The main issue of this working paper is whether the accounting treatment of the Repurchase agreement 105 contributed to the collapse of Lehman Brothers. It was questioned how the Repos were used and the following effects over Lehman’s financial stability.
While seeking for an appropriate solution of the main issue, the paper goes through the historical fluctuations of the financial system, from the 1950s till 2006 (two years before the Lehman’s bankruptcy). Further, the paper reviews some causes that may have led to the collapse of the investment bank. Finally, the global impact of the collapse has been summarized and possible preventions from future crisis have been proposed by the author.
Inhaltsverzeichnis (Table of Contents)
- 1. Introduction
- 2. Company background
- 3.1. Before the beginning.
- 3.2. The boom and the bust......
- 3.3. Reasons for the financial bankruptcy and moral hazard.
- 3.4. The accounting treatment of the Repurchase agreement Repo 105.
- 3.5. The impact of Lehman Brothers' collapse at the global level
- 4. Could Lehman's failure have been avoided?
- 4.1. The role of the corporate governance and the audit practices.
- 4.2. Analyzing the case of Lehman by using CAMELS ratios.....
- 5. Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis investigates whether the accounting treatment of repurchase agreements (Repos 105) contributed to the collapse of Lehman Brothers in 2008. The paper examines Lehman Brothers' history, its aggressive growth strategy, and the use of Repo 105 transactions to manage its leverage ratios. It also explores the impact of Lehman's collapse on the global financial system.
- The role of accounting practices in financial crises
- The impact of aggressive growth strategies on financial stability
- The use of financial instruments to manipulate leverage ratios
- The systemic risks associated with the failure of major financial institutions
- The need for effective corporate governance and audit practices
Zusammenfassung der Kapitel (Chapter Summaries)
- Chapter 1: Introduction: This chapter introduces the topic of Lehman Brothers' collapse and its potential connection to the accounting treatment of Repo 105 transactions. It highlights the rapid growth and subsequent decline of the investment bank.
- Chapter 2: Company background: This chapter provides a detailed overview of Lehman Brothers' history, its business model, and its growth strategy leading up to the financial crisis. It analyzes the factors that contributed to Lehman's vulnerability, including its aggressive investment practices and its reliance on short-term debt to finance long-term assets.
- Chapter 3: The case of one of the world's leading investment banks – Lehman Brothers Holding Inc.: This chapter examines the use of Repo 105 transactions by Lehman Brothers. It explains how these transactions were used to reduce reported leverage ratios and the potential implications for financial stability.
- Chapter 4: Could Lehman's failure have been avoided?: This chapter investigates whether the collapse of Lehman Brothers could have been prevented. It explores the role of corporate governance, audit practices, and regulatory oversight in mitigating financial risks.
Schlüsselwörter (Keywords)
This thesis focuses on the accounting treatment of financial instruments, particularly repurchase agreements (Repo 105), and their potential contribution to the collapse of Lehman Brothers. Key terms include corporate governance, audit practices, leverage ratios, financial stability, and systemic risk.
Frequently Asked Questions
What was Repo 105 and how was it used by Lehman Brothers?
Repo 105 was an accounting maneuver that allowed Lehman Brothers to classify short-term loans as "sales." This enabled them to temporarily remove billions in debt from their balance sheet to report lower leverage ratios to the public.
Did accounting practices contribute to Lehman Brothers' collapse?
Yes, the aggressive use of financial instruments like Repo 105 masked the bank's true financial health, misleading investors and regulators about its actual risk exposure and liquidity.
What are the "CAMELS" ratios used in the analysis?
CAMELS is a rating system used by regulators to assess a bank's health, focusing on Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk.
What was the global impact of Lehman Brothers' bankruptcy?
The collapse in 2008 triggered a global financial crisis, leading to a massive credit crunch, stock market crashes worldwide, and a deep recession in many countries.
Could the failure of Lehman Brothers have been avoided?
Research suggests that stronger corporate governance, more transparent audit practices, and stricter regulatory oversight could have identified and mitigated the risks before the bank became insolvent.
- Arbeit zitieren
- Viktoriya Sheyretova (Autor:in), 2015, Did the accounting treatment of financial instruments contribute to the collapse of Lehman Brothers?, München, GRIN Verlag, https://www.grin.com/document/426871
