Lehman Brothers
Lehman Bros filed for bankruptcy on 9/15/2008
How did Lehman Bros. perform in 2007?
Around 2007 year-end Lehman Bros. had a $30 Billion market capitalization. What was
Lehman Bros.’ market capitalization on 9/12/2008?
Describe the “business model” for a brokerage, underwriter, investment banker.
Discuss the risks of a brokerage business
Lehman Bros. reported $700 B in assets, how much stockholders’ equity did they have
Why would the capital markets support a very high leverage for brokerages
Describe Lehman Bros’. new “business model”
Discuss the risks of this new business model
Explain the profits from borrowing short-term to make long-term investments
Explain the risks of such a strategy
What happens if the FMV of the long-term investments declines?
Would the capital markets support such high leverage for such a business?
Did the change in strategy demonstrate management override of controls?
Describe a Repurchase Agreement
What journal entries would you make for a Repo
Do we make a journal entry for collateral? How do we report collateral?
Describe a REPO 105/108
What journal entries would you make for a Repo 105 transaction?
Did you report a loss when you sold $105 worth of securities for $100?
Who received any coupon payments on the securities which were sold?
How did they report the $5 difference?
What did Lehman Bros. use the $100 cash they received?
What effect did paying off liabilities have on Lehman Bros. leverage ratios?
How did E&Y define materiality for Lehman Bros.?
How did Lehman Bros. competitors account for Repo 105 transactions?