Investment Analysis Lehman Brothers

INVESTMENT ANALYSIS: LEHMAN BROTHERS 1

InvestmentAnalysis: Lehman Brothers

Introduction

Aglobal financial meltdown occurred in 2008 when one of the leadinginvestment banks in United States collapsed amidst a global financialcrisis. Lehman Brothers was considered one of the Wall Street’sbiggest dealers in fixed interest trading. The bank also had heavyinvestments in securities that are linked to the US sub-primemortgage market. The bank went under after it failed to secure abuyer and the government failed to bail it out (Wiggins&amp Metrick, 2014).With over $600 billion in assets to administer, Lehman is one of thebiggest corporate bankruptcies in the history of US which is alsoconsidered one the largest catastrophe to hit the financial industry.

Factorsthat contributed to the financial failure of the firm,

Someof the factors that accounted for the Lehman’s failure include:Unethical management practices and poor management choices Lehmanmanagement team in bid to achieve their expansion strategy used badmechanisms which did not give any regard to the acceptable standardsof corporate governance. (Larcker &amp Tayan, 2010). For instance,unacceptable accounting practices such that fraud was perpetrated intheir financial statement and they also violated the Sarbenes OxelyAct which was enacted to strengthen external auditing practices. Mostof the Lehman’s executives were purported to be carrying outsecurities fraud practices as well as payment of huge bonuses todirectors prior to the firm’s failure.

Anotherfactor was the inability of the firm to meet their short termobligations despite it having a high asset base, in this regard,Lehman lost its market. To curb this Lehman reduced its gross assetbase which on the hand caused its mortgage exposure to be reduced by20%. In this case, the bad decisions by its managers did not help thesituation as their strategy to be rescued failed (Obiri, 2013). Theserisks could have been avoided had the managers taken preventivemeasures rather than reactive measures to manage the risks.Accordingly, company regulators should be keen to guide companies todo business within the confines of the law, keeping a blank eye ofthe Lehman’s executives’ illegal activities. To prevent such afailure then the regulators need to be more stringent in theirsupervision of firms’ performances (McDonald &amp Robinson, 2009).The linkage between management and regulations need to be set up toprevent such future occurrences.

Riskmanagement techniques used by financial institutions today

Risktaking is an integral part of the banking business and riskmanagement is important for the purpose of risk reward trade off. After the fall of the Lehman most banks adopted measures to countersuch threats from volatile mortgage backed securities. These includedassessments and measurement of risks before investment, monitoringand efficient management. There are four ways that institutions dealwith risks which include avoidance of risk. This is where aninstitution does not engage in activities that are risky in any way. Another risk management technique used is mitigation where aninstitution chooses to lessen the negative impacts of a risk. Thistechnique is mostly used when the risk is unavoidable. (Lopez, 2003).

Theother technique include transfer of risk where by an institution maychoose to transfer the risk from the institution to another forinstance insurance company that covers an institution againstfinancial loss of some substance. Risk acceptance is the lasttechnique that an institution can use to manage a risk this is wherean institution that has embarked on a project accepts the risks thatcome with it if the profit anticipated more than the potential risk. At financial institutions, risk management practices such as riskidentification and measurement, liquidity risk, valuation practicesand management oversight should be utilized in order for theinstitution to gauge its performance. Accordingly, betterunderstanding of the risk and its measure should be critical inchoosing a technique to deal with it and the sub sequential financialcrisis.

Evaluatemanagements role within a financial investment firm for establishingproper risk management procedures for high-risk investments

Themost critical role of the management in a firm is to ensure that theclients’ investments are earning a good interest, are wellprotected and that they are involved in minimal risks. Managementcontrols are usually set up by the management system which ensuresthat they are stable and that the feedback system is well installedto caution in case of any possible risks in its processes.

