LEHMAN

BROTHER
“Scam”

Presented To: Sir Zahid Iqbal

Presented By:
Saiman Nawaz
Muhammad Zuhaib
HISTORY &
ORIGIN
01 Founded by German immigrant Henry Lehman in
Montgomery, Alabama in 1844.

Lehman Brothers, founded in In 1850, Henry Lehman and his brothers, Emanuel
02
1844, began as a general and Mayer, founded Lehman Brothers
store. In the 1990s, it thrived
post-Glass-Steagall Act repeal. It provided investment banking, trading, investment
03
But subprime mortgage- management, private banking, research, brokerage,
backed securities led to its private equity, and associated services.
2008 downfall.
COMPANY PROFILE

Lehman Brothers Inc. as an American global financial services firm founded in 1850.
Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank
in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), with
about 25,000 employees worldwide.
 Introduction
The disorderly and costly nature of the LBHI bankruptcy the largest,
and still ongoing, financial bankruptcy to the massive financial
disruption of late 2008.
The collapse of lehman brothers holdings Inc.had a crippling effect on
the global economy with the financial crisis escalating to other parts
of the world. In the aftermath of this event, financial institutions froze
lending activities thereby creating liquidity problems in the shadow
banking financial system.
 Introduction
According to the World Bank, the economic recession hit the USA and

the world at large in three phase

Phase 1- U.S subprime mortgage structured finance

Phase 2- Post Lehman global financial market turmoil

Phase 3- The worldwide economic recession

 US Housing Boom

Was marked by a sudden increase in housing prices followed by a

downfall

In the year 2006-2007 foreclosure rates increased drastically

Dec 30, 2008 case Shiller home price index recorded largest dip

Resulted in Mortgage debt higher then the actual value of the property.
Cont.

A combination of very low interest rates and a loosening of credit underwriting

standards can bring borrowers into the market, fuelling demand.
A rise in interest rates and a tightening of credit standards can lessen demand,
causing a housing bubbles to burst.
Senior Management
Richard “Dick” S. Fuld, Jr

Chairman of the Board & Chief Executive

Officer

Ian T. Lowitt Joseph “Joe” M. Gregory

Chief Financial Officer President and Chief Operating Officer

Madelyn Antoncic Herbert “Bart” H. McDade

Former Chief Risk Officer President and Chief Operating Officer

Christopher M. O’Meara
Erin M. Callan

Chief Risk Officer

Chief Financial Officer

Matthew Lee

SVP, Finance
Board Members

Michael L. Ainslie Marsha Johnson Evans

John F. Akers Sir Christopher Gent

Roger S. Berlind Jerry A. Grundhofer

Thomas H. Cruikshank John D. Macomber

Background Of Fraud

Repo 105 transactions Accounting Mark to Market Issues

Manipulation

Lehman Brothers used Repo They may have disguised Lehman might have been
105 transactions to loans as sales to further slow to adjust the value of
temporarily remove risky improve their financial bad assets, inflating their
assets from their books, picture. stability.
making them look better
financially.
 Nature of Fraud

Potential Accounting
Misrepresentation Delayed Asset Valuation
Manipulation
Lehman used Repo 105s to Lehman might have been
Disguising loans as sales (if
hide risky assets, creating a slow to mark down bad
true) would significantly
false impression of assets like mortgage-
understate liabilities and
financial strength. backed securities, further
inflate their financial health.
misrepresenting their true
financial picture.
 Richard “Dick”
Fuld, Jr

