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1 – 10 of over 3000On September 15, 2008, Lehman Brothers filed for bankruptcy and nearly caused a meltdown of the financial system. This article looks at the situation before Lehman went bankrupt…
Abstract
On September 15, 2008, Lehman Brothers filed for bankruptcy and nearly caused a meltdown of the financial system. This article looks at the situation before Lehman went bankrupt and how this event came to trigger a financial panic during the fall of 2008 and early 2009. Two key ideas inform the analysis. The first is that what triggers financial panics are typically hidden losses. The second is that confidence plays a key role in financial panics and that confidence can be conceptualized as a belief that action can be based on proxy signs, rather than on direct information about the situation itself.
Jim Rooney and Suresh Cuganesan
The purpose of this study is to examine how managers in financial institutions satisfy themselves of the effectiveness of risk mitigation strategy and management control. It…
Abstract
Purpose
The purpose of this study is to examine how managers in financial institutions satisfy themselves of the effectiveness of risk mitigation strategy and management control. It studies the co-opting of accounting tools within a single financial institution case study, examining the recursive and emergent characteristics of risk management practice.
Design/methodology/approach
Adopting a field study approach within the strategy-as-practice perspective, the paper provides insights into the role of actor perceptions of risk and accounting as a calculative practice in the adaptive enactment of risk strategy.
Findings
Results highlight the interactions between risk management strategy, management controls and actor interests at Lehman Brothers. The actions and reactions of risk management decision-makers such as Executive Committee and Board members are examined to better understand the role of accounting and leadership.
Research limitations/implications
Results of this study may not be generalised beyond this single case study.
Practical implications
The paper emphasises that concern for the social relations and the performative interests of actors in a risk management network needs to be understood and considered in accounting research. It is argued that the market prices of tradable financial asset will continue to be opaque without these insights.
Originality/value
This study explores an under-researched topic in the accounting literature in examining how management controls are affected by and, in turn, affect risk strategising.
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Charles Hines, Jerry Kreuze and Sheldon Langsam
The purpose of this paper is to investigate the bankruptcy of Lehman Brothers, with particular focus on its use of Repo 105 transactions.
Abstract
Purpose
The purpose of this paper is to investigate the bankruptcy of Lehman Brothers, with particular focus on its use of Repo 105 transactions.
Design/methodology/approach
The use of the Lehman's bankruptcy report produced in part by Anton R. Valukas was used as a basis to explain how Lehman maintained acceptable leverage ratios through the use of Repo 105 transactions to paint a better picture of its financial position than actually existed.
Findings
The study concludes that Lehman's accounting method choice disguised its real problems, perhaps long enough for bankruptcy to become the only option.
Practical implications
Lehman's bankruptcy becomes part of a growing history of business failures where accounting principles have become the focus. The failure of Lehman reminds us that financial reporting must remain transparent, allowing users to make informed decisions with confidence.
Originality/value
This bankruptcy provides a painful reminder that financial reporting must allow users to differentiate among investment alternatives, based on the relative, factual financial position of the investment. The credibility of our reporting model is at stake.
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David P. Stowell and Evan Meagher
In recent years Lehman Brothers, one of the five largest investment banks in the United States, had grown increasingly reliant on its fixed income trading and underwriting…
Abstract
In recent years Lehman Brothers, one of the five largest investment banks in the United States, had grown increasingly reliant on its fixed income trading and underwriting division, which served as the primary engine for its strong profit growth. The bank had also significantly increased its leverage over the same timeframe, going from a debt-to-equity ratio of 23.7x in 2003 to 35.2x in 2007. As leverage increased, the ongoing erosion of the mortgage-backed industry began to impact Lehman significantly and its stock price plummeted. Unfortunately, public outcry over taxpayer assumption of $29 billion in potential Bear losses made repeating such a move politically untenable. The surreal scene of potential buyers traipsing into an investment bank's headquarters over the weekend to consider various merger or spin-out scenarios repeated itself once again. This time, the Fed refused to back the failing bank's liabilities, attempting instead to play last-minute suitors Bank of America, HSBC, Nomura Securities, and Barclay's off each other, jawboning them by arguing that failing to step up to save Lehman would cause devastating counterparty runs on their own capital positions. The Fed's desperate attempts to arrange its second rescue of a major U.S. investment bank in six months failed when it refused to backstop losses from Lehman's toxic mortgage holdings. Complicating matters was Lehman's reliance on short-term repo loans to finance its balance sheet. Unfortunately, such loans required constant renewal by counterparties, who had grown increasingly nervous that Lehman would lose the ability to make good on its trades. With this sentiment swirling around Wall Street, Lehman was forced to announce the largest Chapter 11 filing in U.S. history, listing assets of $639 billion and liabilities of $768 billion. The second domino had fallen. It would not be the last.
