Synopsis

In late 2007, Lehman Brothers owned $700 billion of assets, financed by $675 billion of debt, secured by only $25 billion of owners’ equity. The assets included large numbers of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Declining home prices in 2006 led to mortgage defaults and foreclosures, which caused MBS and CDO values to plummet. Bankruptcy examiner Anton Valukas concluded that Lehman Brothers failed because of poor business decisions rather than because of fraud, but said there were “colorable claims” against Lehman executives and auditors.

Discussion Questions

1. How did Lehman Brothers finance its $700 million investment portfolio?
2. How did Lehman Brothers’ accounting treatment of “repo-105” transactions reduce the company’s reported financial leverage ratio?
3. What economic events led to Lehman Brothers’ bankruptcy?
4. On what grounds did plaintiffs seek damages from Lehman Brothers’ auditor Ernst & Young?

Additional Sources

Report of Anton R. Valukas on the Bankruptcy of Lehman Brothers. U.S. Bankruptcy Court, Southern District of New York.

The Case Against Lehman Brothers. 60 Minutes correspondent Steve Kroft interviews attorney Anton Valukas who investigated the Lehman Brothers bankruptcy (13:40 minutes).