Lehman Brothers filed for bankruptcy in 2008 due to excessive risk taking and losses related to the subprime mortgage crisis. To hide their troubled financial position, Lehman executives and their auditor, Ernst & Young, used an accounting maneuver called Repo 105 to temporarily move $50 billion in assets off their balance sheet at the end of each quarter. This made the bank appear healthier than it really was. When the financial markets deteriorated, Lehman was unable to mask its true risks and liquidity problems any longer. Its bankruptcy highlighted the need for greater transparency, accountability, risk management and ethical leadership in the financial industry.

1. LEHMAN BROTHERS SCAM
BY KASHISH DHINGRA
BUSINESS ETHICS PROJECT ON

2. Founders of Lehman brothers
Henry Lehman Emanuel Lehman Mayer Lehman

3. INTRODUCTION
It was a global financial services firm. Before declaring
bankruptcy in 2008, Lehman was the fourth-largest investment
bank in the United States (behind Goldman Sachs, Morgan Stanley,
and Merrill Lynch), doing business in investment
banking, equity and fixed-income sales and trading (especially
U.S. Treasury securities), research, investment
management, private equity, and private banking. Lehman was
operational for 158 years from its founding in 1850 until 2008.

4. On September 15, 2008, the firm filed for Chapter 11 bankruptcy
protection following the massive exodus of most of its clients,
drastic losses in its stock, and devaluation of assets by credit rating
agencies, largely sparked by Lehman's involvement in the subprime
mortgage crisis, excessive risk taking and subsequent allegations of
negligence and malfeasance. Lehman's bankruptcy filing is the
largest in US history, and is thought to have played a major role in
the unfolding of the late-2000s global financial crisis.
INTRODUCTION

5. HISTORY OF LEHMAN BROTHERS
• Lehman Brothers had humble origins, tracing its roots back to a
small general store that was founded by German immigrant Henry
Lehman in Montgomery, Alabama in 1844. In 1850, Henry Lehman
and his brothers, Emanuel and Mayer, founded Lehman Brothers.
While the firm prospered over the following decades as the U.S.
economy grew into an international powerhouse, Lehman had to
contend with plenty of challenges over the years.

6. REAL ESTATE HEDGE
INVESTMENT BANK
Morphed into a real estate hedge

7. Reason behind the bankruptcy
•Too much investment in Mortgage related securities.
•Sub Prime Mortgage Crisis
•Very high Leverage Ratio.

8. WHAT ACTUALLY HAPPENED ?
• Lehman Brothers hid over $50b in loans by classifying them as
sales
• Auditor, Ernst & Young, manipulated the books by using accounting
trick “Repo 105”
• Repo 105 was a report that was “materially misleading”
• it temporarily moved $50b of assets at the end of each quarter
• This made them appear to be far less dependent on borrowed
money than they actually were

9. REASONS BEHIND THE COLLAPSE
1. Leverage
During the good times, the best way to enhance your returns is to 'gear up' by borrowing money
to invest in assets which are rising in value. This enables you to 'leverage' (magnify) your
returns, which is particularly useful when interest rates are low. However, leverage cuts both
ways, as it also magnifies your losses when asset prices fall. (Witness the recent return of
negative equity to the UK property market.)
A sensibly run retail bank would have leverage of, say, 12 times. In other words, for every £1 of
cash and other readily available capital, it would lend £12. In 2004, Lehman's leverage was
running at 20. Later, it rose past the twenties and thirties before peaking at an incredible 44 in
2007.
Thus, Lehman was leveraged 44 to 1 when asset prices began heading south. Think of it this
way: it's a bit like someone on a wage of £10,000 buying a house using a £440,000 mortgage. If
property prices started to slide, or interest rates moved up, then this borrower would be
doomed. Thanks to its sky-high leverage, Lehman was in a similar pickle.

10. REASONS BEHIND THE COLLAPSE
2. Liquidity
Most businesses fail not because of lack of profits but because of cash-flow problems. Like all
banks, Lehman was an upturned pyramid balanced on a small sliver of cash. Although it had a
massive asset base (and equally impressive liabilities), Lehman didn't have enough in the way
of liquidity. In other words, it lacked ready cash and other easily sold assets.
As markets fell, other banks started to worry about Lehman's shaky finances, so they moved to
protect their own interests by pulling Lehman's lines of credit. This meant that Lehman was
losing liquidity fast, which is a dangerous state for any bank. Only six months earlier, in March
2008, Lehman rival Bear Stearns faced a similar loss of liquidity before JPMorgan Chase rode to
its rescue.
Believing that Lehman did not have enough liquidity at hand, other banks refused to trade with
it. Once a bank loses market confidence, it loses everything. Being unable to trade meant that
Lehman and its business ceased to exist in other banks' eyes.

11. REASONS BEHIND THE COLLAPSE
3. Losses
After the terrorist attacks of 11 September 2001, US interest rates plummeted, causing a five-
year boom in domestic and commercial property prices. This boom ended in 2006 and US
housing prices have since fallen for three years in a row.
Lehman was heavily exposed to the US real-estate market, having been the largest underwriter
of property loans in 2007. By the end of that year, Lehman had over $60 billion invested in
commercial real estate (CRE) and was very big in subprime mortgages (loans to risky
homebuyers). Also, it had huge exposure to innovative yet arcane investments such as
collateralised debt obligations (CDO) and credit default swaps (CDS).
As property prices crashed and repossessions and arrears sky-rocketed, Lehman was caught in a
perfect storm. In its third-quarter results, Lehman announced a $2.5 billion write-down due to
its exposure to commercial real estate. Lehman's total announced losses in 2008 came to $6.5
billion, but there was far more 'toxic waste' waiting to be unearthed.

12. Hid over $50
billion in loans by
showing them as
sales at the end of
each quarter
What was scandal ?

13. The trick made Lehman Brothers
look much healthier — on paper,
at least. These guys were
desperate to fool investors and
credit rating agencies. They had
screwed up on a truly colossal
scale, and lined their pockets all
the while.
Reason for the scam

14. Who was involved?
Chief Financial Officer (CFO)Erin Callan
Auditor, Ernst & Young
Chief Executive Officer (CEO)Richard Fuld

16. Ethical Issues
Examined
Examining the ethical issues surrounding the collapse of Lehman
Brothers reveals a series of troubling decisions and actions that ultimately
led to the demise of the historic investment bank.

17. Lessons learned from the Lehman
Brothers scandal
1 Accountability and
transparency
Clear accountability measures and
transparent financial reporting are
crucial for maintaining trust and
stability in the financial sector.
2 Risk management and
regulation
Effective risk management practices
and robust regulations are essential
to prevent excessive risk-taking and
speculative behavior.
3 Ethical leadership and
culture
The importance of ethical leadership
and fostering a culture of integrity
within financial institutions to avoid
moral hazards and conflicts of
interest.
4 Educating stakeholders
Ongoing education and transparency
initiatives to empower all stakeholders
with a deep understanding of financial
products and potential risks.

18. Three Wrongs
1 Fuld's Obstinacy
Richard Fuld's refusal to recognize the impending collapse and his failure to
assume responsibility or admit wrongdoing led to missed opportunities for
competitive solutions and preventative measures.
2 Callan's Approval
Callan's approval of siphoning assets away from Lehman Brothers accounts and
into Hudson Castle through Repo 105 was a premeditated and fundamentally
wrong decision.
3 Ernst & Young's Negligence
Ernst & Young's failure to reveal the extensive steps taken by executive
leadership to conceal financial problems demonstrated gross negligence and lack
of corporate responsibility.

19. THANK YOU