Lehman brothers

INTERNATIONAL BUSINESS
MANAGEMENT
GROUP MEMBERS
• ASAD ULLAH KHAN SWATI
• ATTA UR REHMAN
• IBRAR HUSSAIN

CONTENTS
1.PROBLEMS OF LEHMAN BROTHERS CONCERNING :-
• FRANCHISING
•LICENSING
•EXPORTS
•JOINT VENTURE
•MERGER AND PROJECT BASED
2. GAP BETWEEN DOCUMENTATION AND PRACTICES
3. BLUNDER , CORRUPTION AND MALPRACTICES IN REALITY
4. ADVISED SOLUTIONS

INTRODUCTION
On September 15, 2008, Lehman Brothers Holdings Inc filed for
bankruptcy. It filed for protection under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the
Southern District of New York. It filed with $639 billion in assets and
$619 billion in debt, Lehman's bankruptcy filing was the largest in
history, as its assets far surpassed those of previous bankrupt giants such
as WorldCom and Enron. Lehman was the fourth-largest U.S. investment
bank at the time of its collapse, with 25,000 employees worldwide.

BRIEF HISTORY OF LEHMAN BROTHERS
Henry Lehman, an immigrant from Germany, opens a small dry goods
store in Montgomery, Alabama, in 1844.
PROJECT BASED LEHMAN BROTHER INC:
In 1850 Henry is joined by brothers Emanuel and Mayer and they name the
business Lehman Brothers.
In 1858 The Lehmans -- who take cotton from farmers to settle accounts and
trade the cotton for money and merchandise -- open a New York office.`
In 1860 After the Civil War, they move to New York and establish the New
York Cotton Exchange.
In 1887 Become members of the New York Stock Exchange
In 1889 Lehman underwrites its first public offering, for the International Steam
Pump Company.

PROJECT BASED LEHMAN BROTHERS
• In 1929 The Lehman Corporation is created, a closed-end investment
company.
• In 1930 Lehman underwrites the IPO of DuMont, the first television
manufacturer.
• 1950s Underwrites the IPOs of Digital Equipment and Hertz Rent-a-
Car
• 1960 Opens a Paris office.
MERGERS AND ACQUISITIONS
• 1962 With Salomon Brothers, Merrill Lynch and Blyth and Company,
Lehman forms an association nicknamed the "fearsome foursome" that
challenges the major firms for underwriting business.

MERGERS AND ACQUSIITIONS
• Becomes one of the first investment banks to open an office in London
to take advantage of the booming bond market in Europe.
• 1972
• Lehman acquires Abraham & Co.
• 1975
• American Express acquires Lehman Brothers and merges it with
Shearson.
• 1984
• Seat on the London Stock Exchange
• 1986

MERGERS ACQUSISTIONS AND PROJECTS
• Seat on the Tokyo Stock Exchange
• 1988
• American Express divests Shearson, and the independent firm once
again becomes known as Lehman Brothers.
• 1993
• Lehman becomes independent through a public stock offering and
Lehman Brothers Holding Inc common stock begins trading on the
New York & Pacific stock exchanges.
• 1994

• Fuld fights off rumors that the near collapse of Long Term Capital
Management had caused a cash crunch at Lehman.
• 1998
• Lehman establishes an alliance with Bank of Tokyo-Mitsubishi for
Japanese mergers and acquisitions.
• 1999
• Under pressure to cut costs, Fuld decides to pay staff less and in stock,
rather than lay off employees.
• 2001
MERGERS ACQUSISTIONS AND PROJECTS

MERGERS AND ACQUISITIONS
• Lehman establishes its wealth and asset management division and
acquires Lincoln Capital Management's fixed income business.
• 2002
• Lehman acquires Neuberger Berman and The Crossroads Group.
• 2003
• Lehman posts record-high net revenues, net income and earnings per
common share (diluted) for a fourth consecutive year and the highest
volume of trade on the London Stock Exchange for a third year in a
row.
• 2007
• (BEFORE BANKRUPCY ON SEP 15,2008)

