Premium Essay

Repo 105 Lehman

In: Business and Management

Submitted By mickeyv
Words 1927
Pages 8
521 Corporate Financial Management

Lehman Brothers and How The Use of Repo 105 Bankrupted the Wall Street Giant

The year was 2008 and the United States was entangled in the most significant financial crisis since the great depression. Lehman Brothers the countries fourth largest investment bank with revenues of $19.2 billion in 2007 and in excess of $600 billion in assets became the largest bankruptcy in history when they filed on September 15 2008. Aggressive investment strategies, misuse of accounting practices, as well as significant exposure to the subprime mortgage market attributed to the demise of a legend that at its peak employed 25,000. As the housing bubble grew, Lehman Brothers acquired several mortgage lenders. Of the acquired firms some made loans to home buyers without full documentation (Jeffers 2011). When these mortgages began to default, market conditions became unpredictable and the likes of Lehman and scores of other banks faced immense losses. The write down of the defaulted debt securities had colossal adverse effect on Lehman’s balance sheet. Credit rating agencies honed their focus mainly on the leverage ratios of the investment banks and Lehman’s leverage ratios were already extremely high. Any downgrade on Lehman’s credit rating would have sent Lehman’s share prices sharply lower and eliminate their chances to receive any sort of financing. In hope of preventing such an occurrence, Lehman would attempt sell some of its assets to raise capital. As the case with most of the investment banks, Lehman found itself unable to sell any of its assets or raise capital given that the street had no ability to value any of the complex mortgage securities. At that time, Lehman decided to use a very aggressive accounting maneuver known as Repo 105 to temporarily improve its financial condition prior to the release of their financial…...

Similar Documents

Free Essay

Lehman Brother's Scandal

...Lehman History Lehman Brothers had humble origins, tracing its roots back to a small general store that was founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844. In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers. While the firm prospered over the following decades as the U.S. economy grew into an international powerhouse, Lehman had to contend with plenty of challenges over the years. Lehman survived them all – 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. However, despite its ability to survive past disasters, the collapse of the U.S. housing market ultimately brought Lehman Brothers to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step. As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times...

Words: 1009 - Pages: 5

Free Essay

Lehman Brothers Collapse

...------------------------------------------------- Lehman Brothers Collapse ------------------------------------------------- Lehman Brothers Collapse Executive Summary The following report discusses and analyzes the events leading up to the failure of Lehman Brothers as well as outcomes and repercussions of one of the largest bankruptcy cases to date. The first part of this paper describes the primary factors that contributed to the ultimate demise of Lehman Brothers. The main factors that lead to the crisis include, but are not limited to; the misrepresentation of financial statements, a complete lack of internal control, accounting as well as management collusion, managerial fraud, increased moral hazard, and the overpayment of executives within the firm. Misrepresentation of the financial statements and the misuse of accounting practices was the main reason for the Collapse of Lehman Brothers. It was said that upper management violated the Sarbanes-Oxley Act through the use of questionable and unethical accounting practices, more specifically through the use of Repo 105 transactions. The second part of this paper addresses the underlying causes and issues relative to the study of financial ethics. This paper also addresses those who were involved as well as affected by the events that took place in the Lehman Brothers scandal. After evaluating the reasons for Lehman Brothers failure, the report discusses possible courses of action to take in......

Words: 3830 - Pages: 16

Free Essay

Lehman Bros

...      Lehman  Brothers  Holdings,  Inc.     1)  Ernst  and  Young  was  acting  as  the  independent  auditor  for  Lehman  and  not  as   consultant.    Therefore,  I  do  not  feel  that  Ernst  and  Young  had  a  direct  responsibility   in  being  involved  with  the  developmental  process  of  the  Repo  105  accounting   policy.      The  party  who  would  be  labile  for  implementing  Repo  105  would  be   management  and  not  the  independent  auditors.  AU  110  discuses  responsibilities   and  functions  of  the  independent  auditor,  it  clearly  states  how  management  is  in   charge  of  creating  accounting  policies  and  not  the  external  auditors.    The  role  of  the   auditor  would  come  in  after  the  accounting  policies  have  been  made  by   management,  it  would  be  there  job  to  evaluate  the  policies  that  were  set  in  place  and   to  make  evaluations  on  whether  or  not  everything  complied  with  GAAP,  that  no   illegal  accounting  tactics  were  being  used,  and  that ...

