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Issues Arisen From The Collapse Of Lehman Brothers Finance Essay

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Date added: 17-06-26


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This is a report on what types of issued arisen on collapse of Lehman Brothers and how does the American situation compare to Australia. The Lehman Brothers was one of the largest global financial service firms in United States, which was declared as the forth largest investment bank in US before its bankruptcy on year 2008. The US sub prime mortgage market collapse was basis of the Lehman's economic failure. On the time of its collapse Lehman owned $639 billion in assets and $619 billion in debt. Lehman's failure gave a big effect to the global finance market crisis in 2008.(C)

2.0 THE LEHMAN'S FAILURE LESSONS

Lehman's failure offers two types of lessons as follows; We must get rid of the gaps in regularly financial frame work, which is permit large, interconnected firms such as Lehman to run without join supervision. When the time of the Lehman's failure the government agency was helpless to force Lehman in a safe way.(G) But not like the US, Australian investors had another place protection, which was the ASIC. In this case they interfered into clash between Lehman bank Australia and local council and they informed to federal court to hearing the arguments between them before they make the case judgement. (H) The failing banks needs to avoid choices between bailing out of failing in the future, permitting the bankruptcy disorder, need of fresh resolution commands. Some of commands would guard the economy and recover market regulations by providing details regarding whether the shareholders and creditors take losses and whether the management they also replaced or not.(G)

