Introduction
Many people believe the beginning of the end for Lehman Brothers was when Washington repealed the Glass-Steagall Act. This separate the interests of commercial and investment banks, preventing them from competing against each other and protecting their balance sheets by allowing each sector to focus on the business and transactions that it did best. This allowance will be Repo 105 incident. After some years, because of Richerd Fuld’s aggressive business model such as CMBS and subprime loans, Lehman Brothers faced pinch. On Sept.13, 2008, the United States Treasury made it clear that Lehman Brothers would not be the recipient of bailout money. On Sept. 15, Fuld filed for Chapter 11 bankruptcy protection.
Common Ethical Problems Within Corporations
The problem of Repo 105(standard repurchase agreements) is revealed after the financial crisis because of subprime loans. Right after the crisis, Lehman Brothers invested in IT capital to create a high-speed trading platform for equities called Baikal. However, it is likely to have a profound spillover effect to the IT industry and it is not only the information system, they got many IT software to control their complicated data. To make matters worse, the systems became an obstacle of finding out Repo 105’s problem. Their financial executives conceal their debt in Repo 105 but the complicated IT system database prevents Repo 105 from the investigation of attorneys.
The concealment is not only to remove their securities inventory from balance sheet but Lehman accounted for Repo 105 transaction as “sales” as opposed to financing transactions. They also raised cash by selling assets to a behind-the scenes phantom company called Hudson Castle.
Accounting for Ethical and Unethical Behavior
Richerd Fuld said, “I don’t know about that at all”, nevertheless, they found the evidence of E-mail which was attached about Repo 105 information by Valukas report. As a result, Lehman Brothers paid huge compensation. Fuld had a lot of problems involving this matter in IT industry, making worldwide financial crisis, concealment of Repo 105, entrenching in a highly aggressive and leveraged business model. He was obstinate and he didn’t admit his wrongdoings or take responsibility for anything that he did.
Lehman Brothers’ audit company, Ernst&Young which is only third party privy to the happenings at Lehman Brothers, failed to reveal their wrongdoing in spite of Audit Company because Lehman Brothers was sizeable and presumably lucrative client of the firm. This would be the worst case of negligence of any Audit Company in our history.
Ethical Dilemmas
The importance of leverage ratio
Richerd Fuld tried to make it better because Rating Agencies like S&P would grade companies based on leverage ratio. They wanted to keep their approval. If the ratio is high, the company’s reputation would be down grade. Before the crisis, Lehman Brother’s leverage ratio was skyrocketing to 39 to 1 in gross bases. Many people didn’t care about the ratio. After the crisis, when people were aware of the importance of the ratio and they became curious about ratio, Richerd Fuld tried to show the ratio more lower and implemented a concealment by Repo 105. Due to using Repo 105, it could amend its leverage ratio from 13.9 to a far more favorable 12.1 in net bases.
Why Behaving Ethically Is Important for Business
The Valukas Report was made after the incident. Valukas reviewed the available universe of Leman’s e-mail and other electronically stored documents which are estimated at three petabytes of date by web and text mining and so on. He also hired many attorneys and investigators. Because of large information system which is invested by Richerd Fuld, Valukas took an amount of time to investigate about the unethical behaviors. The report found that Leman painted a misleading picture of its financial conditions using a Repo 105 accounting strategy that auditors Ernst & Young knew about but didn’t question. This objective is not to repeat such a huge financial crisis.
More Info
Lehman Brothers’ Perfect Storm: Where Ethical Lapses Met Bad Judgment
The Valukas Report on the Lehman Brothers collapse: the e-discovery aspects
Lehman Brothers invested in IT despite credit crunch
http://www.computerworld.com/s/article/9114721/Lehman_Brothers_invested_in_IT_despite_credit_crunch
The Dearth of Ethics and the Death of Lehman Brothers
http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers
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