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Lehman Brothers evidence

Lehman Brothers evidence

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Published by The Guardian
Filings from the US bankruptcy court investigate the reasons behind the collapse of Lehman Brothers
Filings from the US bankruptcy court investigate the reasons behind the collapse of Lehman Brothers

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Published by: The Guardian on Mar 16, 2010
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10/31/2012

As described above, Lehman’s stress tests suffered from a significant flaw.

Although Lehman made a strategic decision in 2006 to take more principal risk, Lehman

did not modify its stress tests to include the risks arising from many of its principal

investments – including its real estate investments other than commercial mortgage‐

660 For further detail regarding the Repo 105 transactions, see Section III.A.4 of this Report.

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backed securities (“CMBS”), its private equity investments, and, during a crucial

period, its leveraged loan commitments.661  Thus, Lehman’s management pursued its

countercyclical growth strategy, including an increasing concentration of risk in illiquid

assets, without availing itself of a common risk management technique for evaluating

the potential risk to the firm from that strategy.

But stress tests, like risk limits, are an instrument available for use of

management as it deems appropriate; Lehman’s management was not legally required

to make business decisions based on the results of stress testing.662  Moreover, the SEC

was aware that Lehman’s stress tests excluded untraded investments and did not

question the exclusion, because historically it had been the norm to limit stress tests

only to traded positions.663  Based on these facts, the Examiner does not find that

Lehman management’s use of the stress tests gives rise to a colorable claim for a breach

of the duty of care.

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