Study Behind The Fall Of Lehman Brothers Finance Essay - Free Essay Example

Sample details Pages: 4 Words: 1146 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Introduction Lehman Brothers, the Americas fourth-largest investment bank, declared the largest bankruptcy in the United States history on 15 September 2008. The fall of Lehman Brothers rattled the global market and led to a great drop in the United States stock market the day after the announcement and ultimately, the financial tsunami. Lehman Brothers had successfully survived many economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management in the 1900s in its 158 years of history. So what made it collapsed? Reasons of the Bankruptcy Low Liquidity The basic reason for Lehman Brothers bankruptcy was the lack of liquidity. Lehman Brothers had total debts of US$613 billion against total assets of US$639 billion when it bankrupted. Its total assets were seemingly enough to cover the debts, however the liquidity pool was far below from the total. Few days before the filing of the bankruptcy, it publicly reported a US$41 billion liquidity pool but with a significant portion which was difficult to monetize or illiquid. For example, substantial amounts of cash and securities which were placed as deposits with various banks for its usual clearing business and had become actual pledges were included in the pool to achieve and report a better liquidity and maintain the market confidence. Lehman Brothers actual liquidity pool contained less than US$2 billion of readily monetizable assets. The lack of liquidity made it impossible to repay the short term debts and go bankruptcy without choice. High Leverage Lehman B rothers bankruptcy was also a result of its high-risk and aggressive leverage policy. It usually had a leverage of more than 30 to 1 (i.e. US$3.30 of equity for every US$100 loans) while commercial banks are regulated to leverage its equity no more than 15 to 1. When it bankrupted, the leverage ratio was slightly reduced to approximately 24 with a capital of around US$26 billion and the total liabilities of more than US$600 billion. Its high debt-to-equity ratio implied how seriously it relied on the use of debt to supplement investments. Issuing bonds can finance the long term investments. However, for a large part, Lehman Brothers funded itself through the short term repo markets and borrowed money in the markets to be able to operate daily businesses. Lehman Brothers leverage policy put itself at high risk of instant shortage of funds. When the repo markets lose confidence in Lehman Brothers and refused to lend, Lehman Brothers would fail to repay the previous debts and fund its daily operations. It became the real situation of Lehman Brothers when it went bankruptcy. Confidence in Lehman Brothers was eroding following the sub-prime residential mortgage crisis in 2007 and the near collapse of Bear Stearns in early 2008. It was widely considered to be the next bank which might fall. Huge Losses In addition to the liquidity and leverage problems, the huge losses resulting from the sub-prime residential mortgage crisis also played an important role in Lehman Brothers bankruptcy. For a number of years prior to the crisis, low interest rates and large inflows of foreign funds created easy credit conditions in the United States. Easy credit encouraged the demand for housing, which drove house prices higher. With a belief in long term trend of rising housing prices, subprime and adjustable-rate mortgages became more popular. However, when the adjustable-rate mortgages began to reset at higher rates and the housing market started to decline after the peak, refinancing became more difficult and mortgage delinquencies and foreclosures rose dramatically. Lehman Brothers held on to large positions in subprime and lower-rated mortgage-backed securities. Huge accumulated losses of approximately US$60 billion with a combination of write-downs on assets, sales of assets at losses and losses on hedges were resulted from the continuing mortgage delinquencies and foreclosures. The market generally believed that the reported losses might be underestimated and further provisions had to be made for the depreciation of the value of the mortgage-linked assets. The uncertainties discouraged potential investors to take over Lehman Brothers and Lehman Brothers could only go bankrupt. Don’t waste time! Our writers will create an original "Study Behind The Fall Of Lehman Brothers Finance Essay" essay for you Create order Belief in Accounting The bankruptcy of Lehman Brothers shocked the market. Few months before the bankruptcy when it reported a quarterly loss, it was still trying to cushion the bad news by trumpeting its strong liquidity position and the decline in its leverage ratio. Neither its quarterly reports nor annual reports mentioned the risk of being bankrupt though it finally did. The general public believed that Lehman Brothers did not truly present its financial status in its financial statements and such belief was recently supported by a report of the causes of the bankruptcy made by a court-appointed examiner. It was discovered that Lehman Brothers made use of an accounting device called Repo 105 to paint a misleading picture of its financial condition. Lehman Brothers entered repurchase (repo) agreements at the end of a financial quarter to raise cash by collateralizing assets with an obligation to repurchase them at a small premium the day or several days after the year-end. The