the managers of Lehman brothers including Mr. Dick Fuld showed arrogance (Chew and Gillan, 2009, p.348). It is surprising that being an intelligent individual and a part of the organization like Lehman Brothers for almost forty years failed to take any proactive or preventive measure to save the organization from these challenging circumstances. It can be argued that Mr. Dick Fuld was totally concerned about his personal rewards and earnings (Kolb, 2012, p.54). Therefore, he did not focus on the warnings of government and several analysts. Several analysts have argued that the bankruptcy issue cannot come from nowhere. Several sales negotiations had taken place with several firms. But this strategy can be referred as too late too little in order to save the organization from such disaster (Tricker and Tricker, 2012, p.156). Through this analysis important aspect of Mr. Dick Fuld’s nature and personality has been revealed. It is recommended to all the financial institutes that the organizations should keep a limit in terms of size and wealth. In terms of CEO of the organization, he should have the maturity and experience to handle the high level of power and stress (Ledwidge, 2012, p.134). From the above analysis it can be stated that Mr. Dick Fuld had played a major role in the growth of Lehman Brothers. Moreover, he was a great business tycoon. But it was the unexpected arrogance, inflexibility and highly short-sightedness that had driven both employees and organization and most significantly a particular part of the global economy into the stupor. Impact on Employees The bankruptcy of Lehman Brothers had a negative impact on the families of its more than 25,000 employees. The managing Director and Chairman, Mr. Dick Fuld ensured high job satisfaction and job security for all the employees of Lehman Brothers. Moreover, he paid huge amount of salary to the employees (Clarke and Chanlat, 2009, p.14). The employees of Lehman Brothers started to face uncertain future due to the inadequate decision making strategies of Mr. Dick Fuld (Tibman, 2009, p.9). During the financial crisis and global recession the employees of the Lehman Brothers found it difficult to search for a new job. Specifically the employees who used to receive the salary as bonus sharing found it difficult to survive under these problematic circumstances. According to the views of the employees’ of Lehman Brothers, Mr. Dick Fuld should sell all the individual assets in order to compensate and pay back the salaries to those employees (Authers, 2012, p.98). The inadequate decision making process about the empire building is the major reason behind the collapse of this fourth largest investment bank (Samson and Daft, 2012, p.147). Despite of economic distress and uncertain financial scenario Mr. Dick Fuld continued to focus on the buying of real estates. It is quite certain that people will not point out the faults involved in the decision making process when an organization is doing well and moving towards the right direction. During the global economic and financial distress situation, the investment bank used to provide loan amount to the subprime market (Davies, 2011, p.2). The organization made most critical decision to provide total independence and responsibility in the decision making process. The organization could monitor and handle all the thought process of Mr. Dick Fuld. It would help Lehman Brothers to save the organization from the collapsing situation. Economic Fallout The bankruptcy of Lehman Brothers was declared on September 15, 2008. It was earth shattering news. The industrial average of Lehman Brothers fell by 500 percent on that specific date. It has affected another leading organization named AIG. The organization slid 60 percent as they had done bidding against the collapse of Lehman Brother (Maynard, 2013, p.89). The bankruptcy of such leading financial institute jerked the global financial market. The declaration of the bankruptcy of Lehman Brother’s created fear among several global financial institutions. Several partners of Lehman Brothers were affected due to the collapse. For example, the Boston Investment bank had a deal sharing arrangement with Lehman Brothers. Due to the collapse Boston investment bank had to pay huge amount of loss to its clients. Due to fear in mind, the leading global financial institutes started to review the organization structure through top-down approach (Oliver, 2010, p.81). Moreover, the organizations are trying to focus on the effective corporate governance practices in order to stabilize the organization’s financial position. Conclusion The bankruptcy and collapse of one of the largest investment bank Lehman Brothers have shocked the global financial market. Still the global financial market can feel the remedy of collapse of this investment bank. The collapse of Lehman Brothers has become one of the hottest topics to debate and it is quite understandable. Several controversies have been raised during the discussion of this topic. The organization was filed for bankruptcy in the year 2008. Several reasons can be stated that are responsible for the collapse of Lehman Brothers. At the time of collapse it was evident that almost 46 billion US dollar had been wiped out dramatically. Lack of transparency, neglecting the significance of effective corporate governance and poor decision making strategy of the Managing Director and Chairman of Lehman Brother, Mr. Dick Fuld drove the fourth largest investment bank towards the collapse (Wright, Siegel and Keasey, 2013, p.159). Tending to invest in the UWS real estate sector was the beginning of disaster. The volatility of this industry can result to huge loss. Despite of federal government’s warning, Mr. Dick Fuld continued to invest in the real estate sector. On the other hand, it was the responsibility of the organization to monitor and control all the decisions of a chairman. In order to fulfil various personal interests, Mr. Fuld adopted several rigid strategies. Ultimately, it was the lack of ability and skill of Mr. Dick Fuld that he could not implement any significant strategy to overcome the issues and save the organization from the distress situation. References Authers, J., 2012. Europe’s Financial Crisis. London: Sage. Chew, D., and Gillan, S., 2009. US Corporate Governance. New York: Springer. Choudhury, M., 2012. The Principles of Banking. New Jersey: John Wiley & Sons. Clarke, t., and Chanalat, J., 2009. European Corporate Governance. Berlin: GRIN Verlag. Davies, A., 2011. The Globalisation of Corporate Governance. London: Gower publishing ltd. Ferrell, O., Fraedrich, J., and Ferrell, L., 2009. Business Ethics: Ethical Decision Making and Cases. Stamford: Cengage Learning. Kolb, R., 2012. Too Much is Not Enough. New York: McGraw-Hill Education. LaRocco, L., 2009. Thriving in the New Economy. New York: Prentice Hall. Ledwidge, J., 2012. Clearing the Bull. New York: Springer. Maynard, J., 2013. Financial Accounting, Reporting and Analysis. Oxford: Oxford University Press. McDonald, L., and Robinson, P., 2009.A Colossal failure of Common Sense. Stamford: Cengage Learning. Oliver, J., 2010. How They Blew it. London: Kogan Page. Rosenbarg, J., 2012. The Concise Encyclopaedia of the Great Recession 2007-2012. London: Scarecrow Press. Samson, D., and Daft, R., 2012. Management. Stamford: Cengage Learning. Solomon, J., 2007. Corporate Governance and Accountability. 3rd Ed. New Jersey: John Wiley & Sons. Tibmen, J., 2009. The Murder of Lehman Brothers. New York: Springer. Tricker, B., and Tricker, R., 2012. Corporate Governance: Principles, Policies and Practices. Oxford: Oxford University Press. Wearing, R.T., 2005. Cases in Corporate Governance. London: Sage Publications. Williams, M., 2010. Uncontrolled Risk: Lessons for Lehman Brothers. New York: McGraw-Hill Education. Wright, M., Siegel, D., and Keasey, K., 2013. The Oxford Handbook of Corporate Governance. Oxford: Oxford University Press. Read More