Reasons Behind Lehman Brothers Bankruptcy

Reasons Behind Lehman Br new(prenominal)wises BankruptcyUndoubtedly, the complexity and unpredictability of the give a styleside surround- commercialize forces/stakeholders influenced the mood and manner Lehmans CEO, Mr Ric strenuous Fuld be necessitated. He involved himself and his organization into un good practices due to so m some(prenominal) expectations on them. The market competition was getting very fierce, so he had to bend the rules in order to keep his organization profit able-bodied. market amaze complacency, weak pecuniary standards, lack of transpargonncy and poor immanent pecuniary control policy led to the demise of Lehman Brothers. Mr Fuld select the omnipotent cerebration of charge hardly told the U.S House of Representatives Committee on Oversight and political relation Reform that the collapse of his family was totally knocked egress(p) of his control-i.e. symbolic approach. This indicated a weak incorrupt culture/development at the preconditional level. His ethical contestation indicated a utilitarian approach which involves decision making carnald on favorable anticipated outcomes.Clearly, the give ear of Lehman Brothers was a pr eventidetable man-make disaster. He enshrined a very poor risk focussing culture in the organization by go highly leve flat solided owe Backed Securities. still if Mr. Fuld felt the economic tides were beyond his control as he proclaims, he should have at least sold the comp some(prenominal) early fair to middling the way Merrill Lynchs CEO smartly did. But his ego as wholesome as poor guidance insight took a better sh atomic number 18 of him.Lehman never meshed in palpable Corporate loving Responsibility, quite what they did was philanthropy with ulterior motives in mind. They never issued a CSR report of all kind depicting lack of transparency and accountability.There is no denying the hard and bitter truth that we are experiencing a global m bingletary receding with many a n ation counting their losses. We are in situation going by dint of possibly the worst global computer address crisis since the peachy impression. Given that the world is flatter and with advancing engineering science, global m hotshottary markets are straightaway integrated thus making an otherwise subject field pecuniary market a global phenomenon. By a easy percolate of a button, billions of dollars grass seamlessly traverse national boundaries at the speed of light.Sadly, this global fiscal meltdown originated in USA due to the widespread subprime owe defaults, economic recession is bear upon all the major players of world economy.By kinsfolk 2008, the credit crunch, which started around 2006, had alarmingly ballooned into argue bridle-paths biggest crisis since the Great Depression as hundreds of billions in owe-related enthronements went sour mighty enthronement banks that once rule high finance unfalteringament crashed.In the midst of this conundrum, ac c apply fingers are been pointed at different quarters some blame the regulatory administration everywhere complacency and blind-faith, while some blame the private and investment banks over greed, poor corporate governance/practises and investment decisions. The worst shoot directly were the insurance companies, investment banks, manipulate Fund operators, Large owe Lenders much(prenominal) as Lehman Brothers, Merrill Lynch, Bear Stearns, Fannie Mae, and Freddie mack etc.The United States governing body activity has been battling to starve off what has surely snowballed into a global economic recession by acquiring national owe giants Fannie Mae, Freddie Mac, AIG as substantially as midwiving Bear Stearns Cos Incs sale to JPMorgan Chase. Bank of America took over Merrill Lynch. opus these bailouts were going-on, a blind eye was off on the struggling 4th gargantuanst investment giant- Lehman Brothers.Consequently, the Lehman brothers filed for unsuccessful person on September 15, 2008 as a precede of the federal official refvictimization to bailout them out or at least backstop their deadly assets.1.1 CASE ISSUESThe case issues discussed areThe Internal and External EnvironmentWe shall pronounce how these purlieus interacted with Lehman Brothers.Managerial EthicsReactions are bound to be elicited as organizations continue to interact with their purlieus. Hence we shall attempt to assess how Lehman Brothers behaved and reacted in conformation with ethical theories and standards.Corporate Social ResponsibilityLehman Brothers Social Responsibilities as easily as their attendant consequences shall be taxd. in bourneit A2.0 THE INTERNAL AND international ENVIRONMENT OF LEHMAN BROTHERS2.1 The External EnvironmentOrganizations do non operate in a vacuum because they derive their ultimate existence from the milieu. Environmental chemical elements whether precise or broad-based, influences an organizations strategy for survival and profitab ility. Lehmans external environment consists of its stakeholders such as Mortgage financiers, Hedge Funds, Pension Funds, Government Regulators, Commercial Banks, Investors, Credit evaluation Agencies, employees, Home