The Visionless Policies and Strategies of the Company - Essay Example

Lehman Brothers Introduction Lehman Brothers Holdings Inc was an American financial services firm which faced destruction in 2008 because of the ongoing global recession. In fact the collapse of Lehman Brothers was totally unexpected and it revealed the seriousness of the current global financial problems, not only to Americans but also to the entire world. It should be noted that this company was the fourth largest investment bank in America. This paper analyses the brief history, rise and fall, and reasons for the financial crisis in Lehman Brothers. Brief history In 1844, Henry Lehman immigrated from Rimpar, Germany, to Montgomery, Alabama where he established a small shop selling groceries, dry goods, and utensils to the local cotton farmers. By 1850, his two brothers, Emanuel and Mayer, had joined him in the business, and they named it Lehman Brothers. After Henry Lehmans death in 1855 at the age of 33, the two younger brothers headed the firm for the next four decades. During their tenure, only family members—sons, brothers, and cousins—were permitted as partners. This was a policy that continued until the 1920s (History of Lehman Brothers, 2012). Lehman brothers tasted big success in cotton business and the company started to diversify its business portfolios. The company started to establish strategic business tie ups with other companies as a business strategy to conquer American market. In 1858, Lehman Brothers opened an office in New York, particularly for doing commodities trading business. As a result of the boom in commodities trading business, the company established various trading ventures such as Cotton Exchange, Coffee Exchange and the Petroleum Exchange during the period of 1870’s. After tasting success in commodities business, the company again diversified its activities into sales and trading of securities. “In 1887 the firm became a member of the New York Stock Exchange, marking the evolution of Lehman Brothers from a commodities business to a merchant-banking firm”(History of Lehman Brothers, 2012). Rise and fall of Leman Brothers From 1925 to 1969, the company was under the leadership of Robert Lehman. He was a charismatic leader who brought revolutionary ideas into the business and helped the company to grow significantly. He had unique business philosophy which was catered around consumption rather than production. He has identified many of the growing businesses in America during that period and invested heavily in those businesses which helped the company to consume or share the success of other companies without spending anything for the production activities. In short, Lehman brothers acted as a parasite while investing in growing business such as retail industry, motion picture industry, airline industry, communication industry, oil industry etc. This strategy helped the company to escape from the onslaught of Great depression in 1930’s and 40s. “In the 1960s the firm greatly expanded its capital markets trading capabilities, particularly in commercial paper. This led to the firms designation as an official dealer for U.S. Treasuries” (History of Lehman Brothers, 2012). Until the beginning of 2000, Lehman Brothers climbed the ladder of growth. However, it started to face problems from 2001 onwards. It should be noted that the 2001 World Trade Centre attack resulted in the destruction of its corporate office in New York which forced the company to shift its operations to Manhattan in 2002. “Lehman Brothers became entangled in the subprime mortgage lending crisis, which led to its demise in 2008. The companys assets were subsequently sold to several other firms, including Barclays Bank, PLC and Nomura Holdings, Inc” (History of Lehman Brothers, 2012). On September 15, 2008, Lehman Brothers filed bankruptcy suit citing reasons such as lack of customers, losses in stock, and devaluation of its assets. The collapse of Lehman Brothers resulted in the loss of jobs for more than 26000 employees. Moreover, this bankruptcy suit was the largest in history. Reasons for the financial crisis Even though, lack of customers, losses in stock, and devaluation of assets were the major reasons cited by Lehman Brothers for the crisis, many people believe that reasons such as manipulation of financial data, problems in the structure of the company, unethical behaviors of the top executives, low service quality, and Credit Default Swaps were the actual reasons for the collapse. Plenty of other reasons were also cited for the collapse of Lehman Brothers. Some blame chief executive Dick the Gorilla Fuld for his overconfidence and failure to recognize that Lehman faced a momentous crisis. Arguably, Fulds battle to salvage something for Lehmans suffering shareholders eventually cost them every cent. Some commentators blame Bank of America for ending takeover talks with Lehman in favor of buying its larger rival Merrill Lynch for $50 billion the following day. Other pundits blame Barclays for refusing to buy Lehman without US government backing, in the form of emergency funding (D’Arcy, 2009). Actual factors involving in its crush, devastation and bankruptcy The exact reasons for the failure of Lehman Brothers can be summarized in 3 L’s; leverage, liquidity and losses. “The demise of Lehman Brothers is the result of its very aggressive leverage policy in the context of a major financial crisis” (Zinagales, 2008, p.2) “During the good times, the best way to enhance your returns is to gear up by borrowing money to invest in assets which are rising in value”(D’Arcy, 2009). This strategy would enable a firm to leverage or increase its returns when favorable market conditions such as low interest rate occur. Lehman Brothers did so and went in to trouble because of the unexpected failure of the property market. “Although it had a massive asset base (and equally impressive liabilities), Lehman didnt have enough in the way of liquidity. In other words, it lacked ready cash and other easily sold assets” (D’Arcy, 2009). Ready cash is essential for the banking transactions. Lehman Brothers tried to purchase as many assets and failed to maintain enough ready cash for money transactions. In short, cash flow problems or liquidity gave momentum to the collapse of Lehman Brothers. The third reason is the losses suffered by the bank followed by the 2001 terrorist attack and the subsequent dip in property prices. As mentioned earlier, Lehman Brothers invested heavily in properties and the dip prices of properties caused heavy losses to the company. Conclusions Lehman Brothers collapsed in 2008, because of the visionless policies and strategies of the company. The causes of its failure can be summarized in three words; leverage, liquidity and losses. References D’Arcy, C. 2009. Why Lehman Brothers collapsed. [Online] Available at: http://www.lovemoney.com/news/the-economy-politics-and-your-job/the-economy/3909/why-lehman-brothers-collapsed[Accessed 20 January 2013] History of Lehman Brothers. 2012. [Online] Available at: http://www.library.hbs.edu/hc/lehman/history.html [Accessed 20 January 2013] Zinagales, L. 2008. "Causes and Effects of the Lehman Brothers Bankruptcy” [Online] Available at: http://faculty.chicagobooth.edu/luigi.zingales/papers/editorials/zingales_oral.pdf[Accessed 20 January 2013] Read More