LEHMAN BROTHERS-RISK MANAGEMENT

1. CASE STUDY- RISE AND FALL OF LEHMAN BROTHERS
Group Members:-
 Raju Karri- PGCFM01055
 Naveen Jhawar- PGCFM01046
 Pradeep Kumar- PGCFM01051
 Vinay Narasimha-PGCFM01082
 Amardeep – PGCFM01004
 Joel- PGCFM01028
Group Observations as under
 Duck Fuld CEO of the wall street Investment Bank Lehman Brothers in May 2015.
 Fuld Spoken about Sep 2008 Bankruptcy and subsequent liquidatation of his firm
 And also mentioned list of factors for Lehman demise
a) Very little regular regulations b)Market Supervision
b) Government Agenda to increase Home Ownership
c) Market conditions in 2008 worse than he realized at that time.
d) When Lehman mandated into Bankruptcy Fuld told that
They are having the following:
1) Equity Capital is $128 Billion
2) Tier I capital was 4%
3) Un encumbered Collateral of $127 Billion
 As per above it is evident firm has followed risk management culture and that there was hidden agendra
behind Leyman’s being forced to file.
 With nearly $ 700 Billion in Total Assets, Lehman’s was the larget US Bankruptcy in history.
 In 2007, Leyman achieved the record of earning of 4 Billion on revenue of 60 $ Billion.
 As per CBS news Steve Kroft mentioned that serious ness of 2008 collapse of Lehman Brothers. Due to this
26,000 employees lost their job and Million of Investor loose their money. Further to that during War time
it is chain reaction because worse worse financial crisis and economic down turn.
 In 2009 Court appointed one examiner Mr Anton R Valukas reviewed lehman’s criminal charges against any
one involved.
 Securities Exchange Commission in 2010 sued CIVIL case against Lehman’s Auditor Ernst & Young.
 Henry Paulson was secretary of Treasury in 2006. Before that He was CEO of Goldman Sachs.
 As per Glass Stegall Act 1933 Banking Act Banks are devided into Commercial Banks & Investment Banks
 Commercial Banks Took deposit from public and lending by way of Loans.
 Investment Banks specially focus on securities related activities.
Origin of Lehman Brothers:-
 It was Investment Bank and they are into moving busiess i.e Raised money for companies and bought
companies public. Lehman Brother got deeper and deeper into the storage business, complex trades and
credit derivatives & credit CMBS. Compex secuties in Commercial Real Estate, residential real estate.
 Lehman’s brothers was founded in 1850 by Henry, Emmanuel & Mayer Lehman three brothers who has
immigrated from Germany to Montgomery, Alabama. They operated merchandise store and expanding into
trading commodities,
 Lehman decided to expand its financial advisory and under writing operations in 1984 the firm was
acquired by American express for $360 Billion and merged with American Express’s Brolerage.
 Lehman’s new CEO set forth an aggressive agenda for the newly independent company.
 Lehman’s Balance sheet dominated by Short term Liabilities and Long term Assets.