Owners, Small and Large companies, etc. See figure beneath for a schematic diagram of Lehmans overall environment. Figure 1 spherical ECONOMICSDEMOGRAPHICS POLITICAL/LEGALTECHNOLOGICAL SOCIOCULTURALSuppliersPressure GroupsLEHMAN BROTHERSCustomersCompetitorsHow changeable and complex is Lehman Brothers environment?Be piteous is the Uncertainty matrix used to evaluate how the external environment bear on Lehman Brothers. Figure 2ENVIRONMENTAL uncertainty MATRIXSource Robbins, Bergman, Coulter, Management 4e, 2006, Pearson Education, AustraliaDue to the type and nature of business, Lehman Brothers waterfall inside the cell block 4 which con nones a dynamic and occasional environment characterised with many components and a high need for association. Hence, Lehman st ands the chance of been influenced by the external environment which may reduce the influence of its managerial decisions and interventions.Lehman Brothers broader environment as it affected their activities, behaviour and outcomes are discussed under the fol first gearing sub-headings using the Political/Legal, Economical, Socio-cultural and Technological changes, PEST analysisPolitical/LegalLehman Brothers which was make some 158 years ago was ab initio involved in assisting galactic corporate trustworthys such as Sears, Roebuck and F.W. Wool expenditure, etc raise capital to expand their businesses. During the 1930s, the Lehman Brothers diversify into strictly Securities business when the U. S government forced all monetary institutions to choose between commercial banking and Securities.Lehmans portfolio deepened following the repeal of the Glass-Steagall Act in 1999, during the Clinton administration. The act prohibited banks from investing on Wall Street, thus shield cons umers from riskier transactions. Once that surety was abolished, Lehman was able to gamble and it became among the largest issuers of Mortgage-Backed Securities making its share wrong to climb from its 1994 price of $5 to $86 in 2007.As a result of Lehmans desperate attempts to compete fiercely with its core rival, Morgan Stanley for market share, it occupied some(prenominal) under-arm tactics that exposed it to several bitter brushes with the law amounting to triple litigations (See appendix 1). This further hurt its corporate image by brew fear, panic, distrust amongst its stakeholders resulting in it been abandoned during its time of need.Lehman would have been pay offd sound as Fannie Mae, Freddie Mac, Bear Stearns and AIG under the current political climate, but in that respect were outstanding issues involved e.g. the federal officialeral Reserve picked out big holes created by the toxic assets in Lehmans balance sheet twin with their refusal to come out clean to the reality. Instead, Treasury and Federal Reserve bosses, Messrs Henry Paulson and Ben Bernanke respectively, preferred to alleviate others because they felt that allowing these (Fannie Mae, Freddie Mac, Bear Stearns and AIG) to fail would have resulted in a cataclysmal cascade of events that volition consume not only in the U. S economy but the Worlds. Moreover, Mr Paulson never believed it was by rights to use taxpayers money to save Lehman. Whether this was a right decision remains to be jiben as the Lehmans failure has inevitably crippled global pecuniary markets worldwide.EconomicThe Macro and Micro-economic environment which Lehman Brothers operated played a vital quality in its demise. Indeed, what basically happened to Lehman was typically a simple economic case of supply outstripping penury.After the terrorist attacks of September 11, 2001, the Fed greatly get downed disport rates in other to stimulate economic growth and prevent deep recession. Expectedly, the large st Wall Street firms began reacting to this Federal Reserve policy of extremely low rates at which money was borrowed by purchasing billions of dollars of subprime mortgage loans. These were well-nigh bidly bought from nonbank mortgage companies, which borrowed money from companies like Lehman in order to make loans and quickly resell them to Wall Street.Bear Stearns and Lehman Brothers almost monopolised this market as other players like Merrill Lynch were late arrivals to the highly leveraged/risky subprime lending and securitizing business. Lehman offered bulk loans to nonbank lenders, in addition purchasing mortgage products and indeed turning them into Asset Backed Securities (ABS), and then selling these bonds to end investors basically make up of the insurance companies, Hedge Funds, Pension Funds, Local Governments and foreign banks.The Securities and Exchange Commission escalated the already downslope economic situation in 2004 by encouraging these investment banks th rough the relaxation of the pre- real limits on leverage. Expectedly, the leverage ratios of the five largest independent investments banks mint the rooftop (Labaton, 2008). Lehmans greedy internal pecuniary policy did not help matters at all, as it offered potentially dangerous leverage ratios as much as 301, asset-to-equity ratio (Table 6, see appendix 2). Given this scenario, any 3% drop in appreciate of assets completely