Repo 105

Should Lehman Brothers Investment Bank Have Been Allowed to Fail? Name: Ran Linyan Table of Contents 1 Introduction 3 2 Corporate profile of Lehman Brothers Bank 3 2.1 Corporate Profile and Business 4 2.1.1 History of Lehman Brothers 4 2.1.2 Lehman Brothers Investment Bank 4 2.2 Forces of Change and Competition in Lehman Brothers 4 2.2.1 Change in Lehman Brother’s Business Strategy 4 2.2.2 Financial Competiveness in Lehman Brothers 5 2.3

Despite its humble beginnings in 1844 as a simple general store turned financial firm, the Lehman Brothers greed drove their firm into the ground. It seemed as if Lehman Brothers was indestructible. Surviving through the railroad bankruptcies in the 1800’s, the Great Depression of the 1930’s, two world wars, a capital shortage in 1994, and everything in-between, it seemed the firm was built to last. However its inevitable end started in the early 2000’s with the housing boom after the repeal of the

that required it to raise billions of dollars per day to keep their operations going (Wiggins, Piontek, Metrick, 2014, p.1). Another reason was their leadership who encouraged the risky culture of the firm and operating an accounting device name Repo 105 to keep assets off its balance sheet so it may appear that the firm was not borrowing that much money (Robbins, 2016, pg. 178). The firm was able to do this because around the 2000s, there was a deregulation of the financial industry that made it

2. U.S. Treasury Bond Market Yields on U.S. treasury bonds especially on the bonds with a maturity up to one year decreased significantly between 2007 and 2009 as shown in the graph below. The one-month treasury bond yield decreased from 4.79% in January 2009 to 0.04% in December 2009. In the beginning of 2007 bond yields were very high and therefore mortgages takers with adjustable-interest rates had high interest payments. All this led to a high number of default and strong decrease in house prices

The Report Submitted by Johannes Introduction Lehman Brothers Holdings Inc. was a global financial services firm. Henry and Emanuel Lehman founded it in the year of 1850 in the city of Alabama. Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the US, doing business in investment banking, equity and fixed-income sales and trading especially U.S. Treasury securities, research, investment management, private equity, and private banking. Lehman Brothers had

Essential for a firm’s survival and its ongoing success is effective corporate governance. Indeed, when executed effectively, corporate governance helps to not only “prevent corporate scandals, fraud and civil and criminal liability but also enhance a company's image in the public eye” (Sun, 2010). This, in turn, positions a firm as a self-policing institution, accountable and worthy of shareholder and debtholder capital. Responsible for charting the strategic direction, approving policy and ensuring

The purpose of this memo is to provide an assessment into the Bankruptcy Examiner’s report regarding the risk management failure as it relates to Leman Brothers. The fundamental reason for the failure is based on the change in corporate strategy of 2006 in which Lehman decided to shift from a “moving” or securitization business to a “storage’ business, with the firm making and holding longer-term, risk investments. This “strategic positioning” was fully supported by the board, although the chief

bank directors and the chairman are accused of having certified false financial statements and not disclosing key financial practices in the bank. Among the undisclosed practices was the Repo 105. The Lehman had been using it from 2001, it involved using the Repos to finance assets and treating them as sold Repos while accounting. This according to the report was abuse of ordinary repurchase agreements, it was done to lower the banks leverage as was asked of investment banks toward the end of 2007

Variable Interest Entities One topic that has generated much discussion and even some “bad blood” in the accounting profession and business community as a whole is variable interest entities, formerly known as “special purpose entities.” One common definition of a variable interest entity is a legal business structure which does not have enough capital to support itself due to its lack of equity investors. The financial support for the variable interest entity is provided by an outside source

Lehman Brothers was founded by German immigrant Henry Lehman and his two brothers Emanuel and Mayer in 1850. Lehman Brothers was able to overcome many obstacles– “the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998.” (Investopedia) But the collapse of the housing market was one obstacle they could not overcome. During