Lehman Brothers Essay Example

Lehman Brothers

Lehman Brothers

Introduction

The Global Financial crisis that occurred between 2007 and 2008 is considered by many scholars as the biggest crisis since the financial depression that was experienced in the 1930s. The crisis started off in the US where many reputable financial institutions collapsed thus affecting many households in many states. According to Roubini (2010) many analysts have attributed the origin of the crisis on the housing market. According to available literature, during this period the prices of houses hit low bottom and the consequence was the many house closures that were experienced across America. One of the most reputable firms that was affected by this crises is the Lehman Brothers. Many did not see this coming because it was considered as one of those biggest firms that were financially stable and resolutely grounded in business. Hence, just like other credit lending institution they engaged in giving mortgage loans at low interest rates even to people who could afford to repay. The housing market was expanding so fast and the returns were lucrative and so Lehman’s Brother’s was no exception in this wave. According to Chiang and Zheng (2010) the collapse of the Lehman’s Brothers has been attributed to many factors including poor decision making at the management level, poor risk management, bad lack, a focus on personal gain by the top management as well as exposure to subprime market (Diamond & Rajan, 2009). The devastating impact of the collapse of the Lehman’s brothers was not just felt across America but in the world as a whole.

Corporate governance and management culture

According to Graafland (2011), in an interview with the queen about the global financial crisis she reiterated that if the cris was so huge how come there was no prior warning prior to the unfolding of the events. This then brings back to the question of the role of corporate and management cultures to the escalation of the crisis and the resultant collapse of the Lehman’s brothers. The top management at the Lehman’s bothers has been blamed on the account that it was blinded by personal benefit and thus kept making bad decisions. The executive management resorted to offering high risk mortgages so that they could generate big profits in a short time. According to available records even when the company was aware that it was facing financial crisis the management kept it out the knowledge of the public so that they don’t lose their reputation. During all this time they resorted to some unscrupulous ways to survive including the altering of financial sheets by the management. The management was responsible for allowing lending to individuals they well knew that weren’t interested in mortgages or had no ability to repay. Additionally, Dowd (2009) reiterates that the managers were allowed to take huge bonuses on behalf of other, and it’s a culmination of this management culture that escalated the collapse of this bug firm. In fact the employees pay checks were pegged on the amount of revenue generated without keeping in mind the risks involved. He further argues that the management also allowed for the accumulation of high level risks in which the key stakeholders had to foot in case of defaults.

Role of Credit Rating Agencies

According to SIFMA (2008), Credit rating agencies are those institutions that are mandated to appraise big debtors and their financial instruments. Top on their agenda is to determine the credit worthiness of an individual or institutions as afar as debt payment is concerned. Interestingly the Lehman’s Brothers continued to get good ratings even after the crisis had begun. According to Diamond and Rajan (2009), Fitch Ratings company went ahead to report that the risk profile of Lehman’s Brothers was in good shape while other companies that were in the same league had already been bought up. This to some extent confirms the reports that the company’s management were using illegal means to remain on the top of things. The fact that the board of management was only for a few selected and isolated individual made it easier for them to collude with the credit rating firms so that they could be given a good appraisal (Chiang and Zheng, 2010). In a 2007 credit rating report on Lehman’s Brothers, Fitcher which has been described by scholars as on the street reported that the company had improved from a rate of A+ to AA-. The reasons provided for this exemplary findings were that the firm had diverse sources of revenue, stable capital levels, a stable management and reduced reliance on short term funding (Dowd, 2009).Therefore institutional investors as well as banks relied on this credit rating report to sell even the most complex and opaque debt instrument on behalf of Lehman’s Brothers.This especially because largely the non-traditional debt offers underwent rapid growth over a short period of time which resulted in huge profits for Lehman’s Brothers. It is this growth that actually led to the collapse of financial markets across America and the world as a whole. Investors were blinded by the belief that the housing market will continually grow and the lending institutions will not incur any risks. This therefore led to many lending institutions such as Lehman’s brothers relaxing their lending rules and regulation thus exposing themselves to huge risks when the markets collapsed.

Bibliography

Chiang, T.C., Zheng, D., 2010, An empirical analysis of herd behaviour in global stock markets. J. Bank. Finance 34, 1911–1921.

Diamond, D.W., Rajan, R., 2009. The credit crisis: Conjectures about causes and remedies. National Bureau of Economic Research.

Dowd, K., 2009. Moral Hazard and the Financial Crisis. CATO J. 29, 141–166.

Graafland, V. V., 2011, Johan J. Graafland, Bert W. van de Ven, The Credit Crisis and the Moral Responsibility of Professionals in Finance, European Banking Center Discussion Paper no 2011-012,

Roubini, N, & Mihm S., 2010, Crisis Economics, Penguin, 353 pp. New York.

Securities Industry and Financial Markets Association (SIFMA). 2008, Recommendations of the Credit Rating Agency Task Force. Retrieved June 29, 2017 from http://www.sifma.org/capital_markets/docs/SIFMA-CRA-Recommendations.pdf.