blows out the entire value of equity thus rendering the company bankrupt. Nevertheless, Lehman grew rapidly, playing a plethoric role in the securitisation market and the leveraged lending businesses posting quarter afterwards quarter of record earnings from 2004 to 2007.Even after the economy had recovered, the U.S Fed notoriously kept interest rates low which make mortgage payments even cheaper and affordable thus greatly reducing the likelihood of defaults to barest minimum. Therefore, demand for homes began to escalate, sending prices up. In addition, m illions of homeowners seized the opportunity of rate drops to refinance their existing mortgages. As the industry became saturated (as virtually everybody now owned a home), join with the never-ending competitive rivalry among lenders, the quality of the mortgages went down resulting in the erosion of underwriting standards.For the fear of inflation due to senseless fluidity in the markets, Fed started increasing interest rates which eventually make mortgages already owned, worth less than the amount for which they were initially purchased due to higher payments. This sent widespread panic across all stakeholders which to loss of confidence and trust in financial markets leading(a) to mortgage defaults and subsequent foreclosures. With this ugly scenario playing out, coupled with the Lehmans increasing unfitness of meeting its debt obligations, investors lost confidence in its memory boards resulting to bankruptcy with about $613 billion in debt.Socio-culturalThese are factors such as behaviours, beliefs, values, demographic trends as they affect organization. A majority of Lehmans workforce be great to the extension Y. Generation Y are principally lifestyle oriented, tech-savvy, ambitious, impatient, etc. Because they generally flock to where the money is, Lehmans top prudence continued to do everything in its power to retain its best brains. With the continuous availability of low interest funds, change in consumer taste became the norm. An individual who otherwise wouldnt have been able to afford a house now had access to owning more(prenominal) than one house. This made the public adopt the culture tending towards investment instead than consumerism which affected other real sectors of the economy. This change in consumer taste favoured Lehman initially because of increase in mortgage demands. Soon Lehman had no borrowers for its mortgage products because everybody now had a house and with the increase in interest rates, foreclosures became appar ent because the real weak financial status of its borrowers became obvious.TechnologicalAdvancement in technology played a very double-edged sword role at Lehman Brothers. It brought about drastic reduction in the cost of creating mortgages. The growth of the meshwork coupled with easier availability of information about potential borrowers by the simple click of the mouse button, encouraged it to rely more heavily on convenient sources of information, such as credit scores and ratings, rather than on the more labour intensive time tested methods. It also made searching for a new set of borrowers easier and less costly, mortgage offerings using bulk email sending tools.On the other hand, these transitions created what economists call an self-confidence problem. Since the mortgage originator was no longer going to hold the mortgage to maturity, but rather was going to immediately sell it to a securities firm and collect its fees upfront, it did not have a strong inclination to do ings a thorough appraisal of the loan.2.2 The Internal EnvironmentThe internal environment of any organization basically symbolizes its culture, nature, commonly shared values and beliefs (Robbins S., et al, 2006). Companies will react to same circumstances differently due to the differing cultures that distinguish them. Furthermore, an organizations internal strengths and weaknesses as well as opportunities and threat, SWOT can play a vital role in its success or failure.2.2.1 Lehmans CultureLehmans CEO, Mr Richard Fuld in my idea is viewed as an omnipotent leader because he single-handedly turned the fortunes of the company around when he assumed office in 1994. He ran the organization like a warfront where he enshrined a very strong culture amongst his subjects.His colleagues even nicknamed him Gorilla because of his imposing stature on the firm as nobody not even outsiders dared challenge his ideas, policies and decisions. This behaviour was not unexpected because Lehman has h ad a long history of hostilities, in-fighting and coup de tat inwardly its ranks which had cost it its independence in 1984.Since we already know that the internal environment of an system of rules is all about its culture, behaviour and reaction as to how it sees the external environment. For the cooking stove of this report, we may not dwell so much on the positive culture of Lehman rather we shall take a critical vista at how its culture might have played a role directly or indirectly in its demise using the septenary dimensions of culture.Usually, attention to details is very much of required skill financial