cash raised was th en used to pay down the debt. By nature, it was a short term financing and had no effect on the overall leverage. However, Lehman Brothers took the advantage of an accounting rule called SFAS140 and recorded the transactions as sales of assets. The collateralized assets were taken away from the balance sheet and the obligation to buy back the assets was not shown either. Such way of treatment helped Lehman Brothers to reduce the balance sheet and report a better leverage at the quarter-end. With limited access to Lehman Brothers financial information, investors were definitely misled by this material window dressing action. Lehman Brothers, apparently, was not moral to its investors, so as Lehman Brothers auditor, Ernst Young, who was supposed to give a true and fair view on its accounting and disclose anything material to investors. The accounting gimmick put the trustworthiness of accounting in doubt. And what the Financial Accounting Standards Board did to save the banks a nd financial systems from the crisis made people further question the role of accounting. The Board changed the accounting rules to allow the banks close to bankruptcy to report high profits even though their financial position remained unhealthy in reality. Accounting is a means to provide quantitative financial information that helps users in making better business decisions. It provides a fairly good account of the past economic activities of company and a picture of the present and future. It tells the performance and earning power as well as the financial position in terms of resources availability (assets) and obligations (liabilities) of a company. It provides reliable financial information, however it has its limitations. It does not provide non-financial information such as behavioral and socio-economic which may influence the decision-making. To conclude, we could believe in accounting but we should not rely on accounting without taking other information in consideratio n when making a decision.

The Americans with Disabilities Act (ADA) in the Workplace...

People with disabilities have become an integral part of the workforce. The ADA forbids discrimination against people with disabilities when recruiting, hiring, training, and compensating employees (Sotoa Kleiner, 2013). The ADA prohibits discrimination against people with disabilities in employment, transportation, public accommodation, communications, and governmental and establishes requirements for telecommunications relay services (activities (Stryker, R. (2013). Employers are not allowed to ask employees if they have a disability. The employers are not allowed to ask employees with disabilities to undergo a medical exam before an offer of employment unless all applicants are required to take the same exam (Kaye, Jans, Jones,†¦show more content†¦Every employee in the organization should be given the necessary accommodations to make sure they are working in an environment that is safe. Organizations struggle with ADA because they are unaware of the guidelines set by t he law and they lack the expertise to manage the needs for the employees. Every person in the organization with a disability has a different need. Organizations work around the clock in many occasions to comply with the accommodations of each individual in the organization. Educating staff in how to comply with the requirements of ADA can be quite challenging. Organizations are afraid to hire, retain or accommodate workers with disabilities because of lack of awareness of disability and accommodations issues, concern over costs, and legal liability (Kaye et al., 2011). It is therefore the responsibility of the organization to educate management about the law and train on disabilities and accommodations. The guidelines, regulations, and building codes should be implemented to make the facility more welcoming and inviting to workers with disabilities (Stryker, R. (2013). Having workers with disabilities can be beneficial to organizations. Sotoa Kleiner, 2013, recommend to incorporate disability into the agency’s diversity statement, increase supervi sor knowledge of the employment of people withShow MoreRelatedReasonable Accommodation In The Workplace Under the American with Disabilities Act (ADA)1796 Words   |  8 Pages Reasonable Accommodation in the Work Place Under ADA nbsp;nbsp;nbsp;nbsp;nbsp;There may be as many as one thousand different disabilities that affect over forty-three million Americans. Of all the laws and regulations governing the treatment of those Americans the American with Disabilities Act (ADA) is the most recent major law. It was passed in 1990 and although it is spelled out in a technical ADA manual that is several hundred pages in length. 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White Collar Crime Social Interaction Conflict Theory Free Essays