Erin M. Callan

Persons/Executives
involved in Fraud
Ian T. Lowitt

Christopher M.
O’Meara
 Lehman lacked
transparency

Corporate
Governance Weak risk managemen
codes
Ineffective board
oversight
Main causes for
bankruptcy
The bank had taken on too much risk without a
corresponding ability to raise cash quickly.
In 2008, it had $639 billion in assets, technically more than
enough to cover its $613 billion in debt.
However, the assets were difficult to sell.
As a result, Lehman Brothers couldn’t sell them to raise
sufficient funds.
That cash flow problem is what led to its bankruptcy.
 Cont.
Lehman underwrote mortgage backed securities more than
any other firm, accumulating an $85 billion portfolio, or four
times its shareholders equity
Leverage levels up to 20-35 percent of their equity capital in
order to invest on securitized products using debt capital.
Excessive risk taking
Passing the investment risks through unregulated credit
default swaps CDS where they didn't have any adequate
capital behind them. AIG case
 Collateral Debts
Obligation

CDO are a types of structured asset backed security (ABS)

whose value and payments are derived from a portfolio of
fixed income underlying assets.
Issuer of the CDO, typically an investment bank, earns a
commission at times of issue and earn management fees
during the life of the CDO.
Classification of CDOs based
on funding

Cash CDOs involve a portfolio of cash assets, such as loans, corporate bonds,
ABS or MBS.
Synthetic CDOs don't own cash assets like bonds or loan; instead they gain
credit exposure to a portfolio of fixed without owning those assets through the
use of CDOs.
1.
This was the largest bankruptcy
in the entire world, so basically
everyone got affected
 2.
Less profit of U.S based
Companies

3.
Cost of borrowing also
increased
3.
Almost 6 million jobs were lost all
over world
4.
Unemployment rate almost
doubling to 10%
6.
Million of investors lost all or
almost all of their money

7.
Reduced global market value
by $10 trillion in market
capitalisation
 8.
Intensified the downturn that
started in late 2007 created
from the sub prime mortgage

9.
Popular index DOW JONES fell
by 5000 point
Whistleblowers/
Sources of Red Flags

Lehman Brothers filed the largest bankruptcy filing in history, Matthew Lee, a senior
vice president who oversaw the bank's global balance sheet, blew the whistle on the
bank in a letter to executives
Court hearings/
legal proceedings

Chapter 11 Bankruptcy:
In September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection in
the Southern District of New York. This is a complex legal process aimed at
reorganizing a company's finances.
Court hearings/
legal proceedings

Focus of Proceedings:
The bankruptcy court oversaw the sale of Lehman's assets, distribution of
proceeds to creditors, and resolution of various legal claims.
Court hearings/
legal proceedings

Investor Lawsuits:
Numerous lawsuits were filed by investors alleging Lehman misled them
about its financial health. These were likely consolidated and potentially
settled within the bankruptcy court framework.
 Victims’
Compensation

Bankruptcy Focus Individual Investor

Lehman Brothers' bankruptcy Individual investors who lost
focused on paying creditors money on Lehman's stock
the company owed money, weren't compensated
like banks and bondholders. because their losses were
from market fluctuations, not
direct claims on the
company.
 Corporation Fate
Lehman Brothers Filed for Chapter 11
Bankruptcy

In September 2008, facing financial collapse, Lehman Brothers entered Chapter 11

bankruptcy. This is a legal process for companies to reorganize their finances, but due to
the severity of Lehman's situation, it ultimately led to:
 Corporation Fate

Liquidation

The court oversaw the sale of Lehman's assets to repay creditors. The brokerage unit
completed its liquidation process in September 2022, over 14 years after the initial
filing.
NEW REGULATIONS AND
LEGISLATION IN RESULT
OF THIS FRAUD
Dodd-Frank Wall
Street Reform and
Consumer Protection
Act (2010)
This act aimed to prevent future financial
crises. Key areas of reform included:

Increased regulation of investment banks and

hedge funds.
Creation of the Consumer Financial Protection
Bureau (CFPB) to safeguard consumers.
Tighter oversight of credit rating agencies.
American Recovery and Reinvestment Acts of
2009 sign this law to President Obama.
Focus on
Transparency

The act emphasized transparency in financial

reporting and risk management practices.
This aimed to prevent the kind of misleading
accounting that may have occurred at Lehman
Brothers.
THANK YOU
FOR YOUR ATTENTION