institutions must possess. But due to the competitive landscape and greed on the part of precedential management, ethical details were ignored regarding the type of mortgage loans that were issued. Background checks werent performed to determine the credit worthiness of its mortgage borrowersInnovation and attempt allowanceXHigh innovation/High risk tolerance culture as evidenced in their highly leveraged mortgage securities offering which came through several complex financial innovative packagesOutcome tasteX-Outcomes/result-oriented culture that focuses more on results rather than how they were achieved. This attitude made it lose sight on the illiquidity of the market during the impending crisis because of blind greed Short term deed reward culture throughout the firm not minding if these loans would survive in the long term or notStabilityXVery strong/stable culture of lets oblige the status quo which resulted in their inability to adapt to the current financial situations. mess orientationX-Poor and ineffective communication culture from top management to the bottom. Senior execs never took feedbacks from employees in the field seriously While senior management compensated themselves with cash bonuses, other employees were issued bonuses mainly in stock options and bonds. Lack of recognition for outstanding performance especially if it came from a lower employee A culture of lack of transparency among the senior executives. They never communicated the straightforward nature of their liquidity to their employees and other stakeholdersAggressivenessXOverly war-ridden culture in which they tried to bully, manipulate and outsmart the market but got their fingers burnt.Team orientationXNon collaborative competitions which dampened employee morale. The atmosphere was like that of a collegiate, people formed cliques and cartels. There was teamwork, but competition was basically on a personal level because of rewards that may accrue from individual performanceThe above disceptationed cultural adoptions by Lehman went a long way in tarnishing their image before its global stakeholders which made it difficult for it to be rely and rescued when its state of insolvency became apparent. Table 2.02.2.2 SWOT Analysis of Lehman BrothersSWOT expositionStrengths-Lehman has a robust financial base with liquidity in excess of $42 billion as at Aug., 2008 which is capable of withstanding severe financial stresses (Scott S., Tanya A., 2008). It also has a strong franchise across its core investment banking, trading, and investment management businesses. Cutting-edge IT infrastructure is one of Lehmans strengths which it exploited maximally in the acquisition of customers more efficiently (see PEST analysis). Strong wise(p) and skilled workforce Strong culture which is one of team-work, collaboration and knowledge sharing as evidenced by the rotation of workers around departments at least every two yearsWeaknesses-Poor managerial decisions which led to the inability or otherwise outright refusal to see the financial dangers coming. -Poor risk management and internal controls which led to its finances being exposed to risk of been wiped out within days. Strong culture which resulted in sluggish adaptability to the changing financial situations within and without the organization.Opportunities-The U.S Federal Treasury kept interest rates low for prolonged periods which made mortgage acquisition/repayments even cheaper and affordable which change magnitude the patronage that accrued to investment banks, Lehman Brothers inclusive. Securities and Exchange Commission relaxed limits of financial leverage which gifted Lehman with the opportunity to offer more highly leveraged mortgage back securities to its investors. But these seeming good opportunities turned out to be a curse in disguise.Threats Stiff competition coming from Morgan Stanley, Goldman Sachs, and Merrill Lynch in the hunt for new mortgage clients leading to the drastic reduction in the quality of mortgage instruments issued. More and more leverage was issued in other to remain competitive and remain profitable. The worst threat came from the Federal government backed Fannie Mae and Freddie Mac which had exclusive access to government subsidy (very low interest rate loans) making them issue the lowest rate mortgages on that p ointby dominating the mortgage market. This then forced other players to issue even lower rates in order to stay in business. -Short selling of its stocks by brokers on the floor of the exchange which made the value fall freely thereby escalating investor anxiety resulting in loss of confidence. Negative market sentiments concerning its likely collapse due the earlier collapse of Bear Stearns, bailouts of Freddie Mac and Fannie Mae.Summary of the SWOT AnalysisNo doubt, Lehman is an indeed very large bank. With its robust financial war chest, experienced/diverse workforce and with-it IT/IS at its disposal, it still went under. Lehman failed to utilize its strengths/opportunities to strategic advantage. Stiff competition, financial regulation laxity as well as poor management made it issue highly