The American dream exists because everybody has a dream of what they want, or what they want to achieve. Americans achieve success through achieving their goals. The American dream is what gives people hope; it allows them to work hard to achieve happiness, and all the things that come with it. We will write a custom essay sample on White Collar Crime Social Interaction Conflict Theory or any similar topic only for you Order Now Like gaining all the things you want and need in life (Warshauer). The American dream is a big part of America’s culture. The American dream is based on the freedom of the people to pursue their goals through hard work and free chance (Malone). Maybe the American dream doesn’t exist maybe there was no American dream to start with. The American dream is dead for the majority of America† say’s financial guru Suze Orman, she believes that the dream of one day owning your own home and working one job till you retire, well and being able to retire will one day be crushed. Orman says we are on a road leading to poverty and there are no roads coming off of it. This is the end of the American dream some say â€Å"it has been sold† says (DCraig), but it’s the start of a new American Dream. The new American dream deals with responsibility, quality, ethics, and creativity while money takes its new place as a means. But the American dream changes and changes in the 20th century, the American Dream was summarized as â€Å"a single family house in the suburbs with a white picket fence around it,† (Leinberger). So the American dream changes with time, as the world changes so does the American dream. The us bureau of labor stats that out of 100 people that started working when they were 25, by the age of 65, 1 percent are wealthy, 4 percent have retired, 3 percent are still working, 63 percent are dependent on social security and charity,29 percent are dead. This represents real people who will most likely never make it to the top. This says that only 5% of the people you see will be finically successful. The worst thing about the American dream is that people would rather be rich and miserable than poor and happy. â€Å"I once said that at a party, and a woman about my age said, â€Å"Well sure I would. If I was rich, I could make myself happy. † â€Å"Nope,† I replied. â€Å"That’s not the deal: You can either be rich and miserable, or poor and happy. Period. So which is it? † She thought about it for several seconds. â€Å"I’d rather be rich. â€Å" Said Francis Hare That’s the problem with the American Dream. It used to be that a person with good work ethic could become anything they wanted and be happy with it. Now it’s about all the money you can make how much you have and you social class. (Hare) Another way to achieve the American dream is through education; education is the key to success, if you don’t have the proper education it’s not likely for a person to succeed in life (Stone). If there is an American dream which means, people pursuing their dreams, then why is the unemployment rate so high? The answer to that question is that the American dream has changed in some people’s eyes. The opinion I share is that the American dream has always existed in Americans dreams hence the â€Å"American Dream†. I think it is what people dream of having which varies from person to person, no one person has the same dream. It also changes from time to time; as new things come out people want them. Most of all people are losing sight of the American dream all they want is money and an easy was to get it, most people are trying to achieve their American dream the easy way through lawsuits or the lottery (Warshauer). So I do think the American dream varies depending on the person. I can see why people think the American dream doesn’t exist. Since there is really no definition for the American Dream or you can’t really put your finger on what it actually is. Lorie A. Johnson says the American dream is getting farther and farther out of reach. Today, people cannot afford to buy a home; people are spending their money on other things to find happiness. But Lorie A. Johnson says that â€Å"in order to be truly happy, Americans need to reject the false American dream and create their own vision of happiness†. Johnson) But the real question is does the American dream still exist? The answer to this question is there is no answer, because it only exists in the people that believe in it and it’s also different from person to person. The American dream only exists in the people that believe in the American dream. For the people that still believe in the American dream, it gives hope of success in their life. For the people that don’t believe in the American dream, they are now slaves to their jobs don’t have goals to achieve. Which makes it harder and harder to believe there is an American Dream? (Malone). The American dream can be said to be many things but one this for sure is that it is not gone. It just changes with the time, if America is still around so will the American dream no matter how bad the economy gets. The American dream is definitely still alive and kicking people just need to know that, the American dream is whatever their dream is or whatever they want to accomplish. How to cite White Collar Crime Social Interaction Conflict Theory, Papers

Using Your Accounting and Business Knowledge