Words: 1194 - Pages: 5

Premium Essay

Lehman Brothers Case Study

...1) Describe the situation at Lehman Brothers from an ethic perspective. What’s your opinion of what happened here? Lehman Brothers had a culture problem, as they incentivized there employees to take excessive risks. Their culture fostered significant risk taking. They use to reward employees with lots of money for taking risks. Individuals who made questionable deals were treated as heroes; on the other hand anyone who questioned decisions was often ignored or overruled. They use to ignore risk just hoping for outlandish profits, meaning it felt more like a casino then an investment bank. They ignored basic regulatory rules which created financial danger. Basic rules are the way companies grow and expand. Their desire to make money at all cost was more important than following basic ethical values. 2) What was the culture at Lehman Brothers like? How did this culture contribute the company’s downfall? The culture at Lehman Brothers was to take risks at all costs. When Transactions were presented to them they ignored the warning signals costing them. This eventually led to shady deals which eventually lead to the company’s downfall. Repo 105 is a good example of how Lehman misused this device to get some $50 billion of undesirable assets of its balance sheet at the end of the first and second quarter of 2008, instead of selling those assets at a loss. They continued to take lots of risks which caused them to lose a lot of money, there by bringing down there......

Words: 615 - Pages: 3

Premium Essay

Lehman Case

...a date that modern day Wall Street insiders will not soon forget. On that day, one of Wall Street’s iconic investment banking firms, Lehman Brothers, filed for bankruptcy. That bankruptcy filing ended the proud history of a firm that had played a major role in shaping the nation’s securities markets and economy for more than a century. Lehman Brothers had approximately $700 billion in assets when it failed, which makes it the largest corporate bankruptcy in U.S. history, easily surpassing the previous headline-grabbing bankruptcies of Enron, General Motors, and WorldCom. By comparison, the telecommunications giant WorldCom, which temporarily held the title of the nation’s largest business failure after collapsing in 2002, had less than onesixth the total assets claimed by Lehman Brothers. The shocking announcement that Lehman had filed for bankruptcy caused the DJIA to plunge more than 500 points within a few hours. That large loss was only a harbinger of things to come. Within six months, the DJIA had declined by more than 50 percent from its all-time high of 14,164.53 that it had reached on October 9, 2007. That market decline wiped out nearly ten trillion dollars of “paper” wealth for stock market investors and plunged the U.S. and world economies into what became known as the Great Recession. In the spring of 2010, the Lehman bankruptcy once again captured the nation’s attention when the company’s court-appointed bankruptcy examiner released......

Words: 6712 - Pages: 27

Free Essay

Lehman Brothers

...Lessons from Lehman Brothers: Will We Ever Learn? MGT 521 September 9, 2013 Introduction Lehman Brothers financial services filed bankruptcy on September 15, 2008, in the New York Southern District U.S. Bankruptcy Court. Resulting in an immediate 500 point drop in the Dow Jones (Did Ernst & Young Really Assist Financial Fraud? 2011). This day became known as ‘‘Dark Monday’’ (Donaldson, 2012). This was to date, the largest bankruptcy filing in history unleashing a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” However this financial icon’s fall is no surprise. The bankruptcy examiner released reports saying that the firm’s executives and auditor, “lambasted” for what they did to cause the collapse of the firm (Robbins & Coulter, 2010). The Lehman Brother culture was one of risk and reward. At the company, “Excessive risk taking by employees was openly lauded and rewarded handsomely. Employees knew they could give risky ideas and they would get rewards for them. Individuals making questionable deals were hailed and treated as ‘conquering heroes’.” (Robbins & Coulter, 2010, pp. 147-148). If anyone would question decisions made or speak out in disagreement, executives would not listen. In addition, the executives would overrule and go with the least desirable decision. Most companies would be wary of taking so many risks and only give reward after......

