Corporate Governance of Lehman Brothers
The American regulatory model of corporate governance rests on the theory of self regulation as the most efficient means to achieve corporate self-control in the marketplace. However, that model fails to achieve regular compliance with baseline ethical and legal behaviours as evidenced by a century of repeated corporate debacles, the most recent being Lehman’s Brothers. Lehman’s Brothers Holdings Inc was a global financial services firm who provided services like investment banking, equity and fixed income sales, research and trading, investment management, private equity and private banking. It was the fourth largest investment bank in the United States. In the year 2008, failure and deteriorating financial position led to destructive and supposedly deceptive financial reporting practices. This in turn led to the company filing for bankruptcy protection, becoming the largest U.S company to fail.
The reasons that led to bankruptcy of Lehman Brother’s were as follows: * In 2006, Lehman made a deliberate business decision to pursue a higher growth business strategy. To do so, it switched from a low-risk brokerage model to a high risk capital intensive banking model. This led to a mismatch between short-term and long-term debts. Therefore, Lehman had to borrow hundreds of billions of dollars in order to get rid of business risk. But this act put Lehman in unavoidable circumstances to maintain good credit ratings. * Lehman 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.
Similar to the collapse of Lehman Brothers was the collapse of Bear Sterns, which was the fifth largest US investment ban. It faced severe liquidity problems which ultimately led to the need for it to be rescued through the takeover by JP Morgan with financial support from the
The reasons that led to bankruptcy of Lehman Brother’s were as follows: * In 2006, Lehman made a deliberate business decision to pursue a higher growth business strategy. To do so, it switched from a low-risk brokerage model to a high risk capital intensive banking model. This led to a mismatch between short-term and long-term debts. Therefore, Lehman had to borrow hundreds of billions of dollars in order to get rid of business risk. But this act put Lehman in unavoidable circumstances to maintain good credit ratings. * Lehman 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.
Similar to the collapse of Lehman Brothers was the collapse of Bear Sterns, which was the fifth largest US investment ban. It faced severe liquidity problems which ultimately led to the need for it to be rescued through the takeover by JP Morgan with financial support from the
References: * http://en.wikipedia.org/wiki/Lehman_Brothers * http://www.fanniemae.com/media/pdf/newsreleases/FNMSPECIALEXAM.pdf * Saurav K. Dutta, Dennis Caplan, Raef Lawson, (2010) Lehman’s Shell Game – Poor Risk Management * Folarin Akinbami, (2010) International Banking in the New Era: Post-Crisis Challenges and Opportunities, International Finance Review, Volume 11, 167-190 * Suzzane Young, Vijaya Thyil, (2008), Corporate Governance, A Holistic Model of Corporate Governance: A New Research Framework, Vol 8, No. 1 * Phillip Lipton, (2003) Keeping Good Companies: Applied Corporate Governance, The Demise of HIH: Corporate Governance Lessons * Grant Kirkpatrick, (2009) Financial Market Trends : Corporate Governance Lessons from the Financial Crisis (ISSN 1995-2864) * Susan Parker, Gary F. Peters and Howard F. Turetsky, (2002) Corporate Governance, Corporate Governance and Corporate Failure: A Survival Analysis (1472-0701) * Gerald Vinten, (2002) Corporate Governance, The Corporate Governance lessons of Enron