The nation still has not fully recovered in economic terms and the high unemployment rate continues to be a cause of concern which speaks volume about the 2007 financial crisis. The conduct by companies like Lehman Brothers played a major role in creating the conditions that eventually gave birth to the crisis.
One of the reasons behind Lehman Brothers’ fall was the company’s huge real estate portfolio which had inflated value due to housing boom, largely triggered by easy access to credit. Lehman Brothers didn’t only have real estate portfolio in the U.S. but also in international markets including Europe and Asia. At the beginning of the third quarter in the year 2008, the company was sitting on a real estate portfolio worth $39.8 billion which it had been able to reduce to $32.6 billion by the end of the quarter. But despite this, Lehman Brothers had been slower than the rivals in selling its real estate assets at a discount. The company was also forced to incur huge write downs on real estate assets it had bought not long ago . Thus, heavy exposure to real estate sector not only negatively affected company’s economic performance but also severely reduced its liquidity position.
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Another factor was the implosion of Bear Stearns, a close rival of Lehman Brothers. The collapse of Bear Stearns created expectations that Lehman Brothers will be the next victim which contributed towards 48 percent decline in stock price in a single day . In September, Barclays announced its intention to join hands with Bank of America to purchase Lehman Brothers. But unlike in Bear Stearns case, the U.S. Treasury refused to provide bailout funds, which caused Barclays and then Bank of America to withdraw their respective bids. On September 15, Lehman Brothers filed for Chapter 11 bankruptcy, with $639 billion in assets and $619 billion in debt .
The case of Lehman Brothers 14-year veteran and senior vice president Matthew Lee demonstrates that even in unethical organizations, there can be individuals who understand their responsibilities and possess tremendous courage. Matthew Lee had expressed his concerns to the company’s auditor Ernst & Young that his employer was moving $50 billion worth of assets off balance sheet. This strategy was designed to severely understate the risk facing the company. Matthew Lee first raised his concerns to a superior who then requested Ernst & Young to investigate Lee’s concerns. Matthew Lee was let go of the company in June 2008 under the pretense of downsizing .
Another example of effective leadership though not popular was bailout package by the policymakers. Without the bailout which was not fair though a necessary measure, American financial system might have collapsed. The bailout prevented further and potentially much costlier failures such as that of AIG Insurance . Difficult times sometimes require difficult decisions and it was not an easy decision for the policymakers to approve bailout for the very players whose irresponsible behavior had played a major role in triggering the crisis.
One of the most troubling aspects of the scandal with respect to the role of the financial leaders is that they continued to mislead the public even when they knew the situation was close to hopeless and their actions caused excessive pain that could have been avoided. Lehman’s CFO and CEO continued to reassure the public that the company was in sound financial position and would surely weather the storm . As far as regulators are concerned, they failed to do the job they were supposed to do. Regulators were also guilty of misleading the public as SEC Chairman had earlier declared both Bear Stearns and Lehman Brothers to be in healthy financial position and being capable of fulfilling their obligations .
Another troubling aspect is that neither business leaders nor regulators took responsibility for their failures. Instead of taking responsibility, they painted themselves as victims of unfavorable conditions and/or extremely unlikely events that were not supposed to happen. In addition, despite leading organizations that incurred billions of dollars in losses, many executives still walked away with millions of dollars which is nothing but blatant disregard for ethical conduct.
In my opinion, the most ineffective aspects of the regulatory actions were that regulators were too close to businesses which created conflict of interest. SEC Chairman Alan Greenspan gave paid speeches such as the one for $250,000 to Lehman Brothers executives in 2006. Similarly, SEC was also lenient when it came to punishing corporations that broke laws. The regulators’ job is also to provide accurate assessment to the public so that they can take adequate measures to minimize losses but regulators were not behind the corporations’ executives in painting an overly optimistic picture regarding the ability of the financial sector to withstand the crisis. The regulators carry significant credibility in the eyes of the general public which means regulators should engage in nothing but honest communication.
- Bloomberg BusinessWeek. (2008, March 19). Lehman CFO Erin Callan: Back from Ugly Monday. Retrieved June 18, 2014. Web.
- Carmichael, K. (2013, October 1). What we learned from the Lehman collapse. Retrieved June 18, 2014. Web.
- Corkery, M. (2010, March 15). Lehman Whistle-Blower’s Fate: Fired. Retrieved June 18, 2014. Web.
- Kyger, L., Fitzgerald, A., & Dunbar, J. (2013, September 12). For Regulators Who Failed To Prevent Financial Meltdown, Life After Crisis Isn’t So Bad. Retrieved June 18, 2014. Web.
- Pristin, T. (2008, September 17). Risky Real Estate Deals Helped Doom Lehman. Retrieved June 18, 2014. Web.
- Sherter, A. (2010, October 1). TARP Trap: How the Bank Bailout Saved the Financial World — and Threatens it Anew. Retrieved June 18, 2014. Web.