Tocapture the risks involved, the management utilizes tools such asreduction in broad assets in investments, assessing and taking actionof the total risk involved in the investors’ investments as well astaking care of any loss that may not meet the investors’obligation. If the management fails to maintain the fiduciaryrelationship between themselves and their clients, then securitiesexchange commission should revoke their licenses. The management alsohas a role of differentiating the sources of risks which involvescalculation of the possible risks and the returns involved in takingthe risks (Busse&amp Wahal, 2010).In this regard, while assessing the future risks, it is importantthat the management take a look at all risks including the aggregateand the factor level.

Giventhe recent debt crisis within the EURO zone of Europe, analyze theimpact to the performance of foreign markets and recommend a strategyfor financial firms to minimize investment risk in these markets.Provide support for your recommendation.

Inessence, the overall blow and effect that the crisis had on thefinancial markets is the corrosion of confidence among the investors,insurance and brokerage companies as well as other financial firms.Many people are unwilling to lend their spare capital or even investdue to the lack of confidence in the market. The foreign marketshave also been affected by the financial turmoil that has seen manybanks collapse and others become very weak. London Interbank OfferedRate is the rate that the banks are willing to lend to each other andit is still high which shows that the interbank market is stilltrying to recover from the crisis. This has resulted to the flow ofmoney to be affected and it is only flowing in small amounts this isbecause of the uncertainty of the loan which ultimately results tohigher rates in the repayments. Diversification is an effective wayof minimizing risks it involves diversification by classes, globallyor even by sector over promising investment opportunities. In thisregard, avoidance of single investments and also trying to take theform of different stock combination and bonds from differentindustries may play a major role in minimization of risks.

Evaluatethe role of the Federal government, if any, related to the regulationof investments by financial institutions including the scope of therole, the authority and enforcement capability within the regulatoryagency, the benefits, and consequences of regulation. Predict how theregulatory environment may change over the next five (5) years.Provide support for your prediction.

InUS the federal government through the Securities Exchange Commission(SEC) sets the rules and the law that are used in the investments andsecurities markets. SEC which is given authority by the InvestmentAdvisors Act oversees the operations of investment companies and allfinancial related firms they are referred to as advisors as theyinclude money managers’ investment and financial consultants. TheAct tries to eliminate abuses in the securities markets, (Campbell,2007), whichare believed to have been a major contribution to the 1929 stockmarket crash and depression in 1930. It is very productive that TheAct provides for the fiduciary relationship between clients and theiradvisors to which the regulation reduces the chances of losses thatmay result from bad risk management practices as well as actions tobe taken in case of challenges is quite helpful to the investmentmanagers.

Inconclusion, risk management will thrive well where best practices andoperations are in utilized, in this regard being a dynamic sectorthese practices ought to change as the risks are being measuredregularly. Reformulation of the adjusted investment methods must bedone so that comparison can be done as well interpretation of theinformation obtained.

References

Obiri,C. (2013). Financialfraud detection for the prevention of business failure – enron and.S.l.: Lulu Com

McDonald,L. G., &amp Robinson, P. (2009). Acolossal failure of common sense: The inside story of the collapse ofLehman Brothers.New York: Crown Business.

Wiggins,R. Z., &amp Metrick, A. (2014). The Lehman Brothers Bankruptcy H:The Global Contagion. YaleProgram on Financial Stability Case Study.

Larcker,D. F., &amp Tayan, B. (2010). Lehman Brothers: Peeking under theboard façade. RockCenter for Corporate Governance at Stanford University Closer LookSeries: Topics, Issues and Controversies in Corporate Governance No.CGRP-03.

JoseA. Lopez. (February 13, 2003). HowFirms Manage Risks.Retrieved from

http://www.frbsf.org/economic-research/publications/economic-letter/2003/february/how-financial-firms-manage-risk/

Busse,J. A., Goyal, A., &amp Wahal, S. (2010). Performance and persistencein institutional investment management. TheJournal of Finance,65(2),765-790.

Campbell,J. L. (2007). Why would corporations behave in socially responsibleways? An institutional theory of corporate social responsibility.Academyof management Review,32(3),946-967.