Words: 1005 - Pages: 5

Free Essay

Lehman

...Question 1: From this case study, it showed how Lehman Brothers walked down to the end of it business. Through Lehman Brothers’ case, it reflects the ugly side of a corporate. A big recognized company collapse due to it unsuccessful leadership management, culture and dishonesty by it people caused the company walked down to the end of it business. There are several points showed how it gone bankrupted. By using the ethical perspective to look at Lehman Brothers’ situation, it showed that the company being dishonest to it clients, failure in the company leadership and corporate management are the major problems that lead to the company downfalls. As a Wall Street icon, they disappointed the public and being irresponsible towards their actions, against the ethnical issue by not being honest to review the actual situation of the company, but using others method to cover it annual report. In my opinion, the top management is the main issue that caused the downfall of Lehman Brothers. According to the case study, it mentioned the major problem at Lehman was culture and reward, it showed the top management of the company did not have a structure way to motivate and guide their employees on the appropriate way of doing tasks. For example, individuals who makes questionable deals were hailed and treated as “conquering heroes” and the others who questionable the decision was often being ignored. This shows that the company only wants to have short term earning instead......

Words: 768 - Pages: 4

Premium Essay

Lehman Brothers

...Case Study : Lehman Brother’s Demise of Lehman Brothers Lehman Brother’s demise was the event that gripped the US financial system into shock. It was the fourth largest investment firm in the US as of 2007 with 25,000 employees worldwide. The Firm had an exponential growth and recognized profits from 2005 to 2006 and in 2007 reported a net income of $4.2 billion dollars on revenues of 19.3 billion. The stock price of the company reached all-time high when it hit $86.18 per share. Lehman increased 56% in its revenues only from the subprime mortgage business alone. While the company kept reaping benefits, the real estate market in the US started to show signs of pending bubble burst. In March 2007 stock market experienced biggest drop in 5 years and mortgage defaults rose up to the highest percentage in almost a decade. Investors were confident with their money as they were satisfied with Lehman’s financial statements and their past resilience with depressions. According to NyTimes “Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio.” Later when Lehman was exposed of their use of accounting gimmicks to mislead the investors. This led the investors to lose confidence in Lehman brothers. Investors started dumping their stocks while......

Words: 1457 - Pages: 6

Free Essay

Lehman

... The crumble of the Lehman Brothers undertook the world by storm. The Lehman Brothers was the leading mortgage broker in the across the globe for centuries. When they filed for bankruptcy in 2008 the financial world was crippled. Over 25,000 employees lost their jobs and livelihood due to the fact that this bankruptcy uprooted their lives and deserted them with absolutely nothing. The Lehman Brothers assets calculated up to $639 billion while their debt equaled to $619 billion (Case study: The collapse of lehman brothers, n.d.). This enormous volume of money for bankruptcy summed up to be the greatest bankruptcy in accounting financial history. This is clearly not the record the Lehman Brothers were attempting to break, but it was the reality. This catastrophe interposed to the $10 trillion in market capitalization that has affected the finance worldwide for the month of October 2008 (Case study: The collapse of lehman brothers, n.d.). This exploit devastated the stock market, the economy, the employees, and the families who trusted the Lehman Brothers company to use them to finance their home loans. Henry Lehman, a German immigrant, started a diminutive conventional store in 1844 and that was established in Montgomery, Alabama (Case study: The collapse of lehman brothers, n.d.). Then by 1850 Henry, Mayor, and Emanuel created Lehman Brothers the mortgage broker company (Case study: The collapse of lehman brothers, n.d.). The organization flourished as the nation......

