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Article

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…

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.

Details

Managerial Auditing Journal, vol. 30 no. 2
Type: Research Article
ISSN: 0268-6902

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Case study

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…

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.

Details

Darden Business Publishing Cases, vol. no.
Type: Case Study
ISSN: 2474-7890
Published by: University of Virginia Darden School Foundation

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Article

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.

Details

American Journal of Business, vol. 26 no. 1
Type: Research Article
ISSN: 1935-5181

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Article

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.

Details

Journal of Investment Compliance, vol. 16 no. 2
Type: Research Article
ISSN: 1528-5812

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Article

Jacopo Carmassi and Richard John Herring

The purpose of this paper is to analyze whether and how “living wills” and public disclosure of such resolution plans contribute to market discipline and the effective…

Abstract

Purpose

The purpose of this paper is to analyze whether and how “living wills” and public disclosure of such resolution plans contribute to market discipline and the effective resolution of too big and too complex to fail banks.

Design/methodology/approach

The disorderly collapse of Lehman Brothers is analyzed. Large, systemically important banks are now required to prepare resolution plans (living wills). In the USA, parts of the living wills must be disclosed to the public. The public component is analyzed with respect to contribution to market discipline and effective resolution of banks considered too big and complex to fail. In a statistical analysis of the publicly available section of living wills, this information is contrasted with legislative requirements.

Findings

The analysis of public disclosures of resolution plans shows that they are insufficient to facilitate market discipline and, in some instances, fail to enhance public understanding of the financial institution and its business. When coupled with the uncertainty over how an internationally active financial institution will be resolved, the paper concludes that these reforms will do little to reduce market expectations that some financial firms are simply too big or too complex to fail.

Research limitations/implications

A very small data set and the necessity of cross-checking the authors' observations with all publicly available sources. The authors have also tried to infer a purpose for public disclosure of parts of resolution plans. The authorities are remarkably vague on the issue and so the authors have assumed they actually did have a specific intent that would strengthen the system.

Practical implications

The inference from the publicly available portion of living wills is that the authorities are a very long way from abolishing too-big-to-fail.

Originality/value

So far as the authors know, this is the first in-depth analysis of the information available in the public sections of living wills.

Details

Journal of Financial Economic Policy, vol. 5 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

Abstract

Details

Strategic Business Models: Idealism and Realism in Strategy
Type: Book
ISBN: 978-1-78756-709-2

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Case study

Elena Loutskina and Rahul Prabhu

The case introduces students to the nature of collateralized debt obligations (CDO) and the CDO origination process, with emphasis on the corporate structure of the…

Abstract

The case introduces students to the nature of collateralized debt obligations (CDO) and the CDO origination process, with emphasis on the corporate structure of the special purpose vehicles, cash flows to various CDO tranches, and motivation behind CDO origination. Students will learn to quantitatively evaluate the risk-return profile of CDO tranches with emphasis on the equity tranche (also known as “toxic waste”). This is ideal for MBA and advanced undergraduate level courses on financial markets, financial institutions, and investments. In the case, an associate at the Debt Capital Markets desk of Lehman Brothers prepares a CDO issuance for Western Asset. Western Asset had been contacted by a group of commercial banks eager to sell senior secured bank loans and high-yield corporate bonds to lower their capital requirements and free up capital for additional lending.

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Book part

Jacqueline A. Burke and Hakyin Lee

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at…

Abstract

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

Details

Sustainability and Governance
Type: Book
ISBN: 978-1-78441-654-6

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Article

Eva Ka Yee Kan and Mahmood Bagheri

This paper aims to explain the importance of the international cooperation and coordination among supervisory authorities of different countries in event of banking…

Abstract

Purpose

This paper aims to explain the importance of the international cooperation and coordination among supervisory authorities of different countries in event of banking crises. It also suggests that the harmonious relationship has to be attained in the adoption of ex ante financial regulatory measures and ex post compensation schemes. In other words, the paper highlights the linkage between ex ante preventive regulatory measures and ex post compensation schemes, on the one hand, and cooperation among national regulatory and supervisory authorities in globalized financial markets. Although the paper is relevant to most developed and emerging financial markets, it chooses Hong Kong as a context to examine this proposal. In the current literature, there are no similar approach linking these two paradigms and examining them in an integrated context.

