Question

Please give a detail analysis of the case "Lehman Brothers Repo 105 Manipulation", including the background of the case, ethic issues, major principle and the rule used according to the professional ethic.

(Professional Ethics)

Answer 1

At the height of the financial crisis in 2008, Lehman used an "accounting gimmick" to make it appear as if it had off-loaded risky assets and reduced its balance sheet. The gimmick was known inside of Lehman as a "Repo 105." In an ordinary repo transaction, Lehman would raise cash by selling assets with a promise to buy them back later. It's a common form of short-term financing. And because it was really a financing rather than a sale, the assets remained on Lehman's balance sheet.

But in a Repo 105, Lehman would treat the transaction as a genuine sale and take the risky assets off its books. Apparently, accounting rules permitted this because the assets valued at 105% or more of the cash recieved. Lehman never disclosed it was doing these transactions. This was no small thing. In the first and second quarters of 2008, Lehman Brothers used the Repo 105 deals to reduce its balance sheet by $50 billion. That had a large and material effect on its leverage ratio, bringing it down from 13.9 to 12.1.

The ethical lapse, which was perhaps the most premeditated and fundamentally wrong, was Callan’s approval of siphoning assets away from Lehman Brothers accounts and into Hudson Castle, the phantom subsidiary created for the benefit of its parent company’s balance sheet. This blatant misrepresentation of financial health, perpetrated through the employment of Repo 105, was an attempt to grossly manipulate the bank’s many stakeholders and also clearly indicative of a much bigger problem. Even more telling is the fact that this technique was used in two consecutive quarters.

The real tragedy lies in the lack of ethical behavior of its executives and professional advisors. They made conscious decisions to deceive and manipulate, and the consequences proved too dire to preserve the historic investment bank’s existence. The perennial lesson of the Lehman Brothers case is that no matter how dire the circumstances may appear, transparency and accountability are paramount. Right action up front may sting initially, but as history has repeatedly shown, gross unethical business practices rarely endure in the long term. A global financial crisis such as that of 2008 may not be prevented from happening again. What can be improved, in large measure through ethics education, is how corporations behave.