Table of FiguresFigure 1: Interdependencies between Lehman Brothers and other entities. Source: PricewaterhouseCoopers, 2009.3Figure 2: What event had the most significant impact on the industry in 2008? Source: SIFMA, 20084Figure 3: Global Presence of Lehman Brothers. Source: PricewaterhouseCoopers, 2009.5Figure 4: Organisational structure and decision making. Source: Goh & Madani, 20129IntroductionThe significance of the bankruptcy of Lehman Brothers is the global footprint it left behind. There were literally thousands of participants in the financial market directly affected by their collapse. Furthermore, it caused a domino effect due to various cross-border and cross-organisational interdependency.
The Lehmnan liquidation caused over seventy five separate and distinct bankruptcy proceedings (PricewaterhouseCoopers, 2009). The interdependency of this firm with others in the industry and how they are interrelated is illustrated in Figure 1.Figure 1: Interdependencies between Lehman Brothers and other entities. Source: PricewaterhouseCoopers, 2009.The collapse of Lehman brothers is viewed by many as a defining moment in financial circles. This is illustrated by the results of a survey conducted by SIFMA in 2008 that asked respondents to list the most significant event of 2008:Figure 2: What event had the most significant impact on the industry in 2008?
Source: SIFMA, 2008This report seeks to ascertain what exactly caused this catastrophic collapse and how they could have been avoided or solved. The issues will be examined in detail and recommendations made. IssuesThe effect of the bankruptcy of Lehman Brothers was exacerbated by the intricate nature of its global legal framework. There were several Lehman Brothers entities worldwide as illustrated in Figure 3. These entities did not file for bankruptcy as one. On September 15th 2008, LBHI filed for bankruptcy and caused global chaos which began with Lehman Brothers International (Europe) filing for administration the same morning.
This was followed by appointment of a SIPC trustee for Lehman Brothers Inc on 19th September, 2009. The impact on clients and colleagues was exposure by several Lehman Brothers bodies located in different jurisdictions which had differing bankruptcy and insolvency legislation, contractual protection and remedies (Pricewaterhouse, 2009). Figure 3: Global Presence of Lehman Brothers. Source: PricewaterhouseCoopers, 2009.Lehman Brothers conducted a risk management assessment in 2006 that outlined the strengths and weaknesses of the firm.
The conclusion reached was the Lehman, while having a considerable credit strength, which gave it a stable A1 rating, it was also hindered by opacity in risk disclosures as well as an industry wide reluctance by securities organisations to give guidance on their risk exposures (FOIA Confidential, 2006). A core competency in the securities industry that is also a driver for critical rating is management of risk. The characteristics of this risk are difficult to disseminate in a timely and transparent way to clients of these firms because of the fluid nature of the industry.
Moody’s ratings are a direct judgement on the risk control culture and capabilities perpetrated by management, predominantly in the financial sector (Global Securities Firms Industry, 2005). The Risk Management Assessment done on Lehman Brothers would inflate this judgement through evaluation of the risk management practises of the firm in the context of the financial sector framework. This is achieved by locating such management as pertains to standards and best practises.