Collapse of Lehman Brothers Bank Analysis - Case Study Example

The Collapse of Lehman Brother’s Bank – 2008 Table of Contents Introduction 3 The Real Losers 3 The Real Culprit 5 Conclusion 8 References 9 Introduction Lehman Brothers Holdings Inc. was a worldwide financial services firms (Razaee, 2011, p.508). In the year 2008, before declaring bankruptcy, Lehman Brothers was one of leading and largest investment bank of US (Hamilton, 2009, p.64). On September 15, 2008 this leading investment bank filed for bankruptcy protection due to the huge exodus of major of its clients, devaluation of assets and drastic losses in the stock by the credit rating agencies. This bankruptcy filing is the largest bankruptcy filing in the history of US. The post bankruptcy period, the UK firm Barclays had announced the agreement to buy, subject to the approval of regulatory along with Lehman Brother’s New York Headquarter building (Watts, 2010, p.174). However, there are several controversies behind the reason for the collapse of Lehman Brothers. Somebody says the global financial crisis of late 2000 is the key reason behind this. Somebody have shared that the collapse was due to the performance and style of the managing director and chairman, Dick Fuld. The study will critically assess the role of Dick Fuld behind the collapse of Lehman Brothers. The Real Losers 25,000 employees of this firm and their families are the actual losers of the bankruptcy of Lehman Brothers. Mr. Dick Fold, the managing director and the chairman of Lehman Brothers have paid major of those employees a huge salary amount and ensured job security and job satisfaction for all the employees (Plunkett, 2007, p.221). Though after doing all these beneficial things, major of the employees think that Mr. Dick Fuld is the only person who can be blamed for this bankruptcy (Williams, 2010, p.71). The employees had started to face vague and uncertain future. Moreover, it created huge difficulty to those employees who used to get the salary as shared base bonus. Therefore, during global recession and financial crisis time period it was not easy for the employees to find a job in the uncertain and unstable financial market. Therefore it can be state that these employees are the real losers and are most affected by the collapse of Lehman Brothers (Conard, 2013, p.138). As the objective of the study is to assess the role of Dick Flud behind the collapse of Lehman Brothers, therefore several evidence and facts have been gathered in order to achieve the objective of the study. Several questions have been raised by the employees of Lehman Brothers during the collapse of the firm. If the chairman used to get 22 million US dollar in every year then they talked about the existence of that money. According to the employees’, the chairman should sell all the assets and everything in order to pay back and compensate those employees. Moreover, the employees have opposed his stay in the multi million US dollar houses. According to people, he needs to be feathered and tarred of everything he has. Mr. Dick Fuld’s arrogance and the unfavoured attitude towards his decision about the empire building have affected the firm (Chapman, 2010, p.201). He had continued to buy real estate despite of the uncertain financial market and economic distress. The arrogance and the attitude of Mr. Dick Fuld was the base of systematic risk that was facing by the financial system of Lehman Brothers. Moreover, it was the fault of the top management that thay had given total independence and responsibility to the CEO; Mr. Dick Fuld. Several wrong and inadequate decisions were the key reasons for the collapse of Lehman Brothers (Wessel, 2009, p.39). It was quite understandable that, people did not complain when all the things were going towards Wright direction. Lehman Brothers at that point of time used to provide loans to the subprime market. It should be known that providing these types of borrower’s mortgage was an inadequate idea. However, it is the people who are to blame if their newly developed homes get repossessed like the CEO of Lehman Brothers Dick Fuld is responsible for the collapse of the firm. It can be state that, Mr. Dick Fuld was the face of one of the leading investment bank Lehman Brothers and had able to develop the business very successfully. As the chief executive officer, every decision needs to pass through him. Therefore, it was all about inadequate leadership style and decision making process that had affected the firm. The Real Culprit Mr. Richard Fuld joined the Bank in 1969. Mr. Fuld never worked for any other firm. Mr. Fuld spent over forty years of his careers in the company. As a matter of fact Mr. Fuld rose from the trading floor to the executive floor. Mr. Fuld was known to be a one of those classic Wall Street personalities who liked taking major risks to reap large rewards. As a matter of fact the expected the same from the staffs also. He was quite famous for his motto ‘never surrender’. Despite of the fierce reputation Fuld was widely respected in and admired as a Wall Street CEO. But it is needless t say that his time spent on the 31st floor and solo management style had played a major role in the demise of the bank (Cowan, 2005, p. 131). The main target customer of Lehman was the local state and federal governments, institutions and high net individuals. The company was mainly focused upon the fixed income products, equity, trading, research, asset management and investment banking. Retail was never considered to be a major product line. But Mr. Fuld felt that the company should seriously think about considering retail as one of the major segments (Bhattacharya, 2009, p. 331). Such thought process mainly stimulated by the fact that the company is losing out on the huge earnings enjoyed by other firms. Hence, under the leadership of Mr. Fuld the company decided to enter the market in 2005. Mr. Fuld by this time had totally ignored the warning of the analysts and the governments regarding the fact that the US housing market had become extremely volatile and the mortgage brokers were handing over loans to individuals who can never pay the money. This was the first step towards disaster (Henry, 2008, p. 201). Documents released