INVESTMENT ANALYSIS: LEHMAN BROTHERS 1

InvestmentAnalysis: Lehman Brothers

Introduction

Aglobal financial meltdown occurred in 2008 when one of the leadinginvestment banks in United States collapsed amidst a global financialcrisis. Lehman Brothers was considered one of the Wall Street’sbiggest dealers in fixed interest trading. The bank also had heavyinvestments in securities that are linked to the US sub-primemortgage market. The bank went under after it failed to secure abuyer and the government failed to bail it out (Wiggins&amp Metrick, 2014).With over $600 billion in assets to administer, Lehman is one of thebiggest corporate bankruptcies in the history of US which is alsoconsidered one the largest catastrophe to hit the financial industry.

Factorsthat contributed to the financial failure of the firm,

Someof the factors that accounted for the Lehman’s failure include:Unethical management practices and poor management choices Lehmanmanagement team in bid to achieve their expansion strategy used badmechanisms which did not give any regard to the acceptable standardsof corporate governance. (Larcker &amp Tayan, 2010). For instance,unacceptable accounting practices such that fraud was perpetrated intheir financial statement and they also violated the Sarbenes OxelyAct which was enacted to strengthen external auditing practices. Mostof the Lehman’s executives were purported to be carrying outsecurities fraud practices as well as payment of huge bonuses todirectors prior to the firm’s failure.

Anotherfactor was the inability of the firm to meet their short termobligations despite it having a high asset base, in this regard,Lehman lost its market. To curb this Lehman reduced its gross assetbase which on the hand caused its mortgage exposure to be reduced by20%. In this case, the bad decisions by its managers did not help thesituation as their strategy to be rescued failed (Obiri, 2013). Theserisks could have been avoided had the managers taken preventivemeasures rather than reactive measures to manage the risks.Accordingly, company regulators should be keen to guide companies todo business within the confines of the law, keeping a blank eye ofthe Lehman’s executives’ illegal activities. To prevent such afailure then the regulators need to be more stringent in theirsupervision of firms’ performances (McDonald &amp Robinson, 2009).The linkage between management and regulations need to be set up toprevent such future occurrences.

Riskmanagement techniques used by financial institutions today

Risktaking is an integral part of the banking business and riskmanagement is important for the purpose of risk reward trade off. After the fall of the Lehman most banks adopted measures to countersuch threats from volatile mortgage backed securities. These includedassessments and measurement of risks before investment, monitoringand efficient management. There are four ways that institutions dealwith risks which include avoidance of risk. This is where aninstitution does not engage in activities that are risky in any way. Another risk management technique used is mitigation where aninstitution chooses to lessen the negative impacts of a risk. Thistechnique is mostly used when the risk is unavoidable. (Lopez, 2003).

Theother technique include transfer of risk where by an institution maychoose to transfer the risk from the institution to another forinstance insurance company that covers an institution againstfinancial loss of some substance. Risk acceptance is the lasttechnique that an institution can use to manage a risk this is wherean institution that has embarked on a project accepts the risks thatcome with it if the profit anticipated more than the potential risk. At financial institutions, risk management practices such as riskidentification and measurement, liquidity risk, valuation practicesand management oversight should be utilized in order for theinstitution to gauge its performance. Accordingly, betterunderstanding of the risk and its measure should be critical inchoosing a technique to deal with it and the sub sequential financialcrisis.

Evaluatemanagements role within a financial investment firm for establishingproper risk management procedures for high-risk investments

Themost critical role of the management in a firm is to ensure that theclients’ investments are earning a good interest, are wellprotected and that they are involved in minimal risks. Managementcontrols are usually set up by the management system which ensuresthat they are stable and that the feedback system is well installedto caution in case of any possible risks in its processes.