Words: 1614 - Pages: 7

Free Essay

Lehman Brother

...Henry Lehman created a small general store selling groceries and dry goods to local farmers in 1844. Shortly after, Henry’s two brothers, Emmanuel and Mayer, joined the business. The three brothers established the business known as Lehman Brothers in 1850’s. The business transitioned from selling merchandise to commodities brokers, where they bought and sold cotton. Lehman Brothers grew rapidly due to the capitalization of high cotton prices. A partnership was formed with a cotton merchant that allowed Lehman Brothers to pursue other venues. Through strategic partnership the business survived the difficult times it experienced during the Civil War. Lehman Brothers opened a new office in New York which became the main campus for its operations. This office furthered their trading business and introduced them to the financial industry. In later years, Lehman became involved in the New York stock exchange where the underwriting business began. The firm grew rapidly and was very successful for years. After many years of hard work and success the company collapsed and filed for bankruptcy in 2008. Lehman had been unhealthy for a while and covered it up by secretly shuffling debt around to make its books look in order and deceive the real situation. Lehman used an aggressive accounting method to hide their losses and made it difficult for investors, executives and/or auditors to detect their actual financial status. This accounting method is known as REPO 105,......

Words: 496 - Pages: 2

Free Essay

Lehman

....  UNITED STATES BANKRUPTCY COURT  SOUTHERN DISTRICT OF NEW YORK     ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x    :    In re  :    :  LEHMAN BROTHERS HOLDINGS INC.,  :  et al.,   :    :    Debtors.  :  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x            Chapter 11 Case No.    08‐13555 (JMP)    (Jointly Administered)    REPORT OF  ANTON R. VALUKAS, EXAMINER                            March 11, 2010    Jenner & Block LLP  353 N. Clark Street  Chicago, IL 60654‐3456  312‐222‐9350    919 Third Avenue  37th Floor  New York, NY  10022‐3908  212‐891‐1600     Counsel to the Examiner    VOLUME 1 OF 9  Sections I & II:  Introduction, Executive Summary & Procedural Background  Section III.A.1:  Risk      EXAMINER’S REPORT     TABLE OF CONTENTS    VOLUME 1      Introduction, Sections I & II:  Executive Summary & Procedural Background    Introduction ...................................................................................................................................2  I.  Executive Summary of The Examiner’s Conclusions ......................................................15  A.  Why Did Lehman Fail?  Are There Colorable Causes of Action That Arise  From Its Financial Condition and Failure?..................................................................15  B. ......

Words: 71002 - Pages: 285

Premium Essay

Lehman Brothers Holdings, Inc

...Lehman Brothers Holdings, Inc. Thursday, October 24, 1929, easily ranks as the most dramatic day that Wall Street has ever seen. That day witnessed the beginning of the Great Stock Market Crash that over the following few years would result in an almost ninety percent decline in the Dow Jones ­Industrial Average ( DJIA). Although not nearly as dramatic as “ Black Thursday,” ­September 15, 2008, is a date that modern day Wall Street insiders will not soon forget. On that day, one of Wall Street’s iconic investment banking firms, Lehman Brothers, filed for ­bankruptcy. That bankruptcy filing ended the proud history of a firm that had played a major role in shaping the nation’s securities markets and economy for more than a century. Lehman Brothers had approximately $ 700 billion in assets when it failed, which makes it the largest corporate bankruptcy in U. S. history, easily surpassing the previ-ous headline- grabbing bankruptcies of Enron, General Motors, and WorldCom. By comparison, the telecommunications giant WorldCom, which temporarily held the title of the nation’s largest business failure after collapsing in 2002, had less than one-sixth the total assets claimed by Lehman Brothers. The shocking announcement that Lehman had filed for bankruptcy caused the DJIA to plunge more than 500 points within a few hours. That large loss was only a harbinger of things to come. Within six months, the DJIA had declined by more than 50 percent from its all- time high of 14,164...

