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The Collapse

Who Was Involved

Effects

http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

playfactile.com/lehmanbros

Lehman Brothers Scandal

The Collapse of Lehman Brothers:

Who did this scandal effect

Who was affected?

What is an Accounting fraud?

  • Accounting fraud is intentional manipulation of financial statements to create a facade of a company's financial health.
  • Anytime money is stolen or hidden by an employee.
  • Over-recording sales revenue or under-recording expenses.
  • Avoiding disclosure of illegal accounting activities.
  • It involves an employee, or the organization itself and is misleading to investors and shareholders

Richard Flud, CEO of Lehman Brothers

  • The Lehman Brothers, prior to 2008 was the fourth largest investment bank in the United States.
  • They focused on serving the financial needs of corporations, governments, municipalities, and high net-worth individuals.
  • High net-worth individual: An individual whose assets exceed his/her liabilities in value by a large figure.

Example

  • For example, a company commits accounting fraud if it overstates its revenue. Suppose company ABC is actually operating at a loss and is not generating any revenues. On its financial statements, the company's profits would be inflated and its net worth would be overstated. If the company overstates its revenues, it would drive its share price up and falsely depict the its true financial health.

  • This was the largest bankruptcy in the entire world, so basically everyone got affected.

  • Due to such a large collapse the whole market was affected, investors and stockholders of all types of businesses were in fear of what might happen and so millions upon millions of shares were sold

  • The stock market crash of 2008 occurred on September 29, 2008, just 14 days after Lehman Brothers filed for bankruptcy, which affected people and business all over the world

  • When Lehman Brothers collapsed, 26,000 employees lost their jobs and millions of investors lost all or almost all of their money, triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years.

Who are the Lehman Brothers ?

Bibliography

  • The Lehman Brothers was founded in 1850. From then on, the firm was a leader in global finances.
  • They had headquarters in New York, London, and Tokyo as well as a network of offices all over the world.
  • They were a global financial services firm.

Who are the Lehman Brothers? continued...

1. 810, N. (2014, October 29). Lehman Brothers Scandal. Retrieved October 29, 2017, from https://prezi.com/bjsnixf97qf8/lehman-brothers-scandal/

2. Amadeo, K. (2017, April 3). When and Why Did the Stock Market Crash in 2008? Retrieved October 29, 2017, from https://www.thebalance.com/stock-market-crash-of-2008-3305535

3. Amadeo, K. (2017, April 3). When and Why Did the Stock Market Crash in 2008? Retrieved October 29, 2017, from https://www.thebalance.com/stock-market-crash-of-2008-3305535

4. Carney, J. (2010, March 11). Report: Lehman Brothers Used "Accounting Gimmick" To Hide The Size Of Its Balance Sheet. Retrieved October 29, 2017, from http://www.businessinsider.com/report-lehman-brothers-used-accounting-gimmick-to-hide-the-size-of-its-balance-sheet-2010-3

5. Freifeld, K. (2015, April 15). Ernst & Young settles with N.Y. for $10 million over Lehman auditing. Retrieved October 29, 2017, from https://www.reuters.com/article/us-ernst-lehman-bros/ernst-young-settles-with-n-y-for-10-million-over-lehman-auditing-idUSKBN0N61SM20150415

6. Kabbara, M. (2012, November 30). Lehman brothers. Retrieved October 29, 2017, from https://prezi.com/7v0ne74lhskq/lehman-brothers/

7. Mercury Outboard Service Manual 115 2 Ebook | osdin. (2012, December 23). Retrieved October 29, 2017, from http://www.bing.com/cr?IG=69C30CE8E9D0410A9968A8A03D64CE22&CID=0113B067EE9D64F21F6FBB4DEF9B6511&rd=1&h=oCsP4z9zoTdOiYPUJmBWBwBCik0iO1LaSqZV46ptaDw&v=1&r=http%3a%2f%2fosdin.org%2fmercury_outboard_service_manual_115_2.pdf&p=DevEx,5049.1

8. North American Free Trade Agreement - prezi.com. (n.d.). Retrieved October 29, 2017, from https://www.bing.com/cr?IG=5BD97BDFB7284294AA4D3CEEAA220ED4&CID=1E503F58556365BB2F7D3472546564C3&rd=1&h=k5wapdlNWfbc-gbAHGCkH9yYDntVMaLUGPNODxMGWew&v=1&r=https%3a%2f%2fprezi.com%2fqlehmstafwko%2fnorth-american-free-trade-agreement%2f&p=DevEx,5065.1

