Causes of Lehman Brothers’ Bankruptcy
There have been a lot of factors
that lead to the bankruptcy of the Lehman Brothers. Some blamed Richard Fuld Jr
who is the Chief Executive in Lehman as he failed to recognized the crucial
crisis that faced by Lehman. This statement arose because Fuld quickly
eliminated anyone who is a threat to him which included a number of critics who
early realized that Lehman was going to be in trouble. The executives of Lehman
also who can see all the upcoming possible changes in the subprime mortgage
market conditions chose to preoccupied themselves with huge payment of bonus.
It is revealed that Richard Fuld Jr received total US$484 million salary,
bonuses and stocks since the year of 2000. He was also received over US$70
million for his compensation in the year of 2007. Although there is a huge
amount of acquisition of emoluments involved, there is no element fraud to be
proven yet as the emoluments of the top management staff were approved by the
Board of Directors.
Furthermore, one of the reasons of
the bankruptcy is there is lack of buyer. This can be seen when the Bank of
America preferred to buy Lehman’s rival which is Merill Lynch for $50 billion.
Barclays also refused to buy Lehman as there is no backing from the US
government in the form of emergency funding. Other troubled institutions such
as Bear Sterns, Merill Lynch, Washington Mutual and Wachovia did not declared
wind up as all of them found buyers for their companies.
There were also misstatements from
the financial statement of the Lehman Brothers. The ‘Repo 105 Transactions’
were described as “accounting gimmick” of the firm which is the main reason of
the bankruptcy of the firm. Repos 105 is the company’s penchant for using
repurchase agreement transactions which denoted that the assets being sold was
worth 5% more than the cash received. The repos were used to window dress its
financial statement to deceive investors, regulators and the public at a large
scale in order to hide its high leverage during reporting times. The repos
transactions led to the misrepresentation of the disclosure of the firm. It is
clearly that Lehman Brothers had breached the US Generally Accepted Accounting
Principles (GAAP) requirement where the significant events that are potential
to a firm’s financial statements should be disclosed. However, the external
auditor of the firm at that time, Ernst and Young failed to detect the timing
of the transaction. The Lehman Brothers not only failed to disclose the repos
transactions, but also treated them as financial statements instead of sales
which misled the public to believe them.
Impact of the bankruptcy of Lehman Brothers.
Lehman Brothers was the fourth
largest U.S investment bank at the time of its collapse. The company has about
25,000 numbers of employees worldwide. Each one of the employees has their own
substantial investments in the stock of the firm. Unfortunately, with the
bankruptcy of Lehman Brothers, all of their employees had lost their jobs. In
other research, the estimated job lost due to the bankruptcy reach almost 6
million. The employments, standard of living and the most important is the
economic indicators were slammed.
The bankruptcy also has a severe impact
to its creditors and investors. A phenomenon which is called “breaking the
buck” happened as soon as the Lehman Brothers was declared bankrupt. The price
of a share or net asset value of the Reserve Primary Fund which is a large
money market mutual fund based in the US fell below US$1. This is due to the
fund held US$785 million in Lehman Brothers’ debt securities, a day before the
firm filed bankruptcy. BNY Institutional Cash Reserves Fund is one of the
investor that was impacted from the bankruptcy. The BNY Mellon’s $22 billion
Institutional Cash Reserves Fund (ICRF) on September 16, 2008, also “broke the
buck,” with its share price falling in value to US$0.991 due to its holdings in
Lehman Brothers Holding Inc.
The Lehman Brothers’ bankruptcy has
also highly affected some major companies and numbers of financial institutions
outside the United States and Europe who had made business with the firm either
direct or indirect. According to the some researchers, more than 75 distinct
bankruptcy proceedings were recorded when the Lehman Brothers had been wind up.
For example, in Hong Kong, over 43,700 individuals had invested HK$15.7 billion
in the form of mini bonds from the Lehman Brothers. Banks and insurers in Japan
were also affected as there were potential losses of 249 billion yen which
approximately US$2.4 billion.
Value of the bankruptcy of Lehman Brothers.
Since Lehman Brothers were the
fourth biggest investment bank in the United States, therefore, the bankruptcy
of the firm had influence the performance of returns of some stock markets in
the world. There is an analysis on the impact of Lehman Brothers’ bankruptcy on
the performance of stock returns in the U.S. stock market. It was revealed that
the firm’s bankruptcy had a devastating effect on some of the major stock
indexes. The bankruptcy of Lehman Brothers was considered as severe because the
financial crisis gave effect to the Chinese stock market which is concluded
that there is generally insignificant effect. Moreover, CNN New York revealed
that the bankruptcy of Lehman Brothers was a major contributor to the worst
performance of certain major market indices across the world at that current