This case covers the period from the sale of Bear Stearns to JP Morgan to the conversion into bank holding companies by Goldman Sachs and Morgan Stanley, including the Lehman Brothers bankruptcy and the sale of Merrill Lynch to Bank of America. The case explains the new global paradigm for the investment banking industry, including increased regulation, fewer competitors, lower leverage, reduced proprietary trading, and-potentially-reduced profits.
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Armin Varmaz, Christian Fieberg and Jörg Prokop
This paper aims to analyze the impact of conjectural “too-big-to-fail” (TBTF) guarantees on big and small US financial institutions’ stock prices during the 2008-2009 banking…
Abstract
Purpose
This paper aims to analyze the impact of conjectural “too-big-to-fail” (TBTF) guarantees on big and small US financial institutions’ stock prices during the 2008-2009 banking crisis.
Design/methodology/approach
The paper analyzes shocks to stock market investors’ expectations of government aid to banks in distress and respective spillover effects using an event study approach. We focus on three major events in late 2008, namely, the Lehman bankruptcy, the Citigroup bailout and the first announcement of the Capital Purchase Program (CPP) by the US Government.
Findings
The authors found significant differences in market reactions to the respective events between small and large banks. For both the Lehman and the CPP event, abnormal returns on big banks’ stocks are negative, while small banks’ stocks tend to generate positive abnormal returns. In contrast, large banks strongly outperform small banks in the case of the Citigroup bailout. Results for a control group of non-financial firms indicate that this behavior may be specific to the banking industry. The authors observed significant spillover effects to both competitors and non-competitors of Lehman and Citigroup, and concluded that while the Lehman event shook the widely held belief in an implicit TBTF subsidy to large banks, the TBTF doctrine was reinstated shortly thereafter.
Originality/value
This paper shows that conjectural TBTF guarantees are priced in by equity investors. While government aid to large banks in distress may prevent negative effects on the stability of the financial system, it may also create negative externalities by putting small banks at a competitive disadvantage. The findings suggest that US and European regulators’ recent policy measures directed at establishing reliable bank resolution schemes should be a step in the right direction to level the playing field for small and large financial institutions.
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Christian Fieberg, Finn Marten Körner, Jörg Prokop and Armin Varmaz
The purpose of this paper is to study the information content of about 3,300 global bank rating changes before and after the Lehman bankruptcy in September 2008 to assess if…
Abstract
Purpose
The purpose of this paper is to study the information content of about 3,300 global bank rating changes before and after the Lehman bankruptcy in September 2008 to assess if differences in stock market reactions for small and big banks emerge.
Design/methodology/approach
The analysis of the stock market reactions of rating changes (upgrades and downgrades) and bank’s size (small and big) is conducted by an event study approach.
Findings
The authors find that while upgrades are not associated with significant abnormal bank stock returns, downgrades have a significantly negative effect. This result holds for both small and big banks, while negative abnormal returns are considerably stronger for the former. For small banks, the authors observe an increase in negative cumulative abnormal returns post-Lehman. The lack of a reaction to large banks’ rating downgrades in the narrow [−1,+1] event window indicates that their stock prices may, to some extent, be insulated from negative rating information even post-Lehman, which the authors attribute to an implicit “too big to fail” subsidy anticipated by equity investors.
Originality/value
This paper provides insights to the differences in the information content of changes in small and big banks’ credit rating on stock returns that is unrelated to the well-known size effect. Compared to small banks, big banks seem to some extent be insulated from negative rating changes even post-Lehman – contributing to the on-going too big to fail debate.
