On September 15, 2008, financial services firm Lehman Brothers filed for bankrup

Question

On September 15, 2008, financial services firm Lehman Brothers filed for bankruptcy with the U.S. Bankruptcy Court in the Southern District of New York. 95 That action–the largest Chapter 11filing in financial history–unleashed a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” The fall of this Wall Street icon is, unfortunately, not a new one, as we’ve seen in the stories of Enron, WorldCom, and others. In a report released by bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the firm’s auditor, Ernst & Young, were lambasted for actions that led to the firm’s collapse. He said, “Lehman repeatedly exceeded its own internal risk limits and controls, and a wide range of bad calls by its management led to the bank’s failure.” Let’s look behind the scenes at some of the issues.

One of the major problems at Lehman was its culture and reward structure. Excessive risk taking by employees was openly lauded and rewarded handsomely. Individuals making questionable deals were hailed and treated as “conquering heroes.” On the other hand, anyone who questioned decisions was often ignored or overruled. For instance, Oliver Budde, who served as an associate general counsel at Lehman for nine years, was responsible for preparing the firm’s public filings on executive compensation. Infuriated by what he felt was the firm’s “intentional under-representation of how much top executives were paid,” Budde argued with his bosses for years about that matter, to no avail. Then, one time he objected to a tax deal that an outside accounting firm had proposed to lower medical insurance costs saying, “My gut feeling was that this was just reshuffling some papers to get an expense off the balance sheet. It was not the right thing, and I told them.”

However, Budde’s bosses disagreed and okayed the deal.

Another problem at Lehman was the firm’s top leadership. Valukas’s report was highly critical of Lehman’s executives who “should have done more, done better.” He pointed out that the executives made the company’s problems worse by their conduct, which ranged from “serious but nonculpable errors of business judgment to actionable balance sheet manipulation.” Valukas went on to say that “former chief executive Richard Fuld was at least grossly negligent in causing Lehman to file misleading periodic reports.” These reports were part of an accounting device called “Repo 105.” Lehman used this device to get some $50 billion of undesirable assets off its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss. The examiner’s report “included e-mails from Lehman’s global financial controller confirming that the only purpose or motive for Repo 105 transactions was reduction in the balance sheet, adding that there was no substance to the transactions.” Lehman’s auditor was aware of the use of Repo 105 but did not challenge or question it. Sufficient evidence indicated that Fuld knew about the use of it as well; however, he signed off on quarterly reports that made no mention of it. Fuld’s attorney said, “Mr. Fuld did not know what these 147148transactions were–he didn’t structure or negotiate them, nor was he aware of their accounting treatment.” A spokesperson from Ernst & Young (the auditor) said that, “Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets.”

Disccussion Question:

1. Describe the situation at Lehman Brothers from an ethics perspective. Whats your opinion of what happend here?

2. What was the culture at Lehman Brothers like? How did this culture contribute to the company's downfall?

(5 paragraph)

Explanation / Answer

From an ethics perspective looking at the situation at Lehman Brothers; my opinion of what happened there is that they had repeated internal risk control and exceeded them at that. This shows there was no ethical leadership taking place along the managers at Lehman Brothers. “In the failure of these actions of non-ethical leadership measures; it poses a strong influence of whether employees’ behave ethically” [Robbins & Coulter 2012, pp. 130]. Also, there was a variety of bad calls by the management team. What have been carried out at Lehman Bros. are managers in different stages of moral development.

My opinion of what happened at Lehman Bros. is that ethical policies and procedures weren’t implemented here. Furthermore, the code of ethics weren’t acknowledged if the company had one. “In addition, managers should have used the processes to guide employees when they face ethical dilemmas. Questions like: 1.What is the ethical dilemma? 2. Who are the affected stakeholders? 3. What personal, organizational, and external factors are important in this decision? 4. What are possible alternatives? 5. What is my decision and how will I act on it?”

2. What was the culture at Lehman Brothers like? How did this culture contribute to the company’s downfall?

In Lehman’s case the culture there and mangers were in the lowest stages of moral development. They only did things for a reward instead of just doing things just because for the greater good. This lack of morals can motivate individuals to be corrupted by an organizational structure that encourages unethical practices. Plus certain issues where ignored in the process of making ethical decisions.

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