FINANCIAL BACKGROUND &

SITUATION
Lehman Brothers, founded in 1850, was a company with a long and
interesting history. During more than 150 years of existence, the company
became the fourth largest financial firm in the world, before announcing
bankruptcy on 15
th
September 2008.
Between 1994 and 2007, Lehman Brothers market capitalization grew
from $2bn to $45bn whereas its share price went from $5 to $86, creating
an average annual return for shareholders of 24.6 per cent.
Lehmans traditional strength was in fixed income. However, by 2006-07,
Lehman Brothers was the number one underwriter of securities backed by
sub-prime mortgages and mortgaged-related securities and loans
accounted for 28% of the firms total assets.
When the firm went public, employees owned 4% of the firm, worth $60m
which increased to 30% , by 2006, equivalent to $11bn, at least on paper.
In the quest for greater profitability, more risks were taken and little heed
was given to any corporate governance, business ethics or moral values,
creating unbridled greed which led to dramatic consequences.

By 2007, Lehman Brothers was the largest trader on the London Stock Exchange
and had a role in a fifth of all corporate takeovers. Lehman Brothers purchased
asset management business Neuberger Berman, California-based BNC Mortgage
and Aurora Loan Services, all of which specialised in making sub-prime loans.
Lehman Brothers strategy was to repackage mortgage loans into bonds because
the real estate and housing market had strengthened. The company reported
record earnings in 2005, 2006 and 2007, wherein the shareholders reaped a 17-
fold increase from 1994 to its peak in February 2007. But the whole strategy was
built on dodgy mortgages that could never and would never be repaid.
The companys decline was inevitable and viciously swift. Although, Lehman
Brothers was worth $42bn with total assets of $639bn in February 2008, but on
15
th
September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection,
wherein its bankruptcy filing listed debts of $613bn.
Lehman Brothers painted a misleading picture of its financial condition using a
Repo 105 accounting strategy that auditors Ernst & Young were aware of but did
not question. Lehman did actionable balance sheet manipulation to keep Rating
Agency approval.