Reasons Behind Lehman Brothers' Bankruptcy

This assessment addresses the following subject learning outcomes:

a) critically evaluate the effect of the external environment on firms
b) select and apply appropriate frameworks to resolve the challenges faced by firms
c) analyse and synthesise industry specific factors in the context of firm decision-making processes
d) Create a business case for potential growth opportunities based on analysis of external environmental factors

Lehman Brothers, Inc. is an investment bank that serves all the institutes, government authorities and individual clients. The main process of the organisation includes corporate finance, equality investment and trading of foreign exchange. The company operates in three sectors that are in investment banking, client services and capital market. The division of investment banking covers all the corporate advices and government clients. The company is working from last 15 years. Suddenly, due to a bankruptcy in 2008 it faced a massive loss in its stock and asserts. The bankruptcy was immediately protected by taking following actions. It helped the company to gain the market value immediately. The reason of collapse was repurchase agreement that removed security from the balance sheet of the company. This agreement affected the brand image of the firm by making financial conditions worse. Federal Reserve Bank conducted a meeting for the future of Lehman brothers that covered all the possible threats and risk that can exist on the liquidation of assets. Thus, it can be clearly stated that Lehman’s bankruptcy was the largest failure in the history and also collapsed with many firms. The failure of Lehman brothers also affected many private and small firms due to investment banks. In this report, all the political, economic, environmental and logical factors are discussed along with the reason due to which the business of Lehman brothers failed. All the effects of the external environment on Lehman brothers were identified. The framework is discussed that help in resolving all the issues faced by the firm. There are various factors that affect the company in making decisions and the business case for potential growth opportunities based on analysis of external environmental factors is listed below in the report. This report is completed by focusing the entire scenario of Lehman brothers.

The Pest analysis of Lehman Brothers Inc. is carried out; the factors include political, economic, social and technological concerns.

• Political factors- The political issues that are faced by the Lehman Brothers relate to all the government issues that are faced by the economy of the country like tax policies, environmental laws and political stability. It also involves the operations that need to be considered by the nation like health education and awareness among people. The political party of the country will keep a track of trade regarding both the import and export conditions. . It is researched that, Lehman brothers have faced various political issues with Federal Reverse to balance out the entire refusal to the public. The economy of the country is directly related to export and import of the goods (Adu-Gyamfi, 2016). The political factors that affect the business are based on increase and decrease of tax based conditions. They work on the fact that other courtiers shout start up new ventures so that unemployment ratio is reduced. The political factor also works on focusing on monitoring the educational quality and efficiency as they are the pillars for future development.
• Economic factors- It can be clearly stated that, economic factor is more important for the growth of the country. Thus, the change in interest rate and inflation rate will have direct impact on the company. The exchange rate of the organisation also affects the capital cost of the country. The trading concept, like how far goods get exported to other country also contributes in the overall economy. The change in currency also affects the organisation as high income of the country boost the demand of the product in the market. The population of the country also plays an important role in deciding whether a company should invest it or not. The presence of employees who are unemployed and poor stake holders affect the economy of the country. The economic factor also looks for cheap labours so that country could make higher revenues. The economic factor of Lehman Brothers were affected by the terrorist arrack in 2001, that lowered the interest rate of the country and that directly affected the economic growth. To overcome such issues they escalated towards the can be by encouraging investment limits.
• Social factors- The social factors in which company operates also affects the growth of the country. The social factors cover the friend, family and media. The social force drives the organisation to change their strategies and demands of goods and services. Considering the case of, Lehman brothers they do not work according to the change in the society because of this reason company failed. Thus, it is necessary to look after all the factor that is taking country to lower ranking (Adu-Gyamfi, 2016). The social factor covers behavioural, beliefs, value and demographic trends that might affect the organisation. The availability of lower interest rate promotes to investment in real sectors of economy.  In case of Lehman Brothers, they do not borrow from other companies and work on a weak financial status.
• Technological factors- The advancement in tools and technology plays an important role for the growth of an organisation. The technology adopted by Lehman Brothers helps in reducing the overall cost and helped in providing feasibility to the customers.  The communication process of the company became fast due to internet and digital gadgets. They have used and delivered technology of other counties so that place in the market could be made.  The reason of failure of Lehman Brothers was they did not adopted to new and innovative technology (Adu-Gyamfi, 2016). Thus, it is important to first analyse the market condition and then develop the strategies so that economy of the country is improved. The technological factors played an important role in the Lehman Brothers firm as they made the services available to eh user at a single touch. It helped the company to find new borrowers easily that save the overall cost and offers better growth options.