PROBLEMS RELATED TO MERGERS PROJECT
BASE AND ACQUISITIONS
AN EVOLVING PARTNERSHIP (1969–1984):
• Robert Lehman died in 1969 after 44 years as the patriarch of the firm, leaving
no member of the Lehman family actively involved with the partnership.
Robert's death, coupled with a lack of a clear successor from within the
Lehman family left a void in the company. At the same time, Lehman was
facing strong head winds amidst the difficult economic environment of the
early 1970s. By 1972, the firm was facing hard times and in 1973,
Pete Peterson, Chairman and Chief Executive Officer of the Bell & Howell
Corporation, was brought in to save the firm.
• Under Peterson's leadership as Chairman and CEO, the firm acquired
Abraham & Co. in 1975, and two years later merged with the venerable, but
struggling, Kuhn, Loeb & Co., to form Lehman Brothers, Kuhn, Loeb Inc., the
fourth-largest investment bank of USA. Peterson led the firm from significant
operating losses to five consecutive years of record profits with a
return on equity among the highest in the investment-banking industry.

• By the early 1980s, hostilities between the firm's investment bankers and
traders (who were driving most of the firm's profits) prompted Peterson to
promote Lewis Glucksman, the firm's President, COO and former trader, to be
his co-CEO in May 1983. Glucksman introduced a number of changes that
had the effect of increasing tensions, which when coupled with Glucksman’s
management style and a downturn in the markets, resulted in a power struggle
that ousted Peterson and left Glucksman as the sole CEO.
• Upset bankers, who had soured over the power struggle, left the company.
Stephen A. Schwarzman, chairman of the firm's M&A committee, recalled in
a February 2003 interview with Private Equity International that "Lehman
Brothers had an extremely competitive internal environment, which ultimately
became dysfunctional." The company suffered under the disintegration, and
Gluckman was pressured into selling the firm.

• Shearson/American Express, an American Express-owned securities
company focused on brokerage rather than investment banking,
acquired Lehman in 1984, for $360 million. On May 11, the combined
firms became Shearson Lehman/American Express. In 1988, Shearson
Lehman/American Express and E.F. Hutton & Co. merged as
Shearson Lehman Hutton Inc.
• From 1983 to 1990, Peter A. Cohen was CEO and Chairman of
Shearson Lehman Brothers, where he led the one billion dollar
purchase of E.F. Hutton to form Shearson Lehman Hutton. During this
period, Shearson Lehman was aggressive in building its
leveraged finance business in the model of rival
Drexel Burnham Lambert.

GAP BETWEEN DOCUMENTATIONS AND
PRACTICES

PRACTICES
• ACCOUNTING MANIPULATION:
• In March 2010, the report of Anton R. Valukas, the Bankruptcy
Examiner, drew attention to the use of Repo 105 transactions to boost
the bank's apparent financial position around the date of the year-end
balance sheet. The New York attorney general Andrew Cuomo later
filed charges against the bank's auditors Ernst & Young in December
2010, alleging that the firm "substantially assisted... a massive
accounting fraud" by approving the accounting treatment.
• On April 12, 2010, Lehman had used a small company, Hudson Castle
, to move a number of transactions and assets off Lehman's books as a
means of manipulating accounting numbers of Lehman's finances and
risks. One Lehman executive described Hudson Castle as an "alter
ego" of Lehman. According to the story, Lehman owned one quarter
of Hudson; Hudson's board was controlled by Lehman, most Hudson
staff members were former Lehman employees.

PRACTICES
• Regulatory capture is not a theoretical concept
• Financial firms had so much money and power, they persuaded
politicians and regulators to leave them alone. Such regulatory capture
is not unusual but in the financial industry it caused global
devastation. The lack of limits to leverage and the low capital
requirements created a disaster waiting to happen. And that is without
all the slicing and dicing allowed, credit rating agency failures etc.
• Weak regulation was highly beneficial to the banks short term but it
has come at great economic cost to the countries those banks are
supposed to serve. Also the failure of weak regulation of the past now
ensures much stricter regulation in the future. Short term the banks and
executives benefitted but in the long term the operating environment
will be a lot tougher.