Design/methodology/approach

The paper adopts a conceptual framework after the 2008 global financial crisis and takes Hong Kong, an international financial centre in which numerous branches or subsidiaries of foreign financial institutions locate, as an example to examine how the coordination with foreign supervisory authorities are being conducted and to analyse whether the present regulatory framework in Hong Kong is effective and sufficient against banking crises. Through the review of the literature, the important link between ex ante regulatory measures and ex post compensation schemes is found to be significant in adopting proper solutions.

Findings

Through analysing the Hong Kong financial regulators’ reports on the collapse of Lehman Brother, the paper finds out that even though there is some weakness in the cooperation and coordination between regulators after the 2008 financial crisis, Hong Kong is still in the progress of proposing bank special resolution regime. Although there has been some awareness on the issue of coordination between home and host states regulatory measures, there is still a lack of awareness of the connection between regulatory measures and compensation schemes.

Research limitations/implications

Conflict of interests could hardly be prevented in the course of cooperation and coordination among home and host regulatory authorities, and the coordination of the important link between ex ante regulatory measures and ex post compensation scheme which involves legal and economic analyses is a challenging task.

Practical implications

The paper’s findings show that there are practical implications for the recent rapid development of special resolution regime for global systematically important financial institutions against future banking crises and for managing the balance between the adoption of financial supervisory laws and special resolution measures.

Originality/value

This paper suggests that the harmonious coordination between ex ante regulatory measures and ex post compensation schemes has to be achieved through international context to avoid the absurd situations. This conceptual integrated framework presented in the current paper is not touched upon by the existing literature. This important concept is valuable for future research, and it is significant to financial regulators, legislators and the government in adjusting policy against banking crises in both developed and developing countries.

Details

International Journal of Law and Management, vol. 57 no. 3
Type: Research Article
ISSN: 1754-243X

Keywords

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Book part

William V. Rapp

This research chapter argues lawyers, not just bankers, for good and bad have been involved in all aspects of the current financial crisis. Indeed after examining and…

Abstract

This research chapter argues lawyers, not just bankers, for good and bad have been involved in all aspects of the current financial crisis. Indeed after examining and assessing various civil causes of action related to the “Mortgage Meltdown” and its aftermath, it appears if lawyers had been less involved or had raised warnings about legal risks as well as economic ones, whether the financial impact would have been so disastrous and widespread. Indeed by raising cautionary flags earlier, lawyers might have better served both the clients’ and the public's long-term interests. This view thus complements issues related to criminally prosecuting mortgage fraud that has also seen explosive growth and where lawyers have again played central roles. Lawyers have been involved at the back end too in terms of legislation or resolving issues such as bankruptcies and foreclosures.

The chapter examines several causes of action the media have reported being raised by various parties and how they illustrate the role lawyers, regulations, and legislation have played in the origins and evolution of the current crisis. The cases explored involve individual parties and class actions. The chapter also analyzes in detail a case representing opposite ends of the origination and foreclosure closure spectrum by describing a derivative shareholder suit against corporate officers and directors actively involved in creating the subprime mess, who were then sued for covering up the inevitable results from failed loans in the reports to shareholders. It thus illustrates the legal complexities emerging from the abuse of complex financial and organizational structures impacting many investors. Finally the chapter concludes by arguing there is a public policy need not only for financial regulatory reform but also for a tightening in the professional standards and regulatory penalties imposed on lawyers involved in such transactions.

Details

International Banking in the New Era: Post-Crisis Challenges and Opportunities
Type: Book
ISBN: 978-1-84950-913-8

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