Lehman Brothers

and
Corporate Governance failure

By : Syed
Sagheer Abbas

Contents
Introduction.
Brief history of Lehman Brothers.
The Board Structure on Lehman Brother.
Causes of Lehman Brothers failure.
o Corporate Governance Failure.
o Technical Causes of Lehman Brothers failure.
o Other Causes.

Conclusion.

Introduction
On September 15, 2008, Lehman Brothers Holdings Inc filed for bankruptcy. It filed for
protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy
Court for the Southern District of New York. It filed with $639 billion in assets and $619
billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far
surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the
fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees
worldwide.
In this presentation we will focus in the corporate governance failure.

Why did Lehman

Fail?

Causes of lehman
On 15 September Brothers
2008, Lehman Brothers Holdings
filed for Chapter 11 bankruptcy
failure
protection. Its bankruptcy filing listed debts of $613bn, and named banks from Tokyo,
Hong Kong, New York, Singapore, Taipei and elsewhere as unsecured creditors owed
hundreds of millions of dollars.
There are many causes of Lehman Brothers failure, we could divide them to tree
categories as follow:

Techni
cal
cause
s

Corporate
governanc
e failures

Corporate Governance
Failure
Lehman Brothers had weak corporate governance arrangements which failed to safeguard
against excessive risk taking are partly to blame for the economic crisis. Such failures
remained hidden in a prosperous market but the downturn has revealed a number of flaws.
The key areas of weakness that have been highlighted are:

Corporate risk management;

Board of directors;

Remuneration scheme; and

Nomination committees.

Risk Management
Lehman Brothers had sex committee, one of them was a
Finance and Risk Committee, which consists of the
Firms Executive Committee, the CRO and the CFO,
should meet weekly to discuss all risk exposures,
position concentrations and risk taking activities, but it
only met twice in both 2006 and 2007.

LEHMAN BROTHERS, Quantitative Risk Management Policy

Manual, September 2007, P. 3.

Risk Management
Timothy Geithner (Secretary Of The Treasury),said in his
report, Lehmans plunge into high-risk businesses in the
years before its bankruptcy has become a familiar story.
During this period of aggressive growth, Lehman developed
significant

exposures

to

risky

subprime

lending,

commercial real estate, structured products, and high-risk

lending for leveraged buyouts. Importantly, the Valukas
Report indicates that Lehman repeatedly breached its own
risk concentration limits in pursuit of higher earnings.

Treasury Secretary Tim Geithner

Risk Management
NEW YORK (CNNMoney.com), Failings by Lehman
Brothers executives and its auditor led to the bank
collapse that unleashed the worst of the financial crisis.

According to a report by a court-appointed investigator,

Lehman repeatedly exceeded its own internal risk limits
and controls," and a wide range of bad calls by its
management led to the bank's failure, says the report,
authored by examiner Anton Valukas.`

Risk Management
Lehman Brothers adopted a new strategy to overcome
their problems but this led to business risks because its
investments in long term assets like the commercial
real estate, private equity and leveraged loans had
more vague prospects and were less liquid than its
usual investments.

Remuneration scheme

study

from

researchers

at

Harvard

University,

The Wages of Failure: Executive Compensation at Bear Stea

rns and Lehman 2000-2008,
shows that the top executive managers of Lehman Brothers
received about $1 billion respectively from cash bonuses and
equity sales between 2000 and 2008.
The Board at Lehman Brothers awarded total remuneration of
close to $500 million to Chairman Fuld, just four days before
its collapse and following an announcement that the firm lost
almost $4 billion in the third quarter, Fuld told the media that
"the Board's been wonderfully supportive."

Remuneration scheme
Fuld (CEO) received nearly half a billion dollars in total compensation Between
1993 and 2007.
In 2007, Fuld earned a total of $22 million, including:
- a base salary of $750,000;
- a cash bonus of $4.25 million; and
- stock grants of $16 million.
The staff received a disproportionately high percentage of their pay in Lehman
stock and options. When the firm went public, employees owned 4 per cent of the
firm, worth $60m. By 2006, they owned around 30 per cent, equivalent to
$11billion, at least on paper.

Nomination

Four of the ten member board at Lehman

Brothers were over 75 years of age and
only one had current financial sector
knowledge.

Technical Causes of
Lehman Brothers failure

One of the main failure cases in Lehman Brothers was the misbehavior of top
executives and the inaction of both the board and the auditing firm (Ernst & Young).

There are many similarities between the collapses of Enron in 2001 and Lehman
Brothers in 2008, that they managed to reduce leverage on the right-hand side of the
balance sheet and, at the same time, reduce assets on the left-hand side. In Lehman
Brothers, Repo 105 transactions doubled between late 2006 and May 2008, were
known inside the corporation, exceeded the firm's self-imposed limits and typically
happened at the end of each quarter, when financial information had to be released.

Technical Causes of
Lehman
Brothers
failure
Lehman in the last year was unable to retain the
confidence of its lenders and clients, because it did not
have sufficient liquidity to meet its current obligations,
and on two consecutive quarters with huge reported
losses, $2.8 billion in second quarter 2008 and $3.9
billion in third quarter 2008, without news of any
definitive survival plan.

Misleading

The Wall Street equivalent of a coroners report, mention

that Richard S. Fuld Jr, Lehmans former chief executive,
certified the misleading accounts, the report said.
Mr. Valukas (one of the examiner) wrote in the report
Unbeknownst to the investing public, rating agencies,
government regulators, and Lehmans board of directors,
Lehman reverse engineered the firms net leverage ratio for
public consumption,. The report states that Mr. Fuld was
at least grossly negligent.

Henry M. Paulson Jr., who was then the Treasury secretary,

warned Mr. Fuld that Lehman might fail unless it stabilized
its finances or found a buyer.`

Henry M. Paulson Je.

Shannon
Stapleton/Reuters

Conclusion
Lehman Brothers filed for many reasons, corporate governance failures were the
most important, especially risk management.
Lehman Brothers failure and other failures that happened in the financial crisis will,
in turn, spawn a new wave of corporate governance reforms.