leveraged risky Mortgage Backed Securities, MBS which eventually wiped out its liquidity due to massive defaults in mortgage repayments which came as a result of increased interest rates to checkmate rising inflation.PART B3.0 MANAGERIAL ETHICSThese are laid down standards of conducts or moral judgements used in the discharge of business. More importantly, it refers to the rules and principles that define right and wrong conduct. It is the ultimate duty of the manager to effectively communicate and devour ethical issues within an organization.Lehman Brothers adopted the utilitarian view of ethics, in which decisions were made based on outcomes and/or consequences. They concerned themselves with making enough dinero to satisfy the greedy yearnings of the top few at the top pecking order of management not minding if their activities were detrimental to the welfare of others. This was clearly seen in the way mind boggling bonuses was dished out to the CEO, Mr. Fuld and other top management executives. harmonize to Mr. Fulds report to the Federal Committee on Oversight and Government Reform, over $30 million was paid to him as bonuses. He also claimed that during the f at years, 2004-2007, an astonishing $16 billion was disbursed as bonuses out of which he completely grossed over $260 million.Below is a table showing a list of variables as they affect Lehmans ability to behave the way it did.Table 3.03.1 Factors affecting Lehmans ethical behaviourFactors affecting Managerial EthicsCommentsState of moral development (managers)Since the ethical behaviour of managers is the single most vital factor that influences employee decisions (Robbins S., et al, 2006), we shall focus on the state of moral development of Lehmans CEO, Mr Fuld R. He operated at the preconventional level since his actions (selling highly leveraged Mortgage Backed Securities at all cost) were tremendously inclined to the rewards and bonuses he and his cronies would get.Personality/ set (ego strength/locus of control)Values which represent personal convictions of what is right and wrong (Robbins S., et al, 2006) go a long way in influencing ethical behaviour. Mr Fuld has a very st rong personality (ego strength) of all time believing that whatever he does is the right thing. Even at the collapse of Lehman, he never accepted responsibility for his actions and/or inactions. When he was snappyed about what financial crisis they were in, by an insider, he waved it off. He also believes he has the ultimate power to control twain his destiny as well as that of others (internal locus of control)Organizational Culture/Design-For the fact that Mr. Fuld took Lehman from rag to riches, he was seen as a demigod who was above the law. Hence, he was not subject to the organizations code of ethics and conduct. The organizational design/structure adopted a Top-Bottom management style of leadership. It enshrined a strong master-subordinate relationship which muffle information and knowledge sharing as no employee dare alert top management on their wrongly adopted strategies Lehmans culture is such that encouraged risk taking and constant innovation which later prove to be its undoing. The emphasis on individual achievement above assort/team achievement encouraged employees as well as management to go extra lengths even if its unethical to perform e.g. the more mortgage clients you get, the more your bonus and recognition which was further boosted by its culture of curtly-run performance appraisals.Issue Intensity Greatness of harm Lehman brothers never believed their actions (highly leveraged MBS) would have deleterious effects on its overall stakeholders after all, it believed its investors had being hedged against dangers through the Credit Default Swaps, CDS being issued by American indemnification Group, AIG-Consensus of wrong Nobody dared oppose Mr. Fulds decisions, the very few that did were summarily sacked. So there was no basis for consensus of wrong here.-Probability of harm Lehman believed the probability of foreclosures was borderline because of the seemingly prolonged low interests rates which created a lot of liquidity in the eco nomyImmediacy of consequences Mr. Fuld in his opinion believed that even if theres an eventuality of foreclosures, economic downturn and/or write downs, it would be for a short while because historically crises does occur every few years and the markets would always heal itself-Proximity to victims Lehman pushed its mortgage customers far off using its distanced subsidiary, Aurora lend Services as the issuer of its mortgages. This, it used to distance itself from its customers. By so doing, most people never knew the subprime mortgages were being offered by Lehman in order to economize a clean public image and avoid responsibility for any untoward adverse effects of its unethical actions-Concentration of effect Lehman ignored how concentrated the effect of foreclosures that would arise from its subprime mortgage sales would have on the national as well as global economy. They failed to see the broader picture of a likely global economic downturn. That necessitated their contin uous