THE COLLAPSE OF

LEHMAN BROTHERS
(2008)

A Case Study
INTRODUCTION

The accounting scandal

involved in the Lehman
Brother’s case was Lehman
employed off balance sheet
devices known within Lehman
as “REPO 105”transactions.
REPO 105 involved
transactions that secretly
moved billions of dollars off
Lehman’s books at a time
when the bank was under
heavy inspection
 WHAT IS REPO 105?

The deals are short BUT: Lehman

term, the bank often IN SHORT: It was a accounted Repo 105
buys back the asset tool used by other transactions as
just days after it sells companies to hide “sales” as opposed
it. liabilities on its to financing
balance sheet and by transactions.
hiding these
liabilities to appear
more sound and
solvent to regulators
and the general
investing public.
 WHAT IS REPO 105?

It is basically a way Repo 105 transactions

for banks to borrow were nearly identical
to STANDARD
money from big
REPURCHASE AND
companies that have RESALE
extra cash sitting TRANSACTIONS.
around.

To make the loan As part of the deal, the

safer for the big bank agrees to buy
company, the bank back the bond at the
“sells” the end of the loan, minus
some small amount
company’s some
that the company gets
asset like bond.
to keep as interest.
ISSUES

01 02 03 04

Inability to
make
accurate
projections Failure to Complicity
and present of the
implement Liquidity transpa- Chief
counter
Problems rency Financial
strategies Officer
when
market
conditions
changed.
 ISSUES

05 06 07 08 09

Misrepre- Lack of
Missed Excessive Manipu- sentation efficient
of the and
opportu- borro- lation of
disclosure effective
nities to wing the of the
trim its resulting accoun- risk
REPOs
massive in high ting transac- manage-
mortgage leverages books of tions and ment
portfolio the negligence policies or
company of Ernst & neglected
Young business
risks
CASE FACTS

Lehman Brothers had humble beginnings as a dry- goods

store, but eventually branched off into commodities
1.
trading and brokerage services.
The firm survived many challenges but was eventually
brought down by the collapse of the subprime mortgage
2. market.
Lehman first got into mortgage- backed securities and
CDOs in the early 2000s before acquiring five mortgage
3. lenders.

The firm posted multiple, consecutive losses and its share

4. price dropped.

Lehman filed for bankruptcy on September 15, 2008, wit

5. $639 billion in assets and $619 billion in debt.
ANALYSIS OF THE
ISSUES

01 02 03 04

Inability to
make
accurate
projections Failure to Complicity
and present of the
implement Liquidity transpa- Chief
counter
Problems rency Financial
strategies Officer
when
market
conditions
changed.
 ANALYSIS OS THE
ISSUES

05 06 07 08 09

Misrepre- Lack of
Missed Excessive Manipu- sentation efficient
of the and
opportu- borro- lation of
disclosure effective
nities to wing the of the
trim its resulting accoun- risk
REPOs
massive in high ting transac- manage-
mortgage leverages books of tions and ment
portfolio the negligence policies or
company of Ernst & neglected
Young business
risks
 ANALYSIS OF THE
ISSUES

Market Liquidity
risk risk
Reputational
risk

Credit risk Operational

risk
 CONCLUSIONS

The economic failure of of Lehman

Brothers had a great effect on the
international banking system and the
financial system.
The top executives at that time were partly
blamed for the fate of the company due to the
decisions taken.
The regulatory bodies should be
adequately competent in terms of
personnel and logistics to ensure effective
and efficient monitoring and supervision.
LEARNINGS AND INSIGHTS
 Avoiding
Unachievable
01
Business Strategy
Ethical Culture in
Business

02 03 Exclusion of
Dubious
Accounting
Principles
THANK YOU