BLUNDERS , CORRUPTIONS AND
MALPRACTICES

WEAK GOVERNANCE FAILURE:
Lehman Brothers had weak corporate governance arrangements which failed to
safeguard against excessive risk taking are partly to blame for the economic crisis.
Such failures remained hidden in a prosperous market but the downturn has revealed a
number of flaws. The key areas of weakness that have been highlighted are:
•Corporate risk management;
•Board of directors;
•Remuneration scheme; and
•Nomination committees.
MALPRACTICES

CORRUPTION:
Lehman Brothers had six committee, one of them
was a Finance and Risk Committee, which consists
of the Firm’s Executive Committee, the CRO and
the CFO, should meet weekly to discuss all risk
exposures, position concentrations and risk taking
activities, but it only met twice in both 2006 and
2007.
MALPRACTICES

RISK MANAGEMENT:
Timothy Geithner (Secretary Of The Treasury),said in
his report, “Lehman’s plunge into high-risk businesses
in the years before its bankruptcy has become a
familiar story. During this period of aggressive
growth, Lehman developed significant exposures to
risky subprime lending, commercial real estate,
structured products, and high-risk lending for
leveraged buyouts. Importantly, the Valukas Report
indicates that Lehman repeatedly breached its own risk
concentration limits in pursuit of higher earnings”.
Treasury Secretary Tim Geithner
MALPRACTICES

RISK MANAGEMENT:
NEW YORK (CNNMoney.com), Failings by Lehman
Brothers executives and its auditor led to the bank
collapse that unleashed the worst of the financial crisis.
According to a report by a court-appointed investigator,
“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, says the report,
authored by examiner Anton Valukas.`
MALPRACTICES

RISK MANAGEMENT:
Anton Valukas, (Chicago Based Lawyer) said in his report, the bankruptcy examiner's
massive report on the collapse of Lehman Brothers has found "credible evidence" that
top executives, including the Chief Executive, approved misleading statements and
used accounting gimmicks as drugs to hide the truth from investors and the public.
Worse, the report raises serious questions about the behavior of auditors and
regulators, who are supposed to protect the public. Specifically, the report's
revelations include:
Inside Lehman Brothers, some executives were very concerned about the firm's
Enron-like accounting practices as the company headed to the brink in September
2008. In May 2008, Matthew Lee, a former Lehman senior vice president wrote a
letter to senior management warning that the company may have been masking the
true risks on its balance sheet. His warnings, revealed in the bankruptcy report, show
that Lehman's auditors knew of potential accounting irregularities and allegedly failed
to raise the issue with Lehman's board.
MALPRACTICES

BLUNDER:
Lehman Brothers adopted a new strategy to
overcome their problems but this led to business
risks because its investments in long term assets
like the commercial real estate, private equity and
leveraged loans had more vague prospects and
were less liquid than its usual investments.
MALPRACTICES

The House of Representatives Committee offered
the following observations on the composition of
the board: “Nine are retired. Four of them are over
75 years old. One is a theater producer, another a
former Navy admiral. Only two have direct
experience in the financial services industry”.
MALPRACTICES

• Board of directors at Lehman Brothers were paid well for their services in
fees that range from $325,000 to $397,000.
• Independent directors may lack the incentive and the time to take care of the
corporation, because, most of them were very busy and had many
responsibilities. For instance, Marsha Johnson Evans serves as a director of
Weight Watchers International, Huntsman Corporation and Office Depot, as
well as chairman of Lehman’s nominating and governance committee and a
member of both the compensation committee and the finance and risk
committee.
MALPRACTICES

REMUNERATION SCHEME:
A study from researchers at Harvard University,
“The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008,”
shows that the top executive managers of Lehman
Brothers received about $1 billion respectively from cash
bonuses and equity sales between 2000 and 2008.
The Board at Lehman Brothers awarded total
remuneration of close to $500 million to Chairman Fuld,
just four days before its collapse and following an
announcement that the firm lost almost $4 billion in the
third quarter, Fuld told the media that "the Board's been
wonderfully supportive."
MALPRACTICES

