Lehman Brothers Finance Assignment Help With Solution
Lehman Brothers was established in Montgomery, Alabama, United States, in 1844 by German immigrants: Henry Lehman, and his two brothers, Emanuel Lehman and Mayer Lehman. It was first set up to be a small general store selling groceries, dry goods and utensils to local farmers. Until 1920s the company was run as a strictly family business, i.e. only family members were allowed to be partners.
Shortly after its establishment, the nature of business that Lehman Brothers conducted changed and the company started to act as a broker that bought and sold cotton for the planters living in and around Montgomery, Alabama. Lehman Brothers became known as a “King Cotton”. Successful operations in the cotton business, allowed the brothers to open a New York office in 1858 which provided the firm with a stronger presence in the commodities trading business as well as a foothold in the financial community (HBS, n.d.). Lehman Brothers’ commodities sales and trading business grew to include other goods and the company was among the first to set up commodities futures trading ventures in the United States.
Changes in the economic environment from agrarian to industrial era led to changes in the operations of the firm. Rapid infrastructure developments including construction of the railroad networks called for financing and this is how Lehman Brothers first started to act as the financial advisors and underwriters firm. The company continued to heavily finance various industries and with the developments in the external environment they always seemed to be among the first to show interest in particular industries.
Company’s openness to innovation, diverse portfolio of investments and overall culture was reflected in its mission statement: “Where vision gets built”.
In the year of 2000, Lehman celebrated its 150th anniversary. The team was really proud by the achievements; after all, the organization survived the Great Depression of the 1930s, Railroad Crash, World Wars and many other obstacles that didn’t seem to damage the company’s strong position in the financial sector as one of the largest investment banks in US. In fact, those challenges served as a catalyst for the firm to develop itself further. For example, in 1929 Lehman Brothers was one of the pioneers promoting new ways of financing that helped many companies to survive the crisis.
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In 2007 the firm reported net income of a record $4.2 billion on revenue of $19.3 billion. The stock reached a record $86.18 which put the company to a market capitalization of close to $60 billion (Investopedia, n.d.). This was also the year when Lehman underwrote more mortgage-backed securities than any other firm – four times its shareholders’ equity, increasing its leverage of total assets to shareholders’ equity to 30 to 1 (Investopedia, n.d.). With increasing number of home delinquencies, Lehman’s Chief Financial Officer made a public announcement stating that those risks didn’t have any impact on firm’s earnings and that he didn’t foresee problems in the subprime market. However, the year of 2008 proved him wrong. As the housing market crashed, Lehman Brothers stock fell in value by 77% in the first week of September 2008 (Investopedia, n.d.). Continuous declines in value led to Lehman declaring bankruptcy on Monday, September 15th, 2008.
Lehman Brothers’ bankruptcy was the biggest downfall in the US history. The company was “Too Big to Fail” and no one ever believed it until it really happened. Its bankruptcy is said to wipe out more than $46 billion of market value which is a significant loss to one country’s economy (Investopedia, n.d.). But it also raises the question as to what went wrong with the company’s governance structure that made it possible for this giant to fall so fast. It is therefore the goal of this report to further investigate the external as well as the internal environments of Lehman Brothers and then develop a comprehensive case as to the sources and causes of organizational crisis that led to corporate governance failure; crisis that resulted in a significant financial loss to the economies of the countries where it operated as well as served as a catalyst for comprehensive financial system reform in the United States. The report will also identify the controls that, if in place, could have prevented the crisis as well as lessons that could be drawn by other organizations as means to avoiding a similar situation.
1. Executive Summary
2. What could have been done to get the organization out of the crisis?
3. What should others learn from to avoid creating a similar situation
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