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Lehman Brothers started out in 1844 as a dry-goods store in Alabama, later growing into the fourth largest investment bank in the country by 2008. They invested in multiple different areas such as the business market, capital markets, investment banking, and investment management. The company also managed equity and fixed income sales, trading and research, investment banking, asset management, private investment management, private equity, proprietary trading, derivatives, securitizations, and real estate. (Wiggins, Piontek, Metrick, 2014). Richard (Dick) Fuld was the CEO of the company from 1994 to 2008. During Fuld’s tenure at Lehman’s, revenue was $2.7 Billion in 1994. In 2006, the revenue was an astounding 600% higher at $19.2 billion dollars (Wiggins, Piontek, Metrick, 2014). Fuld didn’t always have positive success as the CEO, he nearly bankrupted the company several times. By the early 2000’s, the housing industry was booming, and banks were trading mortgage-backed securities (MBS) and subprime mortgages. As the market became engulfed in these MBS investments, banks started to combine other asset backed securities into the MBS. These became known as collateralized debt obligations (CDO), which were tied with the MBS. The CDO were a high risk investment which lowered their investment grade ratings. Lehman was tying up all its assets by buying these mortgages and CDOs. When it was time to submit their quarterly review, Lehman would use a repurchase (Repo) transaction to hide their debt in the mortgages and CDOs, and show positive cash flow in their books. A repo transaction “is an agreement where one company transfers an asset to another company in exchange for short-term cash” (financialclips, 2010). Within the agreement, the borrower is to pay back the cash in exchange for the return of the assets, on a specific date, usually within a week. Lehman’s assets that they borrowed on were the MBS and CDO investments. Then when the quarterly financial reports were due, they essentially, were rid of their debt and replaced it with cash. This made their financial records show a significant amount of cash on hand, low debt and the ability to take more risks in investing. Making a repo transaction is completely legal in the business world. However, when Lehman did it, they described the repo transaction as a sale and not a loan, which is illegal (financialclips, 2010). By calling the transaction a sale, they were not responsible to pay the loan back, which is falsifying their financial reports. Lehman essentially hid $ 50 billion dollars. When the housing market crashed in 2008, Lehman Brothers was a huge contributing factor in the collapse. Millions lost all their life savings. High level management figures in the Lehman Brothers company, who lied about their financial statement, didn’t spend the rest of their life in jail. The person(s) that perpetrated these crimes are still allowed to work in the financial markets. Lehman Brothers Company is still a business and did not receive the corporate death penalty.
Capitalism is the primary motivator in the banking and financial economic system. Businessmen make business deals that promote personal or corporation gains. That’s how business deals work. Each deal is supposed to benefit each party involved, fairly. The free market is supposed to benefit everyone who legally conducts business. With scams like Fuld’s, the government might have to step in and govern the way these big corporations do business on every transaction. Fuld’s virtuous character traits of power and greed became too much over time. Through Fuld’s fifteen years as CEO, he made half a billion dollars, scamming the hard working people. There needs to be extremely harsh laws regarding the manipulation of financial records when other investors are investing their money according to those records. Fuld is morally and ethically wrong for the lies and financial hardships he caused to countless people.
There are many laws that govern the financial industry such as the Security and Exchange Commission, the Sarbanes-Oxley Act of 2002, and the Federal Trade Commission. Somehow, all of these committees did not see the misrepresentation of the financial records that Lehman Brothers was producing. Yet still, after all has come out, no one is behind bars. Richard Fuld has started his own firm, Matrix Asset Advisors, Inc., and is still working as a financial consultant. This outcome is irresponsible and an outrage to the American way.
financialclips. (2010, March 4). Lehman Brothers fraud explained by Dylan Ratigan, 03-12-10 [Video file]. Retrieved from
Wiggins, R. Z., Piontek, T., & Metrick, A. (2014). The Lehman Brothers bankruptcy a: Overview. Yale School of
Management YPFS Cases. Retrieved from http://som.yale.edu/sites/default/files/files/001-2014-3A-V1-LehmanBrothers-A-