The Lehman Brothers have various competitors in the market. Thus, it is important for the company to bet all the banking, financial and insurance industries to make a good position in the market. Some of the competitors are Revolut that provide secure and mobile based service which adds flexibility to customers. Durchblicker is one of the companies that allows user to calculate their deal, insurances deals this allows customers for the best service. Pocketbook also adds tough competition to Lehman brothers as it support customers for spending the money and managing all the finance personally. One of the competitors is M1 finances as they plan for long term plan by building savings and managing all the personal wealth. It is also true that, company grew and expanded in various financial sectors. Yet, it can be said that Lehman brothers stand at the fourth position among all the investment banks. The revenue of the company is less as compared to the other competitors. The reason behind this is size of the company as they remain focused in only some areas. Lehman focuses more on net revenues gained from fixed income sources and trading. This helped Lehman brothers to compete the competitors by increasing their trading efficiency and generating more revenue than its competitors (Bongiovanni, De Vincentiis & Isaia, 2016). From the survey, it was found that gross earning of the company was 19.3, pre-tax income is 6,013, one year revenue growth of the company is 9.5 and equality revenue was found 1,337. The source of Lehman sustainability in the market is of trading activities that is better than other peer competitors. The diversification of business in last years has made the business to increase their profit margins (Cohen,  Krishnamoorthy & Wright, 2017. The Lehman investment practises are comparatively less than other competitors, it is necessary to bet the competitors and bring up more consistent result.

Factors affecting Lehman Brothers' Competitiveness

The image of Lehman brothers was spoiled after the collapse that was held due to financial crises in 2008. The collapse affected the sociological perspective and had a huge pressure in the public (Dodo, 2017). The opinion of public was oriented towards the economic failure and all the risk that are associated with the organisation after the bank collapse. The public critiqued that social changes were the reason behind the collapse and loss of the company. In the public opinion, Lehman brothers were considered as bankrupt as they putted thousands of jobs on risk. It was seen that the entire financial sector was changed after the leman brothers ad it somewhere reflected the public interest rate.  The public opinion about the company was negative as it causes depletion in the prices of real estates. The customers in the market had a fear of selling Lehman products due to the high risk associated with it. The public gave importance to other companies due to lack of security and trust with Lehman brothers (Ball, 2016). The bankruptcy by Lehman brothers opened the gate for many banks by allowing them to handle the fiduciary duties. The crumple influenced the sociological point of view and had a gigantic weight in the general population. The assessment of open was situated towards the monetary disappointment and the entire hazard that are related with the association after the bank crumple. The general population evaluated that social changes were the purpose for the fall and loss of the organization. In the general conclusion, Lehman siblings were considered as bankrupt as they putted a large number of employments on hazard (Mensah, 2015). It was seen that the whole monetary part was changed after the Lehman brothers’ advertisement it some place mirrored general society financing cost. The popular conclusion about the organization was negative as it causes exhaustion in the costs.

The failure of Lehman Brothers is one of the largest bankruptcy cases in the history. The negative impact of failure penetrated in the market. There is no single reason of failure rather there are numerous reasons behind this disaster.  The credit swap was one of the reason behind eh failure of the firm. Other than that, there were high risks associated with a high interest rate.  The reason behind the failure was leverage, liquidity and losses. As, leman brothers borrowed money from other companies so that they can invest in their assets and rise their overall value (Fleming & Sarkar, 2014). It helped in magnifying all the returns. Thus, at time of losses the assets prices also decreases. In case of, Lehman brothers it was leveraged 44 to 1 when asset prices began heading towards south. The prices of property and assets increased or the interest rate moved up borrowers and customers boomed (Beccar-Varela, Mariani, Tweneboah & Florescu, 2017).  The other reason of the failure was lack of liquidity that is issue with cash flow. This was faced by Lehman brothers as they lacked in the cash flow and had easily sold assets (Hurley & Hurley, 2015). The liquidity of Lehman was lost as other banks tried to save their interest ration by pulling their line of credit.  Due to, poor liquidity all the other businesses and banks denied to trade with Lehman brothers (Peck, 2016). This somewhere impacted on the growth and success ratio of the company. The poor cash flow decreased the confidence about the company in the market. The other reason of the failure was the terrorist attack in 2001 that was a boom in the prices of property.

