Sample Business Finance Paper on Collapse of Lehman Brothers


The year 2008 was termed as the year of financial crisis due to the crumbling of financial
institutions into bankruptcy and liquidation. From the perspective of economists, 2008 was the
worst financial crisis to ever occur since the Great Depression (Adu-Gyamfi, 2016). Lehman
Brothers, an invest-banking firm, was amid the global financial crisis. Lehman Brothers was the
largest disaster to have ever hit the United States. The investment banking firm had survived
multiple past disasters during their existence, including two World Wars and the Great
Depression of the 1930s. Lehman Brothers was, however, brought to its knees by the collapse of
the United States housing market. However, Lehman Brothers was not led to its knees by the
collapse of the housing market alone. Other factors led to the collapse of Lehman Brother’s
demise, which included accounting fraud and unethical decisions. These two factors played a
significant role in the collapse of Lehman Brothers.


The Collapse of Lehman Brothers is an exciting topic to research as it shook the global
financial markets, given that the firm was huge and had a significant status in the United States
as well as globally. The topic is vital as it provides the different factors that led to the financial
crisis, and the insight gained can be utilized by firms presently to prevent such an event from
happening again. From the topic, insight is garnered on how poor management, misleading
accounting practices, and unethical actions in a corporation can affect its operations.


History of Lehman Brothers

Lehman Brothers was started as a small general store in 1844 in Montgomery, Alabama,
by Henry Lehman, who was a German Immigrant. Lehman Brothers was then founded in 1850
by Henry Lehman and his brothers Mayer and Emanuel. Lehman Brothers then transitioned to a
commodities broker that served the planters living around Alabama by buying and selling cotton.
The firm later became a merchant-banking firm after it became a member of the New York Stock
Exchange in 1877. There was a spin-off that led to the split of the Lehman Brothers and
American Express in 1994, which led to Richard S. Fuld Jr being the president until its collapse
(Staff, 2017).
The Nature of Fraud
Lehman filed for bankruptcy on September 15, 2008. Lehman had $619 billion in debt
and $639 billion in assets hence making history by surpassing the previous firms, which were
considered to be bankrupt giants such as Enron and WorldCom (Staff, 2017). Lehman Brothers
did not collapse for any specific reason. There exists a myriad of factors that cause some firms
today to collapse or become bankrupt. Lehman Brothers as well collapsed as a result of multiple
factors. The most significant factors that played a massive role in the collapse of the firm were
poor management decisions, together with the misappropriation of repurchasing agreements and
unethical actions. Lehman Brothers firm misused the repurchasing agreements, which they
referred to as Repo 105, and also carried out misleading accounting practices, which violated
General Acceptable Accounting Practices (GAAP) and Sarbanes-Oxley Act. All these factors,
coupled up, is what led to the collapse of the firm. The same factors are common causes of
bankruptcy for different firms globally (Swedberg, 2010).
Poor management decisions, together with unethical actions, was a major factor for the
collapse of Lehman Brothers. Originally, the firm an investment banking firm, after which

management decisions were made for it to transition to a mortgage financier under the leadership
of Richard Fuld Jr. The firm, as a mortgage financier, made its subprime loans and was driven
deep into subprime mortgages. Lehman Brothers financed different lenders across the country
and made intricate loans to dubious borrowers. Lehman Brothers then took all the subprime
loans, after which conversion of the loans was made to toxic bonds and then sold to investors.
These decisions exposed the firm to vulnerability as it provided a chance to the individuals who
wanted to misappropriate assets and misuse their positions in the firm. Richard Fuld Jr used his
position to misappropriate assets for his gains through selling toxic bonds (Staff, 2017). Given
his position in the firm, he may have also rationalized that it was easy for him to manipulate
Misusing repurchasing agreements also contributed to the collapse of Lehman Brothers.
The repo market entails a process in which cooperation that have extra money lend to banks on
an overnight basis, and the money is utilized as a short-term loan. So that the loan is safe, some
assets such as bonds are sold by the bank to the corporation so that if the bank goes bankrupt, the
corporations can sell them. In the dealing, there is an agreement that the bank buys back the
bonds after the corporation keeps a small amount of money (Swedberg, 2010). Lehman Brothers
used to enter into the repo market, where it would make Repo 105 deals with corporations where
it would use its bonds as collateral. Under the accounting rules, once a bank enters into a repo
deal with a corporation and uses its bonds as collateral, the bank should repurchase the bonds at a
lower price, and the repo deal should stay on the balance sheets of the bank. Even though the
repo deal was a repurchase agreement between two entities, under the accounting rules, it is
recorded as a “true deal.” Lehman Brothers misused repurchase agreements made in the repo
market to move assets that were worth $50 billion off the firm’s balance with the claims that the