Tocapture the risks involved, the management utilizes tools such asreduction in broad assets in investments, assessing and taking actionof the total risk involved in the investors’ investments as well astaking care of any loss that may not meet the investors’obligation. If the management fails to maintain the fiduciaryrelationship between themselves and their clients, then securitiesexchange commission should revoke their licenses. The management alsohas a role of differentiating the sources of risks which involvescalculation of the possible risks and the returns involved in takingthe risks (Busse&amp Wahal, 2010).In this regard, while assessing the future risks, it is importantthat the management take a look at all risks including the aggregateand the factor level.

Giventhe recent debt crisis within the EURO zone of Europe, analyze theimpact to the performance of foreign markets and recommend a strategyfor financial firms to minimize investment risk in these markets.Provide support for your recommendation.

Inessence, the overall blow and effect that the crisis had on thefinancial markets is the corrosion of confidence among the investors,insurance and brokerage companies as well as other financial firms.Many people are unwilling to lend their spare capital or even investdue to the lack of confidence in the market. The foreign marketshave also been affected by the financial turmoil that has seen manybanks collapse and others become very weak. London Interbank OfferedRate is the rate that the banks are willing to lend to each other andit is still high which shows that the interbank market is stilltrying to recover from the crisis. This has resulted to the flow ofmoney to be affected and it is only flowing in small amounts this isbecause of the uncertainty of the loan which ultimately results tohigher rates in the repayments. Diversification is an effective wayof minimizing risks it involves diversification by classes, globallyor even by sector over promising investment opportunities. In thisregard, avoidance of single investments and also trying to take theform of different stock combination and bonds from differentindustries may play a major role in minimization of risks.

Evaluatethe role of the Federal government, if any, related to the regulationof investments by financial institutions including the scope of therole, the authority and enforcement capability within the regulatoryagency, the benefits, and consequences of regulation. Predict how theregulatory environment may change over the next five (5) years.Provide support for your prediction.

InUS the federal government through the Securities Exchange Commission(SEC) sets the rules and the law that are used in the investments andsecurities markets. SEC which is given authority by the InvestmentAdvisors Act oversees the operations of investment companies and allfinancial related firms they are referred to as advisors as theyinclude money managers’ investment and financial consultants. TheAct tries to eliminate abuses in the securities markets, (Campbell,2007), whichare believed to have been a major contribution to the 1929 stockmarket crash and depression in 1930. It is very productive that TheAct provides for the fiduciary relationship between clients and theiradvisors to which the regulation reduces the chances of losses thatmay result from bad risk management practices as well as actions tobe taken in case of challenges is quite helpful to the investmentmanagers.

Inconclusion, risk management will thrive well where best practices andoperations are in utilized, in this regard being a dynamic sectorthese practices ought to change as the risks are being measuredregularly. Reformulation of the adjusted investment methods must bedone so that comparison can be done as well interpretation of theinformation obtained.

References

Obiri,C. (2013). Financialfraud detection for the prevention of business failure – enron and.S.l.: Lulu Com

McDonald,L. G., &amp Robinson, P. (2009). Acolossal failure of common sense: The inside story of the collapse ofLehman Brothers.New York: Crown Business.

Wiggins,R. Z., &amp Metrick, A. (2014). The Lehman Brothers Bankruptcy H:The Global Contagion. YaleProgram on Financial Stability Case Study.

Larcker,D. F., &amp Tayan, B. (2010). Lehman Brothers: Peeking under theboard façade. RockCenter for Corporate Governance at Stanford University Closer LookSeries: Topics, Issues and Controversies in Corporate Governance No.CGRP-03.

JoseA. Lopez. (February 13, 2003). HowFirms Manage Risks.Retrieved from

http://www.frbsf.org/economic-research/publications/economic-letter/2003/february/how-financial-firms-manage-risk/

Busse,J. A., Goyal, A., &amp Wahal, S. (2010). Performance and persistencein institutional investment management. TheJournal of Finance,65(2),765-790.

Campbell,J. L. (2007). Why would corporations behave in socially responsibleways? An institutional theory of corporate social responsibility.Academyof management Review,32(3),946-967.