on 12th May 2012, actually proved that Mr. Fuld was totally aware of the high risk involved in holding on to vast real estate properties. During the board meeting held in the month of September of 2007, the executives had presented a very crystal clear picture of the risks involved. As a matter of fact the first tremors were felt in the year 2006 when the poor performance of loan of the sub-prime borrowers started to become a course of concern. According to the book of McDonald’s on Lehman brothers, Fuld continued to get hold of real estate and derivatives backed by mortgages (Dey, 2011, p. 93). Despite of the warnings by the analysts Fuld still kept piling up the risks. According to the documents revealed in 2012 instead of looking for the much required capital, Fuld and the CFO Goldfarb assumed that Lehman was more of a fortress that cannot be penetrated. The documents also revealed that there was an offer made by a Chinese bank to invest in Lehman. However, instead of grabbing the opportunity both the manager showed arrogance (Biswas, 2011, p. 173). According to the Huffington post Fuld called the bank a not started while Goldfarb went on call the bank stupid; although both them agreed that the Lehman could take all the help it needs. And yet Lehman of Mr. Fuld to be more specific said that Bros always win and let the offer go by (Chakraborty, 2003, p. 159). It is quite mind baffling that how can a man with so much of business intelligence who has worked for Lehman for almost forty years did not take any preventive or protective measures to save the company. This gets even more baffling when some gets to know that Fuld know the award of the best CEO in the broker and asset management category. On the contrary he decided to invest in to real estate despite of several warnings by the analysts and executives. It almost seemed as if Mr. Fuld was so very concerned about the personal earnings that he got himself wrapped in a cocoon and ignored all the warning bells (Dey, 2009, p. 351). In the March of 2008, a lot of people warned Mr. Fuld and the company of potential dangers that may be devastating for the company. Mr. Erin Callan was the chief financial officer at that time. If analysts are to be believed Lehman brother was in a situation where the preventive measures could be taken quite smoothly (Burgemeister, p. 291). Analysts believe that bankruptcy did not come up from nowhere. There were sales negotiations with various firms such as Blackstone a private equity group and Blackrock a fund manager. But it was little too late too little to save the company from disaster. Name of a number of interested buyers came up but, Mr. Fuld as unwilling to sell the firm at the price offered. By the Mr. Fuld understood the seriousness of the situation the firm had reached the point of no return (Ramirez, 2009, p. 167). From the above analysis one important aspect of human personality and nature has been revealed. It is the fact each and all financial institutions should have a maximum limit when it comes to wealth and size. Also the assumption that a CEO will have the maturity to handle the increasing amount stress ad power would be so very wrong. Based on the above analysis it can conclude that Mr. Fuld was indeed a man of great business acumen. He reached new heights in his professional career and took Lehman Bros to new heights also. But it was arrogance, stubbornness and extreme short—sightedness that pushed Lehman Bros and the employees and the whole global economy into oblivion (Brownwell, p. 235). Conclusion Lehman Brother’s Bankruptcy and collapse shake the global financial market for several months (Cohan, 2011, p.113). The debate about this topic is quite understandable as the firm was one of the leading players in the global market. Several controversies used to arise while talking or discussing about the topic. In the year 2008, Lehman Brothers was filed for bankruptcy. More than 46 billion US dollar of the market value had drastically wiped out (Willis, 2010, p.22). Mr. Dick Fuld, the managing director and the chairman of Lehman Brothers have paid major of those employees a huge salary amount and ensured job security and job satisfaction for all the employees. Though after doing all these beneficial things, major of the employees think that Mr. Dick Fuld is the only person who can be blamed for this bankruptcy. Mr. Dick Fuld was the face of one of the leading investment bank Lehman Brothers and had able to develop the business very successfully. Several poor decisions, unfavourable attitude and unjustified use of power are the key reasons for the collapse of Lehman Brothers. References Bhattacharya, S.2009. Macro Economic Theory. Kolkata: Matrix Educare Pvt. Ltd. Biswas. P. 2011. Project Management. Kolkata: Matrix Educare. Brownwell, C. 2009. Subprime Meltdown: From US. Liquidity Crisis to Global Recession. New York: Solving Difficult Sudoku. Burgemeister, S. 2003. Market analysis. London: GRIN Verlag. Chakraborty, K. 2009. Financial Management. Kolkata: Matrix Educare. Chapman, P., 2010. The Latest of the Imperious Rich: Lehman Brothers, 1844-2008. New York: Penguin Group. Cohan, W., 2011. Money and Power. London: Penguin. Conard, E., 2013. Inintended Consequences. New York: Penguin Group. Cowan, A. 2005. Risk Analysis And Evaluation. London: Global Professional Publishing. Dey, B. 2009. Business Economics. Kolkata: Matrix Educare. Dey, B. 2011. Strategic Management. Kolkata: Matrix Educare. Hamilton, R., 2009. The Road to America’s Economic Meltdown. Indiana: AuthorHouse. Henry, A. 2008. Understanding Strategic Management. Oxford: Oxford University Press. Plunkett, J., 2007. The Almanac of American Employers. New York: Plunkett Research Ltd. Ramirez, S. 2009. Lawless Capitalism: The Subprime Crisis and the Case for an Economic Rule of Law.New York: NYU Press. Razaee, Z., 2011. Financial Services Firms. New Jersey: John Wiley & Sons. Watts, D., 2010. Dictionary of American Government and Politics. Edinburgh: Edinburgh University Press. Wessel, D., 2009. In Fed We Trust. Philadelphia: Scribe Publication. Williams, M., 2010. Uncontrolled Risk. New York: McGraw Hill Professional. Willis, N., 2010. Death of the American Investor. New York: Net Worth Publications. Read More