9. Sharper Insight. Smarter Investing. (n.d.). Retrieved October 29, 2017, from http://www.investopedia.com/

10. Staff, I. (2010, September 13). Repo 105. Retrieved October 29, 2017, from http://www.investopedia.com/terms/r/repo-105.asp

11. Staff, I. (2017, September 15). Case Study: The Collapse of Lehman Brothers. Retrieved October 29, 2017, from http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

12. Teather, D., Clark, A., & Treanor, J. (2008, September 16). Barclays agrees $1.75bn deal for core Lehman Brothers business. Retrieved October 29, 2017, from https://www.theguardian.com/business/2008/sep/17/barclay.lehmanbrothers1

13. The conservatism principle. (2017, May 14). Retrieved October 29, 2017, from https://www.accountingtools.com/articles/2017/5/14/the-conservatism-principle

14. What is IFRS (International Financial Reporting Standards)? - Definition from WhatIs.com. (2015, July 4). Retrieved October 29, 2017, from http://whatis.techtarget.com/definition/IFRS-International-Financial-Reporting-Standards

Lehman Brothers' employees leaving the Lehman brothers' London office on the day it collapsed in September 15, 2008

Were any employees held accountable?

  • No charges have been pressed against the Lehman Brothers as of today.
  • The Lehman Brothers are still under investigation and analysis.
  • However, Ernst & Young was sued by New York Supreme Court because they are believed to be responsible for hiding the Lehman Brothers' financial health.

The End

How Lehman Hid it all

  • Lehman used what is known as window dressing to hide its reliance on leverage, or borrowed money.

  • Lehman’s superior executives, and the bank’s accountants at Ernst & Young, were aware of the rearrangements.

  • Repo 105 involved transactions that secretly removed billions of dollars off Lehman’s books

  • In its Repo 105 transactions, Lehman used assertive accounting: it seemed to have structured transactions; they sold securities at the end of the quarter, and planned to buy them back again days after.

On September 15, 2008, Lehman Brothers filed for bankruptcy

How They Got Caught:

  • Filed for Chapter 11 bankruptcy protection on September 15, 2008. The filing remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets
  • Provoked panic in an already battered financial system
  • Freezing short-term lending
  • Marking the start of the liquidity crisis, worldwide.

Lehman Brothers' Scandal Summary

The Collapse Continued...

  • Lehman's demise also made it the largest victim of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time.

The Beginning of the End

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85 billion portfolio, or four times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.

  • Hid over $50 billion in loans by placing them under assets as sales.

  • They did this so the capital of the company increases and the liabilities decrease, allowing the company to look less dependent on loans then it truly was.

  • They did this to trick investors.

  • There auditor, Ernst & Young (company) was able to manipulate the books by using “Repo 105”.

  • Repo 105: An accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities.

Repo 105

A Repo 105 is an accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities.

The gimmick was known inside of Lehman as a "Repo 105." In an ordinary repo transaction, Lehman would raise cash by selling assets with a promise to buy them back later. It's a common form of short-term financing. And because it was really a financing rather than a sale, the assets remained on Lehman's balance sheet.

But in a Repo 105, Lehman would treat the transaction as a genuine sale and take the risky assets off its books. Apparently, accounting rules permitted this because the assets valued at 105% or more of the cash recieved. Lehman never disclosed it was doing these transactions.

Description of the Scandal

  • Lehman used accounting gimmickry to mask its shaky finances.

What was the scandal, when did it happen?

“Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.”

  • In 2003 and 2004, with the U.S. housing boom well under way.
  • housing boom is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices.

By:

Utkarsh Sood

Ajay Sangha

Avneet Kaur

Richard Flud

Erin Callan

Lehman's collapse shook global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15.

The Bottom Line

  • Lehman shares fell as much as 48% on concern it would be the next Wall Street firm to fail.

Why did they do it?

  • Lehman misused an accounting trick called Repo 105 to temporarily remove the $50 billion from its ledgers to make it look as though it was reducing its dependency on borrowed money and was drawing down its debt.

  • Lehman never told investors or regulators about it. Repo 105 is an aggressive and deceitful accounting off-balance sheet gimmick

  • The continuing Concern Concept: This states that investors have to assume that a business will continue to operate until it says otherwise.

  • The Principle of Conservatism: Which is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received

  • The demise of the company was the cumulative effect of a number of missteps taken by several individuals and groups.

  • These missteps and offences can be seen as: Lies told by Chief Executive Officer Richard Fuld; concealment endorsed by Chief Financial Officer Erin Callan; and negligence on behalf of Ernst & Young.

Who was involved?

What Financial statements were affected? What International Financial Reporting Standards were violated?

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