Documente Academic
Documente Profesional
Documente Cultură
MANAGERIAL
COMMUNICATION
LEHMAN BROTHERS
(International Management Institute, New Delhi)
Asfar 16PGDM014
Rachita 16PGDM044
Sumanth 16PGDM054
ACKNOWLEDGEMENT
professor for the continuous patronage through her lectures and interactive sessions that have
been really helpful in the entire process. We are thankful to her for giving us this opportunity
to further learn the various concepts taught in the class with the help of this project.
This project is the outcome of the untiring and determined efforts of all those who guided and
directed us during the making of this project, and made it a worthwhile experience.
LEHMAN BROTHERS 3
ABSTRACT
The purpose of this report is to understand how lack of proper communication, both internal
This report tries to explain it by giving an example of the fall of Lehman Brothers which used
to be one the most prominent firms. We have shown the various reasons leading to its demise
and the scenario prevailing after its downfall. We have concluded showing how lack of
proper communication was one of the main reasons for this and how the collapse could have
Contents
INTRODUCTION ..................................................................................................................... 5
CONTROVERSIES ................................................................................................................. 11
CONCLUSION ........................................................................................................................ 13
REFERENCES ........................................................................................................................ 15
LEHMAN BROTHERS 5
INTRODUCTION
Growing economies are often challenged by declination in the number of safe choices. One
such company, which is still considered the biggest downfall in the history is Lehman
Brothers, an investment banking firm founded in 1850. The firm’s operations included
investment banking and management, fixed income, sales, equity, research & trading, private
banking and private equity. Lehman Brothers was the fourth largest investment bank in US
after Goldman Sachs, Morgan Stanley and Merrill Lynch with 25,000 employees worldwide
Lehman Brothers survived everything, the long term capital management collapse, The Great
Depression in the 1930s, two world wars and the Russian debt default of 1998 but the 158-
year-old firm could not recover from a $619 billion debt and filed for bankruptcy on 15th
September 2008. The collapse of Lehman Brothers was not the result of a single lapse in
ethical judgment committed by one misguided employee. It would have been nearly
impossible for an isolated incident to bring the Wall Street giant to its knees, especially after
The impact on the financial sector was so huge that the financial calendar got divided into pre
Lehman and post Lehman: Pre Lehman, being the period with a sense of impending doom.
Before Lehman’s collapse this doom seemed like a distant reality. Post Lehman period saw
panic all across the globe. The stock market crumbled alongside Lehman’s bankruptcy. The
financial system was completely disrupted and the magnitude of the impact was not only
because of the size of Lehman, but also because of the fact that Lehman being the leading
Investment bank, with vastly spread contacts and contracts around the world, was embedded
The impact of the downfall was so huge that George Bush (The President at that time)
decided to intervene and proposed a $700 billion bailout. Soon after this announcement,
another $500 billion lawsuit followed. The company crumpled to nothing and that marked as
In 2003 and 04, during housing boom in US, Lehman acquired five mortgage lenders and
came under supervision from Consolidated Supervised Entity Programme by Securities and
Exchange Commission as it had started to follow Bear Stearns’s strategy and had too much
exposure to derivatives.
The downfall of Lehman Brothers all began when the firm headed by Richard Fuld adopted
an aggressive growth strategy in 2005. Because Lehman Brothers was heavily dependent on
fixed income securitization revenues, it invested its capital in assets like sub-prime and Alt-A
residential mortgages and mortgage-backed securities, commercial real estate and leveraged
After acquisition of five mortgage lenders, Lehman Brother’s real estate business experienced
56% surge from 2004 to 2006. Due to this the firm recorded a speedier rate of growth than
other businesses in the same line. In 2007, the firm reported net income of $4.2 billion on
revenues of $19.3 billion. During the same year, the stock of Lehman Brothers reached an all-
When the housing market began stumbling in 2007, a high number of mortgages based
defaults led to stock market experiencing the biggest single-day plunge in five years.
Lehman’s Chief financial officer (CFO) communicated to shareholders and media that risks
posed by rising home loan defaults were well contained and would have little impact on
firm’s balance sheet. He also said that he did not see any problems in subprime market.
LEHMAN BROTHERS 8
In few months, Bear Stearns, Lehman’s most comparable rival experienced total market
failure of two hedge funds. After Bear Stearns shut down, Lehman Brothers eliminated 2500
mortgage-related jobs and shut down its two of mortgage units. Regardless of deteriorating
market conditions, Lehman Brothers continued giving more mortgage-backed securities than
any other firm and endorsing its financial strengths while bad-mouthing that domestic and
As it turned out, Lehman brothers missed the last chance of acknowledging and
communicating the misstep of continuing its massive risky mortgage portfolio. They could
have trimmed the portfolio and rethought the business strategy. They didn’t do it to show the
investors and Wall Street that no foreseeable concerns existed. Executives took internal action
to preserve the rosy façade and the employees who tried to right the wrongs of the poor
Repo transaction is a transaction where one company transfers an asset to another company in
exchange for short term cash which in exchange comes with place when borrower will pay
back the cash and take back the asset at specified date usually within a week or so and in that
time the Wall Street will see the amount of assets. It helped Lehman hide off their debt by
showing off their money which allowed them to take more risk and in the process more
money by perpetuating the fraud. Richard Fuld CEO of Lehman paid himself with such
schemes 500million $ over 15 years. Instead of describing the repo transaction as loan they
described it as sale never disclosing they ever have to pay back the 50 billion $ they have
borrowed.
Lehman‘s failure to disclose the use of an accounting device to significantly and temporarily
lower leverage was significant. At the same time, it affirmatively represented those low
Lehman widely inflated the value of their company in the days before and after they issued
Richard Fuld and former Lehman’s CFO Christopher O’Meara, Erin M.Callan, IanT.Lowitt
were made aware that the fraud was happening and yet nothing was done by them.