Impact of Lehman Brothers' Failure on the Market

There were number of factors that contributed to the failure of the firm. One of the major reasons was lack of customers or buyers. The other companies like lynch, Washington Mutual, and Wachovia was not declared as bankruptcy as they had buyers.  Other than that, the balance sheet that was designed by Lehman brothers was a disaster. The loan was not sanctioned by the Federal Reserve Bank as they believed that Lehman didn’t have strong capability to pay back the loan (Gehrig & Haas, 2016). The emergency loan was also mot granted as the calculation showcased in their balance sheet was not appropriate. The company didn’t have any strong political palatability for bailouts. The reason behind the collapse was subprime boom and the real state bubble. Lehman brothers mortgage the security of many other firms and the leverage level is up to 20-35 per cent of their equality capital.  The other reason was excessive risk taking strategy that passes away all the investment through unregulated credit default swaps where the company didn’t have any adequate capital behind them. Lehman brothers faced subsidiaries all over eh world due to imprints in the global market. These controversies arrived due to executive pay during the crises and manipulation in the accounting field.

It can be stated that failure of Lehman brothers was due to weak governance arrangements (Dosdall & Rom-Jensen, 2017). They were not able to safeguard the risk taken by the firm and that future resulted in economic crises. The key reason behind this failure is lack of corporate risk management, board of directors, remuneration scheme and nomination of committees. Other than these, some of the technical failure in case of Lehman brothers was misbehaviour between the executive of the firm and the auditing staff. They were unable to retain the confidence in the market after the scandal (Kim & Song, 2017). The reason behind this was obligation on the liquidity and losses in survival plan. Thus it can be concluded, that Lehman brothers failed in the market due to various reason one of the main reason was failure of corporate governance and most importantly risk management. The poor risk and asset management also lead to the failure of the company (McNeil,  Frey & Embrechts, 2015). In the starting of 21^st century, firm borrowed the investment from the mortgage market and crises became more and situation got worst. The complex structure of Lehman was one of the causes along with other issues which lead to the bankruptcy of the company. Example, they have more than 3000 legal entities present but still the management was poor and ineffective. The company also struggled to gain the position in the commercial real estate market (Fernandez & Wigger, 2016).  Lehman also faced an issue while designed balance sheet as they removed approx. 50 billion dollar assets from the sheet for securing their taxes. The ethical decision that was made by the company was not unique (Toporowski, 2016). These decisions affected the Lehman’s financial statements. The external audits done fund out all the manipulation that were done by the company in the balance sheet.

Reasons behind Lehman Brothers' Bankruptcy

The impact of all the political, environmental, social and ecological affected the Lehman brothers and it caused a global economic depression. The impact of Lehman Brothers failure also affected the financial market of other countries. All the countries that were directly linked with the exposures from or to US suffered from the failure. The other countries and the external environment was affected due to the financial linkage that caused the trust and loyalty issue among the customers (Geiß, Weber & Quiring, 2016). The other drawback was trade linkage for development of stock market. It also caused international imbalance due to the poor flow of cash and liquidity. This decreased the overall net capital outflow. Due to imbalance in the outflow, countries with higher financial outflow got affected by the Lehman’s collapse. The credit swap that was done by the firm affected the insurance and financial status. The swaps affected the brand image as it gave false sense of security to the purchasers which added debt risk (Longworth, 2016). Apart from that, as they have borrowed money from various companies and has not returned or paid back on item. It caused negative image for the company as no one invested back for the firm.  Due to, increase in interest rate the sale of the company got affected the overall sale decreased.

External environment directly influence the performance of an organization. The external environment helped the firm to identify all the factors and indicators to enhance the performance. The environment condition of Lehman’s brother had affected relation between the stakeholders (Crosina & Pratt, 2018). It also became difficult to run the business in other countries as it had less economic cash flow that discouraged the customers to spend their money. The competition in the external market also impacted the status of the firm as they were other companies who have gained trust among customers. The external environment has direct impact on the customers and suppliers than impact the cost of the company.  

The framework that can be used is a service recovery framework that helps in identifying all the key elements that causes risk to the firm. The elements include measuring all the outcomes and focusing on the customer satisfaction and retention. This could be done by maintaining the cash flow in the firm and making the payments method faster and easier (Wiggins, R., & Metrick, 2015). The other factor of this framework is successfully recovering from all the failures and credit swap issues. The recovery can be achieved by modifying the services and activities of the firm.  