REMUNERATION SCHEME:
• Fuld (CEO) received nearly half a billion dollars in total compensation
Between 1993 and 2007.
• In 2007, Fuld earned a total of $22 million, including:
- a base salary of $750,000;
- a cash bonus of $4.25 million; and
- stock grants of $16 million.
• The staff received a disproportionately high percentage of their pay in
Lehman stock and options. When the firm went public, employees owned 4
per cent of the firm, worth $60m. By 2006, they owned around 30 per cent,
equivalent to $11billion, at least on paper.
MALPRACTICES

NOMINATIONS:
Four of the ten members board at
Lehman Brothers were over 75 years
of age and only one had current
financial sector knowledge
MALPRACTICES

TECHNICAL CAUSE OF LEHMAN BROTHERS FAILURE:
• One of the main failure cases in Lehman Brothers was the misbehavior of top
executives and the inaction of both the board and the auditing firm (Ernst &
Young).
• There are many similarities between the collapses of Enron in 2001 and
Lehman Brothers in 2008, that they managed to reduce leverage on the right-
hand side of the balance sheet and, at the same time, reduce assets on the left-
hand side. In Lehman Brothers, Repo 105 transactions doubled between late
2006 and May 2008, were known inside the corporation, exceeded the firm's
self-imposed limits and typically happened at the end of each quarter, when
financial information had to be released.
MALPRACTICES

TECHNICAL CAUSES OF LEHMAN BROTHERS
FAILURE:
• Lehman in the last year was unable to retain the
confidence of its lenders and clients, because it did not
have sufficient liquidity to meet its current obligations,
and on two consecutive quarters with huge reported
losses, $2.8 billion in second quarter 2008 and $3.9
billion in third quarter 2008, without news of any
definitive survival plan.
MALPRACTICES

MISLEADING:
• The Wall Street equivalent of a coroner’s report,
mention that Richard S. Fuld Jr, Lehman’s former
chief executive, certified the misleading accounts, the
report said.
• Mr. Valukas (one of the examiner) wrote in the report
“Unbeknownst to the investing public, rating agencies,
government regulators, and Lehman’s board of
directors, Lehman reverse engineered the firm’s net
leverage ratio for public consumption,”. The report
states that Mr. Fuld was “at least grossly negligent”.
• Henry M. Paulson Jr., who was then the Treasury
secretary, warned Mr. Fuld that Lehman might fail
unless it stabilized its finances or found a buyer.`
Henry M. Paulson Je.
Shannon Stapleton/Reuters
MALPRACTICES

• THE PRIME CULPRIT:
• In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way,
Lehman acquired five mortgage lenders, including subprime lender BNC
Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made
to borrowers without full documentation). Lehman's acquisitions at first
seemed prescient; record revenues from Lehman's real estate businesses
enabled revenues in the capital markets unit to surge 56% from 2004 to 2006,
a faster rate of growth than other businesses in investment banking or asset
management. The firm securitized $146 billion of mortgages in 2006, a 10%
increase from 2005. Lehman reported record profits every year from 2005 to
2007. In 2007, the firm reported net income of a record $4.2 billion on
revenue of $19.3 billion.
MALPRACTICES

ADVISED SOLUTIONS
• Risk Management is a misnomer:
• The management of risk has appeared to be anything but, and not just
at Lehman. Basic risks were also badly understood. Classic economic
theory explains the benefits of diversification – don’t put all your eggs
in one basket. And yet that is what many employees at Lehman did.
Their source of income – their job – was dependent on the firm’s
success (even more so as Lehman paid bonuses). But then on top of
that, Lehman staff also had far too much exposure to the bank through
their investments – Lehman stock. And so, when Lehman went under,
they lost not only their jobs but also all their savings. And yet most
employees at Lehman should have realized they needed to spread their
(nest) eggs wider.

