Keller Graduate School of Management
Sherman Oaks, California
Lehman Brothers - what went wrong?
Submitted in Partial Fulfillment of the Course Requirements for
MGMT591 Summer B 2012
The organization that I have selected for my final project is Lehman Brothers, I do not have any stake in the company, but I am very curious and interested in the company. I want to find out how did one of the biggest and most successful companies in the world fall apart.
Lehman Brothers was a very large global financial services firm founded in 1850 in Montgomery, Alabama. They were the fourth largest investment bank in the United States. The firm also was in business for equity and fixed-income sales, and trading, research, investment management, private banking, and private equity. The company employed about 26,200 employees. Lehman Brothers had survived several economic hardships such as the railroad bankruptcies of the 1800s, the Great Depression of 1930, both World Wars, a capital shortage when it spun off by American Express in 1994, and also the capital management collapse and Russian debt default of 1998. However, the firms handling of subprime mortgages in the U.S housing market brought the company down to its knees. Many blame Lehman Brothers as the prime culprit of the U.S housing boom in 2003 as they acquired five mortgage lenders. Among those five, was subprime lender BNC Mortgage. It was this acquisition along with Aurora Loan Services, which specialized in Alt-A Loans, would be the root cause of the massive cracks that emerged in the U.S housing market. Lehman’s Chief Financial Officer stated that risks posed to the housing market were under control and would have little impact on earnings. He also stated that he did not foresee problems in the subprime market that would spill over or impact the economy or the rest of the housing market. He was wrong. As a result, the renowned financial services firm filed for Chapter 11 bankruptcy protection in September 2008. It is still the largest bankruptcy in U.S history. Lehman Brothers is believed to have been a major player in the global financial crisis of the late-2000s. This was a result of a huge exodus of many of their clients, devaluation of its assets, and extreme loses in its stock. Barclays announced that it would be purchasing Lehman Brothers’ North American investment banking and trading divisions as well as its headquarters located in New York City. Nomura Holdings announced, the following week that it would take over Lehman’s franchise in Japan, Hong Kong and Australia. They would also acquire Lehman’s equity businesses in Europe and the Middle East.
What did the hierarchy of Lehman Brothers do wrong that ultimately led to the collapse of one of the largest investment banks in the world? D
| Given knowledge of group dynamics and decision-making, apply this knowledge to a case analysis to diagnose an organizational problem and recommend solutions.
Lehman Brothers is seen as the main culprit of the U.S housing boom in 2003. The gigantic firm acquired five mortgage lenders; however it was the acquisition of Aurora Loan Services was the root cause that led to the turmoil in the U.S housing market.
The hierarchy of Lehman Brothers also failed ethically. They employed balance sheet tricks in order to avoid full disclosure of the financial problems. An example of this is when Lehman had shipped assets to London to make their loans appear like revenue. Lehman executives knew of these activities but neglected to do anything about it.
There appeared to be no accountability for the large firm, specifically for the firm’s owners when it came to managing their assets. Lehman Brothers failed in its pursuit of aggressive growth in line with a sound corporate governance practice. In other words, the firm failed to establish strategic...
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