LEHMAN BROTHERS 10
In May 2008, a Lehman Senior VP, Matthew Lee, wrote a letter to management alleging
accounting improprieties that Lehman used $50 Billion of Repo 105 transactions to
temporarily move assets of the Balance sheet at quarter end. In fact each of the CFOs and
CEOs are required by law to sign off the quarterly and annual reports showing the
transactions as sales and not as loan. Fuld, when interviewed for the report, denied it.
Ernst and Young knew about it and did nothing. Ernst &Young took no steps to question or
challenge the non-disclosure by Lehman of its use of temporary off balance sheet
transactions.
Lehman’s leverage ratio was of around 1:44 while that of Goldman Sachs and Bank of
America Was in 20s which led to higher risk for the company as compared to the competitors.
26000 employees lost their job and investors lost all their money post the collapse of Lehman
brothers. There was a scenario of asymmetric information and moral hazard wherein the
investors and stakeholders were not given the complete information of what was actually
happening within the company. Lehman never told about its use of Repo 105 to the regulators
or investors.
Teams from SEC and Federal Reserve took residence within the company to know what is
actually going on. Sec already knew that fraudulent activities were going on within the firm
also. Matthew Lee who was questioning the firm’s authenticity was side lined. But this
information was not shared with the investors and they continued to put billions of dollars
CONTROVERSIES
There were many controversies surrounding the bankruptcy of Lehman Brothers. The major
talking point after the economy toppling bankruptcy of a major firm was the fact that the top
executives of the firm now staring at bankruptcy have started taking up huge bonus packages.
The documents from Lehman Brother’s showed that all the top 50 executives at Lehman
Brothers earned more than $8.1 million that year and the CEO Richard Fuld earned around
Following these reports, the U.S. House of Representatives’ Committee on Oversight and
Government Reform arranged for a questioning of the head of Lehman Brothers, Richard
Fuld. The Committee headed by Rep. Henry Waxman questioned on the fairness of Fuld
owning assets worth $480 million while his firm was facing bankruptcy and leading the
economy of the entire nation into turmoil. The other major controversy was that the executive
pay figures had increased just before the firm applied for bankruptcy. Waxman remarked that
After the hearing was done, Waxman said "While Mr Fuld and other Lehman executives were
getting rich, they were steering Lehman Brothers and our economy toward a precipice" and
Waxman criticized Fuld’s approach of trying to socialise the losses incurred by his firm while
Later in December 2010, charges were filed against auditors of Lehman Brothers, Ernst &
Young accusing Ernst & Young in aiding Lehman Brothers in an accounting fraud by use of
Repo 105 transaction to improve the financial situation of the firm during the year-end
balance sheet. Ernst & Young, the only third party privy to the happenings at Lehman
Brothers, failed to reveal the extensive steps taken by executive leadership to conceal
financial problems. As a firm of certified public accountants expected to honor and uphold an
industry-wide code of ethics, Ernst & Young may be accused of being responsible for gross
As an accounting firm, Ernst & Young is charged with certifying that companies deliver
accurate and reliable information to shareholders. In this regard, Ernst & Young failed
which it was occurring. In this situation, concern for ethical behavior was of minimal or
nonexistent concern. Therefore, the company’s shareholders were deliberately deceived for
the purpose of preserving a paycheck, and in that regard, the team of accountants who chose
not to act disappointed more than just their company; they let down the entire industry and
CONCLUSION
The failure of Lehman brothers was not only because of losses in its derivative portfolio and
lack of liquidity but also because of bad management choices and policy decisions. Its demise
was the cumulative effect of a number of missteps perpetrated by several individuals and
parties.
Fuld was obstinate and when the time came to recognize his error, he did not assume
his bank’s short-term financial health and its heavy involvement in risky loans, and he
concerns existed.
Additionally, while the immediate effects of admitting a shaky outlook would have been
negative, two repercussions must have been considered. First, large capital investors would
have been appreciative of the transparency, and after getting past the initial shock, they would
have taken action to get the bank back on track. Second, had the general public — including
the federal government — been aware of the situation and the actionable measures being
taken to rectify it, more intellectual and financial aid would have been available to minimize
This was not the case, however, and by choosing to paint an unrealistically optimistic picture
of Lehman Brothers’ financial situation, Fuld forfeited the opportunity to take advantage of
various solutions that would have cut the company’s losses. Had he acted more prudently,
The story of Lehman Brothers’ demise is unfortunate, and not just because its collapse meant
the end of a Wall Street institution. The real tragedy lies in the lack of ethical behavior of its
executives and professional advisors. They made conscious decisions to deceive and
manipulate, and the consequences proved too dire to preserve the historic investment bank’s
existence. The perennial lesson of the Lehman Brothers case is that no matter how dire the
circumstances may appear, transparency and accountability are paramount. Right action up
front may sting initially, but as history has repeatedly shown, gross unethical business
practices rarely endure in the long term. A global financial crisis such as that of 2008 may not
be prevented from happening again. What can be improved, in large measure through ethics
education, is how corporations behave. Wall Street should take note of the case of Lehman
No matter the situation, all the problems have to be disclosed to the employees within the
organization and to the stakeholders outside the organization. Without proper communication,
REFERENCES
http://www.ibtimes.com/death-lehman-brothers-what-went-wrong-who-paid-price-who-
remained-unscathed-through-1405728
http://www.investopedia.com/articles/economics/09/lehman-brothers-
collapse.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-
brothers
http://www.ft.com/cms/s/0/1fed9c58-9085-11e1-9e2e-00144feab49a.html?his
http://www.aljazeera.com/news/americas/2008/10/20081062278398207.html
https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers.html