transactions were sales instead of stating that they were financing. This means that there was no
transparency in the firm’s financials as it made use of the accounting ploy, they termed Repo 105
as a means to move the capital to other company’s and borrow money (Staff, 2017). With the
Repo 105 deals, Lehman executives had not anticipated that liability would eventually exceed
equity. They had instead rationalized that the transactions would meet a short-term goal.
Accounting techniques and practices also presently play a major role in leading many
firms to bankruptcy. Accounting techniques also played a significant role in the collapse of
Lehman Brothers since the management did not provide the actual figures of the firm’s finances
but instead portrayed the financial statements as they wanted them to do (McDonald, 2016).
General Acceptable Accounting Practices (GAAP) and the Sarbanes-Oxley Act were violated by
the firm’s misleading practices. It is important for firms to disclose their actual financial
statements, which Lehman Brothers failed to do. The Sarbanes-Oxley Act of 2002 was violated
by the firm, which serves to protect the general public as well as the shareholders from
fraudulent practices and accounting errors within a firm. The Sarbanes-Oxley Act requires that
the firm through its officers’ reviews and verifies that the position of the company is fairly
disclosed by its financial statements. Through the Sarbanes-Oxley Act of 2002, the financial
executives are liable to imprisonment or financial penalties if the financial penalties are found to
have misstatements (Swedberg, 2010). The firm’s CFO, Mrs. Callan, and the CEO Mr. Fuld
would have faced criminal charges if they were aware of the REPO 105 transactions and had
knowledge that the financial statements due to these transactions were misleading. The general
public and the investors were deceived each quarter through the use of the financial statements
which were misleading and through hiding the toxic assets and liabilities. The external
accounting firm Ernst & Young also violated the Federal Accounting Standards Advisory Board

(FASAB) since it never took note of the Repo 105 transactions, which were termed by New
York prosecutors as accounting Gimmicks, which aided Lehman Brothers to hide the actual
financial situation of the firm. Lehman Brothers were, therefore, guilty of carrying out
misleading accounting practices, which was as well vital in their bankruptcy (Swedberg, 2010).
The Investigation
There was a suspicion of an error in the financial statements of Lehman Brothers by one
Mr. Mathew Lee, who was an accountant at the firm. Lee, who had worked in the firm for 14
years, investigated Repo 105 and presented his questions to the top executives of the firm
without receiving any response. After no response was provided, he wrote a memo stating that
there was an error in the accounting of Lehman Brothers, but six days after writing the memo, he
was terminated (McDonald, 2016). Ernst & Young, the external accounting firm of Lehman
Brothers, were aware of the written memo but did not present it to the company’s audit
committee. After Lehman Brothers had collapsed, an investigation was ordered by the Federal;
bankruptcy court with Mr. Anton Valukas heading it. The findings of Mr. Valukas were that the
financial reports and balance sheets of Lehman Brothers had been manipulated by the top
executives (Adu-Gyamfi, 2016). The investigation resulted in findings of Mr. Fuld certifying
misleading financial statements that were not challenged by both the internal and external
accountants. Upon further investigation, Mr. Valukas found out that the firm had misused the
Repo 105, which is an accounting trick. They had used it to remove $50 billion from the
recorded financial statements in a way that seemed that the firm was reducing its debts (Staff,
2017). It was not made clear to the regulators or the investigators about what was being done to
Lehman’s financial statements. The investigations by Mr. Valukas also stated that government
regulators had knowledge about what was transpiring in the firm before its collapse. There was

an office of government regulators inside Lehman Brothers, but they never raised the alarm
about what was going on in the firm.
The Impact
Lehman Brothers, an investment banking company, is the largest disaster that hit the
United States financial industry in 2008. After the collapse of Lehman Brothers, millions of
investors lost their money, and over 26,000 employees lost their jobs (Mieszala, 2019). A chain
of the reaction was triggered through the collapse of the firm, and the worst financial crisis was
witnessed, and the response was the loss of jobs to over 6 million individuals. Investors lost
almost all their money, and that led to other severe impacts. The rate of unemployment doubled
to almost 10%, other countries such as Chrysler and General Motors declared bankruptcy
(McDonald, 2016). The government, as a result of the firm’s collapse, refused to bail it out. All
the economic sectors were affected by the collapse of Lehman Brothers with the biggest blow
being received by financial institutions (Mieszala, 2019). The high levels of unemployment
witnessed during this period adversely affected the economy of the United States.


The global financial markets were shaken by the collapse of Lehman Brothers, given that the
firm was very large and had a significant status in the United States as well as globally. The
investment bank had a multifaceted structure that gave the top executives a chance to abuse their
position by acting unethically and allowing misleading accounting practices. Lehman Brothers,
who had the lead as Richard S. Fuld Jr, had unethical managers who made irrational decisions to
embezzle the assets of the company, which later became disastrous. The firm violated accounting
practices, including the Sarbanes-Oxley Act, as the financial statements of the firm, were
violated by the firm’s top executive to show that the company was in a better financial position

than it was at the time. The top executives took it upon themselves to inflate their financial
statements to keep the appearance of Lehman brothers with a high growth rate. The actions of
the top managers were disastrous as it led to a lot of individuals being unemployed, and many
investors lost millions of their property that they had invested in Lehman Brothers. Ernst &
Young and the firm’s internal accountants were aware of what was transpiring in the firm and
hence violated GAAP since they did not note that the Repo 105 transactions were being used as
an accounting Gimmick.



Adu-Gyamfi, M. (2016). The bankruptcy of lehman brothers: causes, effects and lessons learnt.
Journal of insurance and financial Management, 1(4).
McDonald, O. (2016). Lehman Brothers (p. 288). Manchester University Press.
Mieszala, R. (2019). Impact of the collapse of the Lehman Brothers bank and the 2008 financial
crisis on global economic security. Scientific Journal of the Military University of Land
Forces, 51.
Staff, I. (2017). Case Study: The Collapse of Lehman Brothers. Retrieved from.
Swedberg, R. (2010). The structure of confidence and the collapse of Lehman Brothers. In
Markets on trial: The economic sociology of the US financial crisis: Part A. Emerald
Group Publishing Limited.