What was the culture at Lehman Brothers like? How did this culture contribute to the company’s downfall? What role did Lehman’s executives play in the company’s collapse? Were they being responsible and ethical? Discuss. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.

Read the case study and answer the following questions.

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.96 That action—the largest Chapter 11 filing in financial history—started an escalating and spiraling “crisis of confidence” that destabilized world financial markets and set off the worst financial scenario since the Great Depression. The fall of this Wall Street icon is, unfortunately, not a new thing, 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 & Young, were lambasted for actions that led to the firm’s collapse. Valukas 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 general counsel at Lehman for nine years, was responsible for preparing the firm’s public filings on executive compensation. Infuriated by what he felt was the firm’s “intentional under-representation of how much top executives were paid,” Budde argued with his bosses for years about that matter, to no avail. Then, one time he objected to a tax deal that an outside accounting firm had proposed to lower medical insurance costs, saying, “My gut feeling was that this was just reshuffling some papers to get an expense off the balance sheet. It was not the right thing, and I told them.” However, Budde’s bosses disagreed and okayed the deal.

Another problem at Lehman was the firm’s top leadership. Valukas’s report was highly critical of Lehman’s executives, who “should have done more, done better.” He pointed out that the executives made the company’s problems worse by their conduct, which ranged from “serious but nonculpable errors of business judgment to actionable balance sheet manipulation.” Valukas went on to say that “former chief executive Richard Fuld was at least grossly negligent in causing Lehman to file misleading periodic reports.” These reports were part of an accounting device called “Repo 105.” Lehman used this device to get some $50 billion of undesirable assets off its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss. The examiner’s report “included e-mails from Lehman’s global financial controller confirming that the only purpose or motive for Repo 105 transactions was reduction in the balance sheet, adding that there was no substance to the transactions.” Lehman’s auditor was aware of the use of Repo 105 but did not challenge or question it. Sufficient evidence indicated that Fuld knew about the use of it as well; however, he signed off on quarterly reports that made no mention of it. Fuld’s attorney claimed that Mr. Fuld had no knowledge of these transactions or how they were recorded on the books since he was not involved in structuring or negotiating them. A spokesperson from auditor Ernst & Young said that Lehman’s bankruptcy was due to several unprecedented unfavourable and hostile events in the financial markets.

1. What was the culture at Lehman Brothers like? How did this culture contribute to the company’s downfall?

2. What role did Lehman’s executives play in the company’s collapse? Were they being responsible and ethical? Discuss.

3. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.