unethical/risky financial actions.ConclusionMr. Fuld of Lehman Brothers acted unethically in most of his decisionsFrom the complex interplay of several factors that affected Lehmans unethical behaviour in the table above, we shall take a scalelike look at some of the ethical issues faced at Lehman Brothers beneath with a view to comparing opposing views on their conducts.Table 4.0 argue arguments concerning Lehmans managerial ethical decisions.Ethical issuesArguments forArguments againstSale of risky/highly leveraged Mortgage Backed SecuritiesSmall percentage appreciation in value can translate to explosive profits for its balance sheet and investors alike humble decrease in value potentially wipes out the entire credit of the company rendering it insolvent. It is unethical to use investors hard earned monies to peril into greedy and risky ventures under whatsoever guise.Constant financial products reengineering and innovationThis creates potential attraction for new custom ers as well as retaining the existing onesCauses confusion as to the understanding of the potential risks these products- offers portends.Unscrupulous bulking or roll up of mortgagesThis otherwise smart strategy helps to dilute the toxic effect of under-performing mortgage securities by lumping them with the good ones thereby creating a positive appearance leading to AAA ratings by rating agenciesThis strategy deceived many investors by underplaying the tangible value and safety of their stock holdings leading them to be taking by surprise when their stocks became worthlessGenerating mortgage demands packaging them, and then reselling them back to Wall Street and the investing public for large profits when in reality, there werent real buyers for themThis was a way to create profits out of vigorThis is an unethical attempt to manipulate the natural forces of demand and supply. Hiding easy their phony subsidiary, Aurora Loan Services to propagate falsehood contributed to the hou sing market bubble burst when it became evident there was no more demand for these mortgagesUnderwriting loans to questionable lenders e.g. FAMCO, Delta Funding Corp., etc and assisting them in cheating borrowers thereby violating consumer protection laws (Graham R., 2008, see bibliography)NAThis led to widespread erosion of global investor and public confidence in the company which further contributed in its bankruptcy.Mr Fulds non-equity incentives were astronomical colossal the 85th percentile. Furthermore, his bonuses grossly exceeded the normal industry average of bonus= base salary x Two. Mr. Fulds bonuses were five times his base salary (Nell M., 2008, see bibliography)NAThis compensation practice doesnt align in favour of shareholder interestsPART C4.0 CORPORATE SOCIAL RESPONSIBILTYThis is a broad term which is used to describe an organizations business activities as it affects the well-being of its stakeholders- customers, investors, employees, communities and the environ ment within which it operates. It is the justifiable ethical standard for which all of an organizations operational activities are metric (Davidson, P. Griffin, R, 2005). Achieving financial success in a manner that honours ethical values and respect people, communities, and the local environment is what defines CSR.An effective CSR program is one that is not mainly based on philanthropy or state of grace but rather on creating productive relationships with stakeholders who represent mingled social, financial and environmental concerns.Lehman Brothers adopted the hand of management approach to CSR in which it powerfully believes in the advancement of its corporate economic interests as well as the protection and enhancement of the quality of life of its stakeholders. The conscience and practise of an organizations management is often a subject of frequent debate globally. Is it compulsory that an organisation must protect and improve the welfare of its specific and remote stakeh olders? Well, the scope of this report is not to argue in favour of or against this dubiousness but to analyse where Lehman got it wrong as regards to CSR.Lehman engaged in several philanthropic (socially responsive) activities all over the world where they had their businesses. Lehmans CSR spanned through the economic and effectual levels terminating at the ethical level. Lehman used its philanthropy to avoid legal actions both from the government and its stakeholders while making sure its activities stayed within the ambit of the law. It engaged in philanthropy (in a socially responsive way) in my opinion because it did what it did just to create more global awareness (Public Relations for financial gains) (economic CSR) as well as to fulfil the general expectations society members place on corporations (ethical CSR). See Bibliography (URL link) for comprehensive details of their charity works.Corporate Social Responsibility goes beyond just philanthropy. CSR means accountabilit y towards a firms various stakeholders e.g. shareholders, employees, customers, local and international communities, etc. Unfortunately, Lehman and Bear Stearns produced no CSR report of any s