Management and operational and strategic decision - Lehman brothers (2007-2009)

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Management and operational and strategic decision - Lehman brothers (2007-2009)

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Themes

Risk management, Lehman brothers, economic growth, financial crisis, firm, organization, market capitalization

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Abstract

On September 15, 2008, Lehman Brothers declared bankruptcy. With USD 639 billion in assets, nearly USD 619 billion in debt and 25,000 employees worldwide, Lehman was the fourth-largest investment bank in the United States. Given its financial strength, far superior to those of Enron or WorldCom, the collapse of Lehman Brothers is the largest in history. The bank is the biggest victim of the subprime crisis of 2008 and its fall has intensified. In fact, it contributed to the erosion of nearly USD 10 trillion in global equity markets in October 2008.
In 2003-2004, the US real estate market is booming. At that time, Lehman Brothers bought five mortgage companies, including subprime mortgages like BNC Mortgage or Aurora Loans Services. These institutions specialize in Alt-A loans that are granted without requiring complete documentation of clients.
Initially, these acquisitions appear profitable and Lehman's real estate revenues allow for 56% growth in the financial markets between 2004 and 2006.
This growth rate is higher than all other investment or asset management institutions. The company has $146 billion of mortgages in 2006, has a turnover of $19.3 billion and a net income of USD 4.2 billion.

The influence of a very speculative environment
An organization that failed integrate the risk control function in its strategic and operational decision-making process
Unethical decision process in an unethical environment

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[...] This is done either by means of indicators which will make it possible to identify the defects of application of the procedures by the first level or by the realization of a random control on the controls carried out at the first level. Internal control, in doing so, ensures the effectiveness of first-level control and thus verifies the correct application of internal procedures. - A third level control, in the form of periodic control. This control is exercised according to a periodicity defined between the management and the General Inspection of the organization concerned. [...]

[...] Initially, these acquisitions appear profitable and Lehman's real estate revenues allow for 56% growth in the financial markets between 2004 and 2006. This growth rate is higher than all other investment or asset management institutions. The company has $ 146 billion of mortgages in 2006, has a turnover of $ 19.3 billion and a net income of USD 4.2 billion. In the first quarter of 2007, the defaults of subprime mortgages and the crash of the US real estate market are already apparent. [...]

[...] This drift can also result from a dishonest desire to divert the uses for personal purposes and can quickly lead to guilty negligence (abandonment of safety rules, lack of application of management rules, deletion of the audit trail, etc.) but also to the realization of an operational risk in the form of internal fraud; - The management of the various risks inherent to the practices of an organization. These risks are of various kinds (security, legal, financial, etc.) and have a cost. The purpose of the internal control system is to enable the organization to control its exposure to risks, in particular in order to limit the financial repercussions that the realization of one of these risks would have. This element is particularly present for credit institutions or investment firms whose risk-taking, especially at the financial level, is at the heart of the business model. [...]

[...] Their ego probably strongly limited rationality at the time of key decisions (Seth et al., 2002)4. III. Unethical decision process in an unethical environment One of the key elements in terms of ethics in the Lehman Brothers situation is the lack of conscience from Lehman brothers mostly of two elements. First, the greed behind their business model can be considered as highly unethical but can be explained by the competition within banks on the financial market and the desire to remain one of the most profitable companies on the US capital market. [...]

[...] Thus, an internal control system relies especially on: - A first level control. This is made by the operational department and can be likened to a quality control. It can, in order to reinforce its effectiveness be broken down in two, that is to say that a first self-check is carried out by the operational one and that a control in the form of validation is provided by a hierarchical superior or another member of this service. This level of control is, for example, identifiable during landings when the head of the cabin (line manager) gives the order "disarming slides, checking the opposite door". [...]

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