This is a case study performed by Eric Greenfield, the CEO of Manhattan Certified Bookkeeping Services. In the years that led to Lehman Brothers 2008 collapse, they borrowed heavily to fund their investing, a function more commonly referred to as leveraging. Since then there has been an overwhelming implementation of regulation, which aims to prevent such a catastrophic event from ever occurring again.
The Collapse of Lehman Brothers, by Eric Greenfield
A substantial amount of this leveraged investing was in housing-related assets, positioning Lehman’s to be highly vulnerable to a downshift in that market. Their leverage ratio was an apparent risk, the assets to owners’ equity increased from approximately 24:1 in 2003 to 31:1 by 2007.
According to Eric Greenfield, during the height of the market, profits were off the charts, however, this vulnerable position meant that just a three to four percent drop in the value of their assets would entirely eliminate their equity. Up until then, investment banking institutions such as Lehman Brothers were not subject to the same regulations that had to be followed by deposit banks to regulate risk-taking
Four bankers from Lehman’s including their CEO Dick Fuld were indicted on for crimes related to the collapse, including knowingly deceiving investors and regulators over Lehman’s use of its infamous Repo 105.
Repo 105 is a tactic used in accounting where a sale is deceptively characterized by means of a cash deposit, rather than an actual sale. The cash recorded from this sale is then applied to pay down debt, permitting the company to show a reduction in its leverage by temporarily paying down liabilities, just long enough to appear on the company's published balance sheet. After the company publishes their financial reporting, they then borrow more cash to repurchases their original assets.
Eric Greenfield resides in NYC and provides professional bookkeeping services to companies on a partner oriented basis. Pricing to level of service scale is exceptional. To learn more, visitwww.BookkeepingManhattan.com