Failure of Lehman Brothers



Failure of Lehman Brothers

What led to the demise and failure of Lehman Brothers? This is the precise question that Anton Valukas, a partner in the New York office of the venerable law firm Jenner & Block, was appointed in January 2009 by the U.S. Bankruptcy Court for the Southern District of New York to answer. Indeed, Lehman Brother's bankruptcy, which was filed on September 15, 2008, is the largest Chapter 11 bankruptcy filing in history. Many would argue that the Lehman collapse has contributed greatly to our current financial crisis—The Great Recession—one of the worst since The Great Depression. Yesterday, Valukas issued a 2,200-plus page Report detailing the failure of Lehman Brothers. And it does. The board at Lehman Brothers was patently unequipped for the challenges facing the international financial institution. The results were all too obvious. Many other companies, both within the financial sector and without, are now feeling the consequences of their own failings in corporate governance.

The news and events company Ethical Corporation has put together a conference on the topic, featuring such diverse speakers as Lord Brittan of Spennithorne, ex-Home Secretary and now a non-executive director at Unilever; David Jackson, Company Secretary at BP; Stephen Haddrill, Director General of the Association of British Insurers, and Bob Evans, Head of Outreach at the Serious Fraud Office.

This diverse set of speakers will be integral parts of a debate covering all the biggest issues in Corporate Governance today - from executive remuneration to the role of the non-executive director, from risk management to improved shareholder dialogue.

Valukas indentified a number of failures in corporate governance and auditing and financial controls. Valukas observed that Lehman Brothers “repeatedly exceeded its own internal risk limits and controls.” According to Valukas, Lehman's management made a number of terrible decisions that ultimately led to Lehman's collapse. Commenting on Lehman's executives, Valukas noted that conduct “ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation.” Valukas indicated that Lehman Brother's attempted to forestall its ultimate demise by misleading investors about its true financial picture.

Perhaps most damning, Valukas discloses Lehman's use of “Repo 105” a financial accounting device to “cook” or alter its balance sheet. Using Repo 105, Lehman shifted $50 billion of toxic assets off its balance sheet during the first and second quarters of 2008, instead of selling and reporting these toxic assets at a loss. Through a loophole and gap, accounting rules allowed Lehman to treat Repo 105 transactions as sales instead of financings. Lehman's chief financial officer was implicated in emails that indicated that Repo 105's chief purpose was to reduce liabilities on the balance sheet.

Valukas found that Repo 105 was not disclosed to government regulators, rating agencies, investors, or to Lehman's board of directors. Lehman apparently did not act alone. Valukas discovered that Ernst & Young, Lehman's auditor, was made aware of Repo 105 and did not challenge the use of this questionable accounting practice. Repo 105 led to the repossession of billions of taxpayer dollars ...