The Lehman Brothers Scandal

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The Lehman Brothers Scandal

I am not sure if you are familiar with the case, Lehman brothers' scandal if so can you please help with notes, ideas, and

scholarly resources?

Consider Reading 4.26 on pp. 289-290, Getting Information from Employees Who Know to Those Who Can and Will Respond.

Develop a research paper that addresses the following:
- Provide a brief synopsis of Mr. Lee's concerns regarding Lehman Brothers.
Matthew Lee was an executive in Lehman Brothers, a senior vice president,in 2008, and both verbally, and in a formal

letter to the then CFO and Chief Risk Officer he reported that he believed that members of the senior management have

violated LB's internal code of ethics by "misleading investors and regulators about the true value of the firm's assets."

(Corkery, 2010)

- What are sensing mechanisms and why are they important?
Jennings advises that executives get out of their office, that is, out of official meetings, and regularly speak

informally with employees. Sponenaity and approachability often leads to new insights about the condition of the company

and its employees. Jennings referred to a television program called Undercover Boss, in which executives of a company

spend time under another alias and worked with their regular workers, speaking to them and listening to them without the

trappings of hierarchy and fear of losing their jobs. Usually the executives learn new things, good and bad, about the

conditions and thinking of their employees.

- What is the humble firm and how does it encourage ethical behavior?
In a humble firm, according to Jennings, "the arrogance of results and top performance is kept at bay. This permits an

more open environment to take hold." (Jennings, 2014,pg 271) This type of environment allows for people of all levels of a

company to speak freely and even correct ethical behaviors. This type of humility will allow for any ethical issues to be

discussed on their own merits, rather than who is engaging in them.

Marianne Jennings, Business Ethics: Case Studies and Selected Readings. Cengage Learning, pg 270-271
http://books.google.com/books?id=K4TaAgAAQBAJ&pg=PA271&lpg=PA271&dq=ethics++sensing

+mechanisms&source=bl&ots=Ah2zD3TiXu&sig=U4IFgSYAvjkIehxKWkUxRi0WqLg&hl=en&sa=X&ei=omysU8KWCva-

sQTKtoH4BQ&ved=0CDQQ6AEwAg#v=onepage&q=ethics%20%20sensing%20mechanisms&f=false

- Describe what leads to the types of behaviors at Lehman and other companies that eventually collapse.
Sometimes leaders of companies feel that compromising their ethics in order to make the company prosper is sufficiently

justified. The causistry theory of leadership implies that making the decisions that are made on behalf of the company is

part of the duties of a leader, even if the decisions are against the law or the ethical guidelines of the company.

However, when they are found out, the majority of the public will not agree that leaders have the right to break the law.

The implication, however, is that some people feel that if it is not known, it can be accepted. This concept, causistry,

states that ""rulers" must, therefore, in conscience and ethics, subordinate their interests,including their individual

morality, to their social responsibility." (Drucker,1981, pg 24-25)
The statement made by former President Nixon, who resigned amid the Watergate scandal of the early 1970's ilustrates this

attitude "When the President does it, it is not illegal."

Drucker, P. (1981). What is business ethics?
http://www.nationalaffairs.com/doclib/20080708_1981632whatisbusinessethicspeterfdrucker.pdf

- Why are managers unable to simply rely on their ethics hotlines
In her book Business: Its Legal, Ethical and Social Environment, Jennings stated "Despite a strong values system, an

individual facing the complexities of business needs help in recognizing ethical dilemmas." Jennings went on to outline

sayings and categories that indicate ethical dissonnance or conflicts. The sayings are

Everybody else does it
If we don't do it, they'll get someone else to do it
That's the way it's always been done
We'll wait until the lawyers tell us it's wrong
It doesn't really hurt anyone
The system is unfair
I was just following orders

Among the categories are these which she then cited, which are:

Taking things that don't belong to you
Saying things you know are not true
Giving or allowing false impression
Buying influence or engaging in conflict of interest
Hiding or divulging information
Taking unfair advantage
Committing acts of personal decadence
Perpetuating interpersonal abuse
Permitting organizational abuse
Violating Rules
Condoning unethical actions
Balancing ethical dilemmas

Often ethical dilemmas must be weighed one against others, and it just isn't easy. Business leaders can look to their own

personal ethical makeup, from their upbringing or culture, and they can also consult organizations that have helped many

businesses to work out a sound legal ethical balance.(Jennings, 2000, 48-54)

Scholarly articles in the Journal of International Business Ethics examine various methods for providing effective means

to prevent ethical breaches in business. A significant issue in business is trustworthiness on the part of the company.

