Lehman Case
A Case Study of the Lehman Brothers Bankruptcy
100 USD 80 USD 60 USD 40 USD 20 USD 0 USD
Financial Risk MVE220 Work distribution: 2010-11-24 Both the members of the project team have contributed equally to the case. Even though several parts have been written individually, the analyzing and key concepts have been developed mutually together. Examinator: Holger Rootzén Robin Feng 910911-1675 Niklas Fredriksson 900310-1855
Abstract Lehman Brothers was the fourth biggest investment bank in America until it filed for the bankruptcy in September 2008, less than a year after the bank presented its biggest profit ever. This report is a part of a reading project about the bankruptcy and aims to establish an overview of the risks included in Lehman Brothers’ business, how they were neglected and finally led to the downfall. The authors have examined five different types of risks that constituted the inherent risk in Lehman Brothers; market risk, credit risk, liquidity risk, operational risk and reputational risk. After analysis, the authors can conclude that all of the above mentioned risks were exceptional high and played a significant role in what would become the largest bankruptcy in history. Finally, the authors present a summary of recommendations for more sustainable risk management in investment banking.
Key words: Lehman Brothers, Investment bank, market risk, credit risk, liquidity risk, operational risk, reputational risk, Bankruptcy
Table of Content
Introduction ........................................................................................................... 4 Background ........................................................................................................... 4 Risks in Investment Banking................................................................................. 4 From Boom Years to Crisis ................................................................................... 5 The Strategical Failures
100 USD 80 USD 60 USD 40 USD 20 USD 0 USD
Financial Risk MVE220 Work distribution: 2010-11-24 Both the members of the project team have contributed equally to the case. Even though several parts have been written individually, the analyzing and key concepts have been developed mutually together. Examinator: Holger Rootzén Robin Feng 910911-1675 Niklas Fredriksson 900310-1855
Abstract Lehman Brothers was the fourth biggest investment bank in America until it filed for the bankruptcy in September 2008, less than a year after the bank presented its biggest profit ever. This report is a part of a reading project about the bankruptcy and aims to establish an overview of the risks included in Lehman Brothers’ business, how they were neglected and finally led to the downfall. The authors have examined five different types of risks that constituted the inherent risk in Lehman Brothers; market risk, credit risk, liquidity risk, operational risk and reputational risk. After analysis, the authors can conclude that all of the above mentioned risks were exceptional high and played a significant role in what would become the largest bankruptcy in history. Finally, the authors present a summary of recommendations for more sustainable risk management in investment banking.
Key words: Lehman Brothers, Investment bank, market risk, credit risk, liquidity risk, operational risk, reputational risk, Bankruptcy
Table of Content
Introduction ........................................................................................................... 4 Background ........................................................................................................... 4 Risks in Investment Banking................................................................................. 4 From Boom Years to Crisis ................................................................................... 5 The Strategical Failures
References: Lehman Brothers (2008), Lehman Brothers 2007 Annual Report Lehman Brothers First Quarter Report, 2008 Lehman Brothers Second Quarter Report, 2008 Norberg, J. (2009) En perfekt storm - Hur staten, kapitalet och du och jag sänkte världsekonomin Valukas, A. R., Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report Chapter 11 Case No.08‐13555, REPORT OF ANTON R. VALUKAS, EXAMINER, Volume I and III, Jenner & Block LLP . Called “Bankruptcy Report No.08‐13555” in the text. Niall Ferguson,“Wall Street Lays Another Egg”, Vanity Fair, December 2008, p. 4 Historical Recources (2010), History of Lehman Brothers, http://www.library.hbs.edu/hc/lehman/history.html Investopedia Staff (2010), Case Study: The Collapse of Lehman Brothers http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp MarketWatch (2008), Lehman posts deep loss, to sell assets http://www.marketwatch.com/story/lehman-plans-to-jettison-assets-quarterly-loss-hits-39billion Further reading For those who want to learn more about the subject, there are many sources to chose from. The book "En perfekt storm: Hur staten, kapitalet och du och jag sänkte världsekonomin" (availible in English titled "Financial Fiasco: How America 's Infatuations with Homeownership and Easy Money Created the Economic Crisis", (2009)) by Swedish author and liberal debater Johan Noberg is a good introduction to the financial crisis. It recounts the crisis, it 's buildup and aftermath in a fairly simple way, although it doesn 't focus explicitly on Lehman Brothers. "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers" (2009), written by Lawrence G. McDonald and Patrick Robinson, narrates the collapse from McDonald 's point of view. McDonald served as vice-president of Lehman Brothers before and during its demise. Another book, "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System - and Themselves" (2009) by New York Times reporter Andrew Ross Sorkin tells the story about the financial crisis in 2008, based on numerous interviews with people from Wall Street. It deals about Lehman Brothers as well as the other banks. A BBC Two documentary called "The Bank That Bust The World" is a part of a series about the financial crisis is and focuses on the Lehman Brother crash. It describes what led to the bankrupt, as well as the last days and the consequences. The bankruptcy report by Anton Valukas, ”Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report” also provides much information, although it’s over 2 200 pages. The report is divided into volumes so it is still possible to read on specific topics.