As the subprime crisis unfolded, Lehman perceived it as a countercyclical growth opportunity. They believed the damage would not spread to other economic sectors (Field, 2010)
These loans were originated by New Century Financial in the second quarter of 2006, a small percentage of the $51.6 billion in loans that the company originated in 2006 before declaring bankruptcy in early 2007 (Hamilton, 2008)
Interbank loans are the marginal source of funds for many banks, as they were for Lehman Brothers. The interbank market is usually one of the most liquid, and confidence in their trading partners usually allows banks to lend to each other without collateral (Interbank Lending, 2009)
Investment in higher yielding subprime mortgages skyrocketed. The Fed continued to slash interest rates until June 2003, when the 1% interest rate was at its lowest in 45 years (Singh, 2009)
In the summer of 2007, its stock was trading as high $82 a share, up from its average of $5 per share in 1994, before it became heavily involved in mortgage-backed securities. Rumors about the extent to which Lehman was heavily invested in subprime mortgages began to percolate -- and with good reason (Lehman Brothers Holdings, INC, 2009, Times Topics)
Lehman Brothers: Here Today, Gone Tomorrow Lehman Brothers was once one of the most respected and also one of the smallest of the major investment banking firms on Wall Street. Until it dipped into the subprime mortgage crisis, it had "focused on bond trading for much of its history, and built a reputation as the ultimate white-shoe financial firm: untouchable, a Wall Street flagship, and an engine of the city's economy" (Rayman, 2008, p
The failure of Lehman revealed the lack of transparency in the banking industry, and the degree to which individuals were exposed to risk through apparently safe mutual funds and bank stocks. Some argue the fallout would have come anyway, however, as more and more banks revealed the extent to which their mortgages had defaulted (Sorkin 2008)
This lack of accountability and fidelity of financial and operational controls is predicated on a core set of senior executives who increasingly chose strategies that deliberately benefited them at the expense of others. By doing this, they had intentionally created a pattern that crushed utilitarianist-based approaches to ethics, and in so doing, created a culture of unethical values and behaviors (Fernando, May, Megginson, 2012)
Modifying balance sheets, the creation and often-used Repo 105 financial transaction and belief by senior management that the means justified the ends all contributed to create a culture devoid of ethics. The lack of accountability and transparency at the senior-most levels of the company led to a culture of invincibility and ethicacy above the law (Murphy, 2010)
We did not understand it, but we approved it by our silence and resignation: we trusted the traders and managing directors who seemed to know this world better than we did. It was a world of "mass securitization, credit-default swaps, derivatives trading, and all the risks those products created" (Berman, 2008)
¶ … Member of the Board of Lehman Bros. As a member of the Board of Lehman Brothers in 2008, I can attest to the fact that none of us knew what we were doing: we were of a bygone age of banking, one that existed before the world of high finance had suddenly and virtually overnight taken on a new persona -- thanks to deregulatory practices and new schemes based on the securitization model invented by Lewis Ranieri of Salomon Brothers (Lewis, 1989)