This framework works on the motive of recovering from all the barriers and offering customer satisfaction and loyalty in all the financial services. This framework helps in bringing back the customers to the business and dealing with all the complaints and problems (Schiereck, Kiesel & Kolaric, 2016). The motive behind this strategy is to make sure that customers stay connected and the sale of the company is not affected. This framework works after taking feedback from the customers and the compensation and frustration could be resolved. This is used to remove the dissatisfaction by taking proper actions; the actions could be legal or regarding business or government policies. All the problems are researched and service problems are identified. The problems are resolved by learning from the past experience and then setting up the problem by tracking the entire system. It helps in identifying all the loop holes of the firm so that modification is done (Wiggins & Metrick, 2014). The loopholes are monitored on regular basis so that the entire negative situation is turned into positive one. It clearly works on three A’s approach, first is acknowledging all the problems and failures, second is assessing all the facts and figures so that situation is understood clearly (Hbs, 2016). The last step is negotiating the solution by discovering an alternative plan.

The severity of failure is the reason this framework was adopted as it undertakes all the failure conditions by creating a procedural plan against failure (Hemphill, 2016). The pre recovery phase starts at becoming aware about the failure and ends after recovering from the service. The delivery of his framework is to empower the customers by retaining them and making them satisfy with all the services. 

While making decision Lehman Brothers need to consider many factors like the dependence of credit rating on other investors. Other was, as Lehman Brothers presented wrong financial statement that caused problem to deal with marketing with other companies. The board of directors were one of the reasons behind making decisions in the global market. The management structure was ineffective in making decisions as there are risks associated with strategic goals and objectives. The liquidity challenge of Lehman Brothers caused loss while making decisions as there were huge loss faced by the company. This can be managed by reducing profit margins before taxes and referring to all the warnings and critics while managing the short term needs (Wiggins,  Piontek & Metrick, 2014). They need to consider the all eh cash receive receipts along with security inventory of eh from to manage the financial arrangements. To balance the transaction cash flow need to check so that specific decisions could be made. Apart from that, ethical decisions of the company also play an important role. The case of external audits of the firm also helps in maintaining decisions by taking care of all the moral intensity (Theguardian, 2016). The individual characteristics towards the organisation and the culture of the firm contribute in making decisions. All the validity associated with the auditors need to be checked before making any decisions. The other factors, that needs to be considered while making decisions is the application of Z-score. The z-score bankruptcy is analysing and studying the imminent for Lehman brothers. It helps in finding financial distress faced by the company and knowing about the steady deterioration of cash flows over the last years leading to the crisis (Wu & Olson, 2015). The financial level and the bonds with other companies help in finding the tight opportunity and deciding future plan. The decision somewhere depends upon the public and government authorities.  The opposition company that also hit with the financial system are analysed and the impact of it on people wellbeing is analysed.  

The external strengths and weakness helped in knowing all the macro environment conditions of the firm. So, that control over the condition outside the company is taken. This helps in finding al the competitors in the market. Finding out their marketing plan along with weaknesses where they are lacking so that more audience could be captured. The other external factors that affected the place are unemployment rate that makes difficult to enlarge their sales and attract more customers (Wiggins Piontek & Metrick, 2014).  The obstacles and problem is identified so that impact of environment does not reflect in the growth of an organisation. The technological innovation in the market eliminates the issue with customer expectation as they adapt to changes. The issues are identified so that successful plans could be developed.  The aim of this analyses is gain information from all the external sources and then planning a strategic action (Kensil & Margraf, 2015). For this, field study need to be done regarding all the financial statements of the company so that legal issues could be cross checked. The external environment helps in finding the change in economy along with political factors.  The external factors can affect the spending pattern of clients as the interest rate gets increased (Benos, Garratt & Zimmerman, 2014). Due to this people experience hardship in financial transactions this leads to crises. The other factor is changing trends in the global market. Technological changes have become so rapid in the last years that have created pressure over the business. Thus, to maintain the risk of losing the market share all the credit swaps and operations are designed automatically (Fitzpatrick & Thomson, 2016). Media is one of the main reason that affect the brand image of the organisation as they advert many issues about the firm that could have negative image.  

Conclusion

Lehman Brothers suffered from a huge loss due to poor cash flow. The other reason behind this failure was wrong financial statement that was showcased. There are various competitors in the market thus once the brand image got spoiled it became difficult for them to get in the market. Thus, it can be concluded that diversification in the culture was difficult to be managed. The source of Lehman sustainability in the marketplace is of trading actions that is better than other peer competitors. The diversification of business in last years has made the business to increase their profit margins. 

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