Question: Discuss financial statement disclosure notes required by US GAAP. Include in your writing the purpose of disclosure notes, and discuss disclosures required for a summary of significant accounting policies, subsequent events, related party transactions, and other disclosures you may wish to address. Please do not include any discussion of IFRS disclosure requirements, and do not discuss the report of independent auditors? Answer: Summary: In this report we are going to discuss the financial statement disclosures required by US GAAP. It contains discussions on the disclosures relating to some significant accounting policies and the purpose they serve for the users of financial statements. Introduction: The Securities and Exchange Commission has adopted a set of accounting principles that are known as Generally Accepted Accounting Principles or US GAAP. When financial statements are prepared in compliance with US GAAP, certain mandatory disclosures have to be made while the management might want to include other disclosures voluntarily. GAAP has four basic assumptions, four basic principles and four basic constraints. Disclosures Helping the end users of financial statements Accounting employs a lot of assumptions and management decisions on accounting policies in the preparation of financial statements. Disclosure notes give the users of the financial statement clarity on the managements decision to employ a particular accounting policy and brings their attention to any deviation from the fundamental accounting assumptions or other facts that can influence the decisions of the users of financial statements which helps them in informed decision making. Significant accounting policies and their disclosure requirements 1. Accounting changes and error correction(1) a. When any change in accounting principle is made the reason for the change along with the retrospective adjustment of any prior period information has to be disclosed in that fiscal year.b. If retrospective adjustment is not practical then the reasons for the same along with alternate method of reporting the change has to be disclosed.c. On restatement of financial statements of prior period to correct an error, the same has to be disclosed along with the effect of correction on at line item level.d. Purpose: Users of financial statement will take decisions based on principles or amounts which no longer exist and thus it would mislead them into making incorrect decisions if proper disclosure is not made.2. Related party disclosures(2) a. Related party transactions of material amounts have to be disclosed indicating the nature of relationship, description and the value of such transactions.b. Any amount due to/from related parties as on the balance sheet date have to be disclosed. c. Purpose: Related party transactions have a significant influence on the decisions of the users of financial statements as it shows the value and nature of transactions between related parties and the proportion of the same to the total activities of the organization.3. Subsequent events(3) a. In case of recognized subsequent events the date through which subsequent events have been evaluated has to be disclosed.b. In case of non recognized subsequent events that need to be disclosed to avoid misleading the user, the disclosure shall include the nature of the event and an estimate of the financial effect.c. Purpose: The user will consider subsequent events that have changed the existing circumstances and take decisions accordingly.4. Segment reporting(4)-a. The criteria for a reportable segment is: Reported revenue is 10% or more of the combined revenue Reported profit or loss is 10% or more in absolute terms of combined profit or loss Assets are 10% or more of the combined assets b. Factors for determining reportable segment based on geography, products and services or regulatory requirements need to be disclosedc. All public entities need to provide details about major customers. Major customers are those who contribute more than 10% of the entitys revenue.d. Purpose: It helps users of financial statements identify the major drivers of an organizations growth, identify those segments which are the most profitable or the ones which are lagging in performance.5. Fair value disclosures(5) a. The fair value of financial instruments needs to be disclosed which includes: Fair value along with carrying amounts of required items Disclosure of reason why fair value cannot be estimated b. Credit risk, market risk and how such risks are managedc. Purpose: The disclosure gives the user information whether valuation has been done based on historical cost or fair value.6. Non monetary transactions(6) a. If the entity has engaged in any non monetary transactions during the year, the same shall be disclosed in the financial statements stating: Nature of the transaction Basis of accounting Profit or loss recognized on the transactionb. The amount of gross operating revenue recognized due to such transaction needs to be disclosedc. Purpose: Non monetary transactions impact the cash flow of the organization and if the user is concerned with cash flows, this disclosure can impact his decision. References: 1. FASB (2005), Statement of Financial Accounting Standards No. 154, Accessed on 19th March, 2015 https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220125351acceptedDisclaimer=true2. Public Resource Org, 850 Related Party Disclosures, Accessed on 19th March, 2015 https://law.resource.org/pub/us/code/bean/fasb.html/fasb.850.2011.html3. FASB (2013), FASB US GAAP Implementation Guide Series, Accessed on 19th March, 2015 URL: https://www.fasb.org/cs/BlobServer?blobkey=id blobwhere=1175826391002blobheader=application%2Fpdfblobcol=urldatablobtable=MungoBlobs4. Ernst Young (2014), Segment Reporting, Accessed on 19th March, 2015 https://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_bb0698_segmentreporting_19june2014/$file/financialreportingdevelopments_bb0698_segmentreporting_19june2014.pdf?OpenElement5. Readyratios (2012), US GAAP Disclosure List 2012, Accessed on 19th March, 2015 https://www.readyratios.com/usgaap/FinancialInstrumentsFairValueDisclosures6. Public Resource Org, 845 Non monetary transactions, Accessed on 19th March, 2015 https://law.resource.org/pub/us/code/bean/fasb.html/fasb.845.2011.html