Lehman Brothers Case Study

The history of Lehman Brothers (LBs) is dated back to 1844 when Henry Lehman and his two brothers established a small shop in Alabama (United States) to sell groceries and other commodities (Geisst, 2001). In the early 1900’s, they formed to a greater business company trading on the New York exchange market and the Cotton Exchange, which successfully promoted the family business to the retail giants with a partnership with Goldman and Sachs (Geisst, 2001; Wechsberg, 1966). Subsequently, the further opportunity raised in collaboration with some firms in the railway industry such as the Baltimore and Ohio railways, Chicago railways and others (Harward Business School, 2012). In 1975, the company achieved its success when it became the 4th largest investment bank in the US by merging with Kuhn, Loeb and Company, which boosted their financial activities in the financial market (Sloane, 1977). In the new line of business by diversifying their operations from a small shop via investments in the industry sectors, eventually they transformed to the company operating in the banking and brokerage (Geisst, 2001). Although LBs experienced remarkable successes and achievements, the housing market bubble in USA led to their collapse causing that in September 2008 the company filed for chapter 11 bankruptcy petitions that triggered a negative flow of consequences (Caplan et al., 2010).

A banking failure of Lehman Brothers had considerable negative influence on economics and financial markets worldwide. Beginning from the point what it could have been/be done, several authors agree that LB’s bankruptcy could have been/be anticipated (Christopoulos et al., 2011; Maux and Morin, 2011). They perceive a major problem in unwillingness or incapabil...

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...fers (2011) considers this as act to hide LBs unhealthy situation and showing a rosy picture for a purpose of positive grading from rating agencies. Valukas (2010) commented that this helped the company remove billions of dollars in commitments and so artificially improve the balance sheet. Further, Jeffers (2011) added that due to complex structure of the company manipulative and fraudulent activities were well masked and this cause difficulty to reveal or monitor such shadow activities for financial regulators. This shows that LBs manipulated its financial position to display a healthier picture of the company, which improved their leverage ratio and issued fictitious positive results to investors, regulators and others (Jeffers & Yang, 2008). LBs clearly failed to comply with law due to failure to disclose an alleged material fact and using misleading statements.