3.0 ISSUES ARISEN ON CORPORATE GOVERNECE FINANCIAL

STUCTURE

The Lehman's failure was widespread in the basic arrangement of the global financial system. The main issues can discuss as follows(D); The lightly regulated Banking system The Market Structure Derivatives Failure in fundamental checks and Balances Facts in accounting treatments Faulty in compensation structure Decreases in future investors funding Reissue 1: The alteration of use of short term liabilities to finance long term assets and leverage intrinsic in banking system, but unlike to normal banking system Lehman carryout its performances with high level of leverage. They financed itself to a large amount relating to the short term debts. The high risk business model and above features cause to the Lehman's collapse.(D) According to the current crisis, in the peak period this system invested approximately $8 trillion in assets with short term commitment as the real banking system. The growth of the system was raised due to weak capital requirements and light regulation facts. Financial sector development limited from the appearance of lightly regulated banking system and this financial failure.(D) Reissue 2: "Repo 105" is an accounting techniques used to cover risk from the market. Valukas reported, Lehman used the Repo 105 transactions to hide their capital amount from regulators, rating agencies and as well as creditors. In 2008, Lehman used Repo 105 to overstate their financial strength and lift up their Repo market. Basically the US investment bankers used this market to exchange their assets for short term loans.(D) The repurchase agreement or Repo market was major basis of liquidity risk and the crisis volatility for the most of merchant firms including Lehman. As the same way the mortgage was secured by home and Repos were protected by assets on trader's balance sheet.The most important part of the repo is "tri-party" repo and it's useful to provide liquidity to safety markets during the regular times. During the stress period this actions cause of liquidity risk for financial sector. During the crisis period, market felt with doubt about the funds money and the repo clearing banks intraday credit. The tri-party repo funding had been restricted to either Treasury or agency safe security classes. The tri-party lenders, turn into less willing to continue funding when the time of lower-quality security value grow to be uncertain.(D) By the effect on above points, financial crisis tri-party repo market and funding was vital evident of liquidity damage on trader firms. Also the money funds shown volatility during this period. On this confused financial environment, assets not have been safe as expected. Those anxieties make stronger after Lehman's collapse. The temporary government policy actions require for guarantee of those industries. Even through in the large risks, uncovered taxpayers protected by the money fund guarantee.(D) Reissue 3: Lehman was a major member in Over the Counter (OTC) derivatives market and holds 900000 derivatives over worldwide. Lehman's derivatives also cause to the Lehman's bankruptcy and its bankruptcy takes the part of flow of the governance financial infrastructure. The national outstanding credits default change over from approximately $2 trillion in 2002 to over $60 trillion in 2007 due to the bilateral basis trade conduct.(D) The regulatory efforts was in progress to reduce this system risks in before the crisis but in 2008 the aggregate credit defaults national amounts was reduced through the regulatory portfolio requirements and as well as Which cause to the trader's surplus position collapse.(D) Reissue 4: The year before the Lehman's economic failure it was a high risk business and in this period Lehman developed important contacts to sub prime lending and business related real estated. In this period Lehman breached its own risk attention limit into search of higher earnings. The sound of Risk management failure was another important point in the financial field. The some of the important test and balances in risk management were auditing and disclosure tasks and bord of directors. (D) Weak points in tests and balances were occurred during and before financial crisis, but board of director's failure provide the significant judgments to access those weakness and auditors' failure and disclosures recognised mistakes in accounting perspective and existing accounting and disclosures did not sufficiently explained about material mistakes arisen to investors.(D) Reissue 5: Lehman identifies how the gaps system effect in the financial firm's regulatory and accounting treatment. US governance regulatory system provide more flexible structure for firms accounting , regulatory and tax activities and differences between US and foreign tax and accounting treatment for the international firms. This systems voluntarily mistake rule allowed all the invest banks as well as the Lehman to work with high risk and leverage. The complexity of the regulatory and accounting treatment cause many challenges to the audit and disclosure rule. It is arguable that the US government's financial supervisors did enough jobs in this situation because the sudden crisis more heavily concerned in the financial industry.(D) Reissue 6: Lehman asked top executes to understand difficulties in business field. The top executives received cash compensation during the bloom and able to cash out vital amounts from stock compensation in the before the crisis. Other financial firm's compensation structures were not true with the risk time horizon and decision-making were considered as short term act with slight attention to the future losses. The high risk activities make the short term profitability.(D) As concerned above US governance system tests and balances was limited certain exercises but in many time these tests and balances did not work. Pay setting decision taken by compensation committees and directors made the decisions relating to the relationship between compensation and risk taking.(D) Reissue 7: After the Lehman's bankruptcy most of investors fear to renew their funding to any financial intuitions. Money funding investors try to exchange their shares and divert funds from private sectors to treasury securities. It seems to be whole financial system would collapse without the government involvement.(D) Lehman was the next weakest investment bank after the Bear Stearns failure which was affected to the US financial system as well as the global economy. Further more, with the limited powers the system worked industriously to avoid the damages to financial system and economic boarder. But unfortunately the tools was had not enough to carry on the further steps. However US financial system deeply damage with from the Lehman's bankruptcy and without better recover tools the US system was absent with no better decisions.(D)