Krzysztof Grabowski. CORPORATE HARMONY AND CONFIDENCE BUILDING SPHERES ON THE FINANCIAL MARKET (2013) Journal of

International Business Ethics Vol.6 No.1-2
http://www.cibe.org.cn/uploadfile/otherfile/j52.pdf

This paper refers to three different theories, all related to leadership or corporate governance: the agency theory, the

stakeholder theory and the stewardship theory. There is also an integrated figure that illustrates hard rules and soft

rules, which are dependent on outside requirements and ethical drives. This method helps to weigh degrees of ethical

soundness.
Grabowski also stated that there should really be a "new definition of corporate governance understood very broadly as a

whole set of relations between the company and its stakeholders built on mutual trust and confidence. It takes into

account not only the company itself, but also all the external spheres, both legal regulations and self-regulations

together with local corporate culture and tradition."
(Grabowski, 2013, pg 8)

Jennings, M. (2012) Business ethics: Case studies and selected readings. Read Unit 4, Sections D-E.

Other references:

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http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers
The Dearth of Ethics and the Death of Lehman Brothers

In an unprecedented move that rocked the financial industry to its core, on Sept. 15, 2008, Lehman Brothers filed for

Chapter 11 bankruptcy protection. Not only was it the largest bankruptcy case in United States history, but it also came

after repeated assurances from the company's chief executives that finances were healthy, liquidity levels were high, and

leverage was manageable. The implosion of this Wall Street institution shattered consumer confidence during a time of

fragility, and in the aftermath of its collapse, a number of questionable decisions came to light. This analysis will

proceed in two parts: First, a recap of the series of events leading to Lehman Brothers' failure, followed by the

identification of several dubious choices made by its executive management team and how the consequences led to the bank's

ultimate demise.
History and Facts

Many believe the beginning of the end for Lehman Brothers was when Washington repealed the Glass-Steagall Act. This

landmark legislation from the Great Depression separated the interests of commercial and investment banks, preventing them

from competing against each other (2) and protecting their balance sheets by allowing each sector to focus on the business

and transactions that it did best. For investment banks, that typically meant highly liquid, asset-light portfolios,

leaving commercial banks to handle capital-intensive portfolios, including real estate or corporate investments.

Additionally, the act insulated the economy from mass collapse in the event of one sector's failure by preventing the

other from being dragged down in tow. But in 1999, President Clinton signed the Gramm-Leach-Bliley Act into law, allowing

commercial and investment banks to compete head-to-head for the first time in 60 years (2). The arms race that ensued

would prove disastrous for Lehman Brothers, the financial community, and the global economy at large.

With the repeal of Glass-Steagall, Lehman Brothers became a key player in the United States housing boom. From 2004 to

2006, Lehman Brothers experienced a 56 percent surge in revenues from real estate businesses alone (1). The firm

recognized profits from 2005 to 2006, and in 2007 it reported a record net income of $4.2 billion on revenues of $19.3

billion. In the same year, Lehman Brothers' stock reached an all-time high of $86.18 per share, giving it a market

capitalization close to $60 billion (1). This proved exceptional to the surrounding climate, however, and the housing

market began to show signs of a pending bubble burst.

In March 2007, the stock market experienced its biggest single-day plunge in five years, while the number of mortgage

defaults simultaneously rose to the highest percentage in almost a decade. Bear Stearns, Lehman Brothers' most comparable

Wall Street rival, experienced the total failure of two hedge funds in August. Despite rapidly deteriorating marketing

conditions, Lehman Brothers continued writing mortgage-backed securities and touting its financial strength to the press

and shareholders while decrying the notion that domestic and global economies were in danger. Meanwhile, its operations

were reckless, as illustrated by its $11.9 billion in tangible equity and $308.5 billion in tangible assets on balance

sheets in 2003 that yielded a leverage ratio of 26 to 1. Four years later, ...