Lehman Brothers' Fall
(7 pages of text)
This case describes the financial undertakings of Lehman Brothers Inc., which was once the fourth-largest investment bank in the world. On September 15, 2008, less than a year after the bank presented its largest profit ever, the world watched its decline. In terms of size of assets, Lehman is considered the largest bankruptcy in history, with assets totaling US$639 billion and liabilities of US$613 billion. The U.S. credit crisis had uprooted the strength of Wall Street, with Lehman announcing a petition it filed under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy raised some interesting questions, the biggest among them being: How could a large company such as Lehman, with a record of reporting huge profits, become so helpless that it had to file for bankruptcy?
Undoubtedly, the financial scenario in the United States had become dire, especially for those companies involved in mortgage banking. Lehman had some additional drawbacks. This case deals with a couple of these problems, one of them being the accountancy of its Repo 105 transactions. The modus operandi of the company has been unveiled to show how it managed to hide its true financial state through gaps in the financial reporting system and remain clean-handed for years.
The case can be used in:
- A financial accounting course to illustrate the accounting practices adopted by a seemingly unethical management.
A course (or a workshop) on forensic accounting or fraud accounting to show the ploys used by firms to reduce liabilities on the balance sheet and overstate revenues to deceive investors.
- A financial reporting systems course to illustrate the need and importance of having an integrated reporting system; and to stress the need to comply with regulations and norms set by the regulating authorities in reporting of financial results in thoughts, words, and deeds (actions).
- A financial management course to illustrate the concept of financial leverage and how it can be temporarily reduced to attract investors and get favourable appraisals from analysts.
Finance and Insurance
United States; United Kingdom, Large, 2008
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