4.0 LEGAL ISSUES

corporate insolvency law breach of contract, breach of fiduciary duty and unauthorized transfer of assets beach of liquidator duties Reissue 1; The United National Commission on International Trade Law (UNCITRAL) has introduced 'model law' system which is included in the other countries insolvency systems. The main goal of the system is to offer recognition facilities and give powers to the foreign insolvency proceeding officers. Likely USA, UK, Australia also accepted the model law but it is not so far universal.(E) The insolvency laws were legislated by the corporate act in the Australia with the ASIC oversight. The law was included "Voluntary Administration, performance of the Company Arrangement, Creditor's Voluntary Liquidations, Receiverships, Court Appointed Liquidations and Member's Voluntary Liquidations". The Voluntary Administration and Receiverships was the major types in Australian External Administration. The Lehman's collapse directed how the most complex international bankruptcy affect the globally.(E) Lehman's Australian subsidiary was liked to support the American parent company. The made new idea of the bankruptcy was to bring a court case in the US would be more costly and it is difficult, but still assets available for creditors. (B) Like US, Australian claimants also taking powerful supports from UNCITRAL's model law in the Lehman bankruptcy. In the Australian court the Cross Border Insolvency bill would stop the fate of the assets and it could be resolute off shore. The main thing in here is main interest centre of the insolvent company been on offshore, the cross border insolvency Act wanted to rule the insolvency proceedings in the Australian court.(B) But insolvency lawyer had little debt that the system was replaced by the cross border insolvency Act had been release mistreatments and charging extra cost for multiple proceedings and all those cost would be going to reduce form the creditor's assets pool.(B) The NSW chief justice Jim's view was the corporate insolvency multi proceeding approach are corresponding of protectionists. And also he explained that local assets maximising the payout to local creditors.(B) Reissue 2: There was an opportunity for the collapsed banks to request revise the deal they made and approved to follow claims for unauthorized transfer assets, breach of fiduciary duty as well as the breach of contracts. The Lehman's unsecured creditors and US securities investor protection corporation's trustees are supported this request.(G) Reissue 3: On the case evident the other important issue appears to have possibility of the breach of liquidator's duties. Duty of care and diligence: Liquidators are also guardian of other people's money. In this situation the first duty is to implement care and due diligence. In this situation, It is arguable that Lehman engages in misleading conduct. According to the Valuka's report (US trustee- appointed Examiner), he presented that their was a misleading picture in the Lehman's financial form to the public by using Repo transactions (repurchase agreement).furthermore he mentioned that he was not disclose its use, such as Repo 105 to the government, rating agencies, directors or investors. The result was help to hide the holding bad assets in the balance sheet. Regarding to this he pointed out that he founded Lehman used Repo105 transactions to get smaller their balance sheet and mislead their investors and creditor. It is important to reduce the financial fraud and gave a confidence and trust about the financial market to investors.(F) The Lehman's collapse case quite similar to the case of Enron collapse in 2001.because their ware misbehaviour of top management due to both auditing and director board. In the Enron management, in the pre pay transition they increase in leverage into positive cash flow without any balance sheet impact and in the Lehman's period they used the Repo 105 for pre pay transaction functions. (A) Liquidity is necessary for the investment banks business models. Valuka's reported the Lehman liquidity take part in important role in their business model. Also he pointed out that when the time the risks were rising the Lehman's executives file misleading financial report and the accounting methods occur mislead investors, including the transaction which was vanish $50 billion amount from its balance sheet and focusing the future project forecast the real estate investments write-down. On Valuka's view Lehman failure take apart from the result of inadequate liquidity.(F) Inclosing,

Reference: aus effect ……………..

According to the US law, the Lehman Brothers was allowed to the collateral and it assumed procedures for court to court communication. When considering the US creditors in excess of international investors, there are vital flow on things can happen to investors who were carry on contracts in internationally. Not only US Australian investors also suffering bad experience with the Lehman Brothers collapse. In here the insolvencies support to the arrange administration of the assets in the unsecured creditors. Australian investors prepared claims by using common law and statutory ground to take an action against the Lehman Brothers with regarding to their investment losses. The Australian statutory requirements create a collective solution for the series of claims against to the Lehman's subsidiary companies in Australia. But the recently held statutory system in the Australian High court was helpless to allow claims of any other Lehman's subsidiary or creditors against third party.()

5.0 CONCLUSION

This case provides the guidance how bankruptcy can direct to the global financial losses for an instance, in the payments and settlement processes and the system disturbance. Lehman did not engage in role of the US value payment system. But they offered number of funds to prime brokerage system and those were lost access to credit line and also as the collateral. The Lehman case direct to a risky satisfaction, such as it can be cause to the any police mistake or stupid legal restriction or can be due to not sufficient bailout power. Another important take out in this case was do we can imagine that as a executive are we done any better. It is clear without the strong rule and trusty workers nobody can do better. Again with the Lehman's case it is good lessons to whole economic system that ignore all the evidence that this system cannot continue. By considering the above evidence we can argue, behind the Lehman collapse their must be simply fraud. Lehman case was not gone down by market manipulation it undergoes with bankruptcy. (A) Another point is before Lehman Brothers faced with this matter the US government do not declare any warning message to them. Because they noticed that the US government did not have the power to take an action to prevent Lehman's failure.
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