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Emre Bulut and Başak Tanyeri-Günsür
The global financial crisis (GFC) of 2007–2008 had far-reaching consequences for the global economy, triggering widespread economic turmoil. We use the event-study method to…
Abstract
The global financial crisis (GFC) of 2007–2008 had far-reaching consequences for the global economy, triggering widespread economic turmoil. We use the event-study method to investigate whether investors priced the effect of significant events before the Lehman Brothers' bankruptcy in European and Asia-Pacific banks. Abnormal returns on the event days range from −4.32% to 5.03% in Europe and −5.13% to 6.57% in Asia-Pacific countries. When Lehman Brothers went bankrupt on September 15, 2008, abnormal returns averaged the lowest at −4.32% in Europe and −5.13% in Asia-Pacific countries. The significant abnormal returns show that Lehman Brothers' collapse was a turning point, and investors paid attention to the precrisis events as warning signs of the oncoming crisis.
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George (Yiorgos) Allayannis and Christopher Brandriff
This case examines the causes and consequences of the Lehman Brothers bankruptcy during one of the most fascinating weekends in financial history. It's about the commercial paper…
Abstract
This case examines the causes and consequences of the Lehman Brothers bankruptcy during one of the most fascinating weekends in financial history. It's about the commercial paper market, a major funding market served by Lehman Brothers, and the events that led to “breaking the buck” on money market funds. It also examines the CDS market where Lehman was such a big player, the potential impact that CDSs had on the crisis, and the notion and validity of the too-big-to-fail hypothesis.
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Craig R Enochs, James Pappenfus, Andrea Pincus and Paul Turner
This article addresses important policy issues raised in the latest Lehman dispute that directly impact the over the counter derivatives market and market participants…
Abstract
Purpose
This article addresses important policy issues raised in the latest Lehman dispute that directly impact the over the counter derivatives market and market participants, specifically in regards to the history and purpose of the Bankruptcy Code’s “safe harbor” provisions for swap agreements.
Design/methodology/approach
By examining the background of, and arguments presented in, the ongoing adversary proceeding, Moore Macro Fund, LP v. Lehman Brothers Holdings Inc., and the related bankruptcy case, in re Lehman Brothers Holdings Inc. the authors offer their interpretations of the scope and intent of the applicable safe harbor provisions concerning set-off rights in the context of terminating swap agreements.
Findings
Parties to ISDA agreements should carefully monitor this case, as the outcome could shape the enforceability of the Bankruptcy Code and the strategic analysis of counterparties following a counterparty’s or credit support provider’s bankruptcy.
Practical implications
Parties must also be cautious when assuming all contractual provisions in industry-standard master agreements will be enforceable. This case confirms that contractual provisions seeming to reflect the intent of the parties may still be called into question before a court.
Originality/value
Litigation analysis and practical advice on the ongoing changes to the physical, futures and derivatives markets from experienced derivatives/structured products and bankruptcy/commercial restructuring lawyers.
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The aim of this paper is to describe the rapid development and effectiveness of online education in an urban college, emphasizing the use of distance education by local students…
Abstract
Purpose
The aim of this paper is to describe the rapid development and effectiveness of online education in an urban college, emphasizing the use of distance education by local students, their academic performance and perspectives for future growth.
Design/methodology/approach
The paper provides a description of the phases of distance education development. It analyzes of survey data on student response to online learning and analysis of grades indicating academic performance online in relation to overall undergraduate performance.
Findings
The paper finds that early unplanned development has brought increased administrative support: plans are being made for programs, major concentrations, and advanced degrees on the undergraduate and graduate level. Student academic success reflects the special demands of online education and indicates the need for special screening processes and support services.
Research implications
The academic success of students reflects the special demands of distance learning and qualifies the popularity of distance education as seen in rapid increases in online enrollment.
Practical implications
The promise of distance education for a local student population (to speed progress to degree completion by increasing the number of courses per semester) should be tested in terms of student academic success.
Originality/value
This account of how distance learning can develop in an urban, commuter college and the possibilities for improving service to existing students while increasing enrollment, suggests strategies for effective integration of online courses into the existing undergraduate and graduate curriculum.
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