2.  Lehman Brothers has acquired stake in the BNC Mortgage, one of the largest Originators of subprime
Mortgage.
 Lehman also owned Aurora Loan Services- has less stringent documents that required in sub prime loans
and higher loan to value ratio (LTV)
 Above two acquisitions are the key drivers of revenue growth
 Lehman total assets has largely of cash and cash equivalents, financial instruments and collateralized
agreements.
 Lehman has number of subsidiaries and was required to maintain certain capital levels by regulators.
 Federal Reserve has business relationship with Lehman in connection with the purchase and sale of
treasury. Federal Reserve has no supervisory role with respect to lehman.
 Funding model involved accessing the short term repo markets on a daily basis and borrowing tens or
hundred of billons of dollars each day to fund its asset
 Leadership – out of nine directors five are 70 years old and only two had background in finance
 Aggressive Growth agenda- Firms capital base is utilized to make principal investments
 Market Begins to turn- Assets valuation is another challenge
 2007, U S Real Estate market was already showing sign of weakness.
 Increasing risk appetite twice between 2006 to 2008.
 Exceeded concentration limit in commercial real estate.
 Lehman has removed chief Risk Officer for their Opposition to Management’s growing portfolio of illiquid
investment. ( Asset that were valued based on the management best estimate of market value)
 Higher priority on increasing profits than keeping firm risk level with in limits.
 Following Risk are observed-
Market Risk- Financial losses arises from movements in Market Prices
Credit Risk- Concentration limit crossed,
Operational Risk- Inadequate internal processes, People-of nine directors five are 70 years old and only
two had background in finance
 Sept 15th 2008 Lehman brothers filed for bankruptcy with total assets of 639$ billion total debt of 613$
billion 110$ billion senior unsecured notes 13$ subordinated notes 5$ billion junior subordinate notes
Having over 25000 employees with a market capital of 25$ billion
 On day bankruptcy was announced the Dow Jones index closed over 5000 points down
Which was biggest drop since terrorist attack in 2001 sept
A report by the advisory committee that assisted the company concluded stating lack of preparation for its
bankruptcy costed the company an estimated 50-75 billion dollars
These costs were stemmed from trading contracts that were immediately canceled by Lehmans counter
parties after it filed for bankruptcy
The report also claimed the company would have been able to unwind most of its 1.1 million derivatives
contracts instead of 900000 contracts that were canceled
 Sale to Barclays- in sept 2008
Lehman and Barclays had signed an asset purchase sale agreement to buy lehmans North American
investment Banking and capital markets operations for 1.75 billion Dollars
That left behind lehmans real estate
The deal was approved in court at lower price after seeing reflects of further declines trading accounts
and asset values atleast 900 million dollars of purchase price was attributed to the value of Lehman
headquarters
 In 2016 analysts refered Barclays purchase of lehmans as deal of century as
Barclays paid anything but retail for Lehman and in process acquired a powerful franchise in the US
resulting in Barclays becoming 7th largest investment bank measured by revenue
 Looking back to the events that led to bankruptcy of Lehman’s
 Federal bankruptcy court in 2009 appointed Anton valukas a former associate to make a detailed report on
the bankruptcy
 After 34million documents and 300 witnesses verification

3.  He mentioned there were sufficient wrong doings by the executives board and ey the banks auditor
 Government officials regulators,financial markets and investment banking model of the firm played a
significant role to the path to bankruptcy
 In 2010 lawsuit was filed against ey and the sec and justice department didn’t press any charges
 In a survey conducted in US in 2015
 Lehmans brother’s bankruptcy with total assets of 691 billion $ was the largest in the country
 Financial performance between 2002-2005
Head count - saw increases of 75%
Revenue 138%
Market cap of 132%
Between 2002-2007
The total assets saw an increase from 312061$ to 691063$
Net assets from 163182 to 373959
Earning per share had also increased from 3.36$ to 7.63$
 Exhibit 3b provides information on Lehman Brothers' net revenues and pretax profits in 2007 by geographic
area and business line. The data show that the largest share of Lehman Brothers' net revenues and pretax
profits came from the United States, accounting for 50% and 44%, respectively. Europe and the Middle East
contributed 33% of net revenues and 34% of pretax profits, while Asia Pacific accounted for 16% of net
revenues and 22% of pretax profits. The remaining 1% of net revenues and 20% of profit before tax came
from the "Investment Bank" business. The figure illustrates the global reach and diversification of Lehman
Brothers' operations at that time.
 Exhibit 3c shows Lehman Brothers' credit ratings as of November 30, 2007. The credit ratings assigned by
various rating agencies provide information about the creditworthiness of the company and the risk
associated with its debt. Lehman Brothers had short-term and long-term credit ratings from agencies such
as Standard & Poor's, Moody's Investors Service, Fitch Ratings, and Dominion Bond Rating Service Limited.
The ratings ranged from A-1 to AA - reflecting the financial strength of the company and its ability to meet
its debt obligations.
 Exhibit 3d shows the evolution of Lehman Brothers' stock price from 2002 to 2007. The data, obtained from
Interactive Data through S&P Capital IQ, shows the fluctuations in Lehman Brothers' stock price over the
years and provides a visual representation of the company's stock market performance during this period.
 Exhibit 4 provides information about Lehman Brothers' Board of Directors as of the date of this document.
It provides a listing of the directors, their positions, background, and affiliations. The board included
individuals from a variety of industries, including finance, business, and the military. The exhibit highlights
the diverse knowledge and experience of the board members who oversaw the company's operations.
 These exhibits offer insights into Lehman Brothers' financial performance, credit rating, stock price
performance, and board composition during a critical period preceding its eventual downfall in 2008.
 Operations are complex both Legally and in Monterey terms
 Since the assets are Focusing on Long term Liquidity is low.
 Operations are complex both Legally and in Monterey terms
 Since the assets are Focusing on Long term Liquidity is low
 Malpractice of widowdressing had done
 In 2008 a drastically declining of Share price of 95%happened This Leads to Bankruptcy
 With No other option of acquisition or Selling or investment