Words: 7677 - Pages: 31

Free Essay

Lehman

...Lessons from Lehman Brothers: Will We Ever Learn? On September 15, 2008, financial services firm lehman Brothers filed for bankruptcy with the U.S Bankruptcy Court in the Southern District of New York. That action - the largest Chapter 11 filling in financial history – unleashed a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” The fall of this Wall Street icon is, unfortunately, not a new one, as we’ve seen in the stories of Enron, WorldCom, and others. In a report released by bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the firm’s auditor, Ernst and Young, were lambasted for actions that led to the firm’s collapse. He said, “Lehman repeatedly exceeded its own internal risk limits and controls, and a wide range of bad calls by its management led to the bank’s failure.” Let’s look behind the scenes at some of the issues. One of the major problems at Lehman was its culture and reward structure. Excessive risk taking by employees was openly lauded and rewarded handsomely. Individuals making questionable deals were hailed and treated as “conquering heroes.” On the other hand, anyone who questioned decisions was often ignored or overruled. For instance, Oliver Budde, who served as an associate generals counsel at Lehman for nine years, was responsible for preparing the firm’s public filings on executives were paid,” Budde argued with his bosses for years about that......

Words: 635 - Pages: 3

Free Essay

Lehman Brothers & Repo 105

...Lehman Brothers & Repo 105 On September 15th 2008, the fourth largest U.S investment bank, Lehman Brothers, filed for chapter 11 bankruptcy. With revenues peaking at $19.2 billion in 2007 and over $600 billion in assets, the collapse of Lehman became the largest bankruptcy in history. Lehman’s demise was attributed to their aggressive investment strategy and significant exposure to the subprime mortgage market. As the housing bubble grew, Lehman Brothers acquired several mortgage lenders, some of the acquired firms frequently made loans to home buyers without full documentation (Jeffers 2011). When consumers began defaulting on mortgages and market conditions began to unravel, Lehman as well as many other banks faced huge losses. The write down of debt securities had significant adverse effects on Lehman’s balance sheet. Furthermore, credit rating agencies began focusing more on leverage ratios of investments banks. Lehman’s leverage ratios were already extremely high. A downgrade on Lehman’s credit rating would have sent Lehman’s share price on a downward spiral and hinder their ability to receive financing. In order to prevent these occurrences Lehman would have to sell some of its assets or raise capital. Lehman was unable to sell any of its assets or raise any capital because no one knew what the value of their complex mortgage securities were. In response to deteriorating economic conditions the investment bank used a very aggressive accounting maneuver...

Words: 1998 - Pages: 8

Premium Essay

Lehman Brothers

...Lehman Brothers Holdings Inc. The control break downs of Lehman Brothers Holdings Inc. included the massive amount of money borrowed to fund its investments. A considerable portion of this investment was in real estate, which made the investment defenseless against a fall in the market. Lehman also used one of its small companies to reallocate investments off its books. The firm was active in the market for Residential Mortgage Backed Securities (RMBS). The process involved buying several residential mortgages, combining them and selling them as securities. RMBS buyers actually purchased claims on the cash flow generated by the securities. Lehman produced a great amount of these securities, making the demand high for mortgage originators. This led mortgage originators to extend credit to people who were not credit worthy, or did not have enough income causing these people to have upside down mortgages on their homes when housing prices plummeted in 2006. In 2000, the stock market started to decline and the Federal Reserve significantly reduced interest rates.  These lower interest rates caused inexpensive mortgage payments, which lead to a large demand for homes.  Homeowners took advantage of the low interest rates and refinanced their mortgages. In 2008, Lehman announced that they would file for bankruptcy after a huge loss in the market, a loss of investors and their inability to find an adequate buyer. Soon after, their collapse set the market into panic......

Words: 673 - Pages: 3