• Regulatory capture is not a theoretical concept
• Financial firms had so much money and power, they persuaded
politicians and regulators to leave them alone. Such regulatory capture
is not unusual but in the financial industry it caused global
devastation. The lack of limits to leverage and the low capital
requirements created a disaster waiting to happen. And that is without
all the slicing and dicing allowed, credit rating agency failures etc.
• Weak regulation was highly beneficial to the banks short term but it
has come at great economic cost to the countries those banks are
supposed to serve. Also the failure of weak regulation of the past now
ensures much stricter regulation in the future. Short term the banks and
executives benefitted but in the long term the operating environment
will be a lot tougher.
ADVISED SOLUTIONS

• Stocks always recover; people don’t:
• Investors have been able to tap anywhere from 4% all the way up to 10% of
their savings annually based on how markets fared in this all-important first
decade of retirement. It’s time to dial down the risks in your portfolio before
the next downturn.
• Diversification works — but in diverse ways:
• In 2008, only one type of diversification seemed to pan out: your basic mix of
stocks and bonds. Among equities, everything pretty much fell in lockstep.
Fast-forward more than three years, when the financial crisis unfolded in a
different guise — this time with the debt crisis. Fear of government defaults
peaked in early 2012, with rates on Greek debt reaching 29%.
ADVISED SOLUTIONS

Mergers & Acquisitions
• Lehman Brothers (1994, spun off by
American Express;2008, bankrupt)
• Shearson Lehman Hutton (merged 1988)
• Crossroads Group (est. 1981, acq. 2003)
• Neuberger Berman (est. 1939, acq. 2003,
sold to management 2009)
• Shearson Lehman Brothers (merged 1984)
• E. F. Hutton & Co (est. 1904)
• Shearson/American Express (merged 1981)
• Lehman Brothers Kuhn Loeb (merged 1977)

• Lehman Brothers (merged 1975)
• Shearson Loeb Rhoades (acquired 1981)
• Kuhn, Loeb & Co (est. 1867)
• Lehman Brothers (est. 1850)
• Abraham & Co (est. 1938)
• American Express (est. 1850)
• Shearson Hayden Stone (merged 1973)
• Loeb, Rhoades, Hornblower & Co (merged 1978)
• Hayden Stone, Inc. (formerly CBWL-Hayden Stone,
merged 1970)

• Loeb, Rhoades & Co (merged 1937)
• Hornblower, Weeks, Noyes & Trask
(merged 1953–1977)
• Cogan, Berlind, Weill & Levitt
(formerly Carter, Berlind, Potoma & Weill,
est. 1960)
• Hayden Stone, Inc (formerly CBWL-Hayden
Stone, merged 1970

• Paul H. Davis & Co.(est. 1920, acq. 1953)
• Spencer Trask & Co.(est. 1866 as Trask &
Brown)
• Hemphill, Noyes & Co.(est. 1919, acq. 1963)
• Hornblower & Weeks(est. 1888)
• Rhoades & Company(est. 1905)
• Carl M. Loeb & Co (est. 1931)
• Shearson, Hammill & Co (est. 1902)
• Shearson, Hammill & Co (est. 1902)
• Hayden, Stone & Co

LEGAL ACTION AGAINST LEHMAN’S OFFICIALS
• Five years after Lehman’s collapse hastened a worldwide economic
panic, the government faces lingering questions about the decision to
spare executives like Richard S. Fuld Jr., who ran Lehman for 14
years until its demise. Not a single senior executive from any Wall
Street bank faced criminal charges from the crisis, either. And the
government’s deadline for filing most charges will expire this year,
providing a reminder of the case and its unpopular outcome.
• Federal prosecutors and the S.E.C. have never officially announced
their decision to close the Lehman investigation. The S.E.C. also
debated the culpability of top Lehman executives. But Mr. Canellos’s
team argued that Mr. Fuld did not know that Lehman was using
questionable accounting practices despite testimony from another
Lehman executive that suggested otherwise.

• There is widespread agreement that Lehman failed under the weight
of risky real estate investments and an inability to finance its
operations amid the economic turmoil of 2008. It has been less clear,
especially after Mr. Valukas released his report, whether the
government did a thorough review of the firm’s collapse.
• Yet The Times’s examination reveals new details about the breadth of
the government’s effort — S.E.C. officials reviewed more than 15
million Lehman documents and interviewed some three dozen
witnesses. The decision not to bring charges came despite early hope
among investigators, whose careers likely would have benefited from
bringing such a prominent case.
• It’s not like a murder case, where you have a dead body and you
know a crime has been committed. The Lehman case once seemed
like the exception.

Lehman brothers

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