This book explains the fundamental causes of the bank's failure, including
the inadequacy of the regulatory and supervisory framework. For some, it was the
repeal of the Glass-Steagall Act that was the overriding cause, not just of the
collapse of Lehman Brothers, but of the financial crisis as a whole. The book
argues that the cause is partly to be found both in weak and ineffective
regulation and also in a programme of regulation and supervision that was simply
not fit for the purpose. Lehman Brothers' long history began with three
brothers, immigrants from Germany, who sold selling groceries and dry goods to
local cotton farmers. Dick Fuld, the chairman and CEO, and his senior
management, ignored the increased risks, choosing to rely on over-valuations of
the firm's assets. The book examines the regulation of the Big Five
investment banks in the context of the changes which took place in the structure
of banking after the repeal of the Glass-Steagall Act. It describes the
introduction of the European Union's Consolidated Supervision Directive in
2004. The book examines the whole issue of valuing Lehman's assets and
details the regulations covering appraisals and valuations of real estate,
applicable at the time and to consider Lehman's approach in the light of
these regulations. It argues that that the valuation of Lehman's real
estate assets was problematic to say the least, as the regulators did not
require the investment banks to adopt a recognized methodology of valuation, and
that Lehman's own methods were flawed.
This chapter examines the issue of valuing Mayer Lehman's assets,
explaining the reasons for the market's lack of confidence in
Lehman's valuations. The kind of regulations governing valuation in
force between 1994 and 2007 are set out. The valuations were Lehman's
own, and were presented as being marked to market. The chapter highlights
the key points arising from the Examiner's analysis of Lehman's
approach to valuation. The purpose is to detail the regulations covering
appraisals and valuations of real estate, and consider Lehman's
approaches to valuation for its commercial-principal transactions
group's portfolio (PTG), in the light of these regulations. The
analysis was that the senior management decided to go for profits, rather
than restricting the risks laid down by their risk management team.
Lehman's corporate charter and Delaware company law protected directors
from personal liability based on their business decisions, since neither
breached the duty of loyalty or good faith.
Professional standards for the valuation of commercial and residential real
estate existed at that time of Mayer Lehman Brothers' bankruptcy.
However, bankruptcy Examiner Valukas demonstrates that Lehman showed little
interest in conforming to them or hiring those who knew how to apply them.
This chapter sets out the difficulties of valuing both complex financial
instruments and real estate, and especially commercial real estate and
development land. It describes the methodologies used to value commercial
real estate and complex financial instruments. The chapter draws on the
procedures as set out by the Royal Institution of Chartered Surveyors in
London, and the Appraisal Foundation, which sets the Uniform Standards of
Professional Appraisal Practice (USPAP), the standards required by the
Financial Institutions Reform, Recovery and Enforcement Act 1989. It also
examines some major derivatives in force when Lehman's collapsed,
including collateralized debt obligations (CDOs) and collateralized loan
This chapter considers who should have been responsible for keeping an eye on
the value of assets in which Mayer Lehman Brothers chose to invest heavily,
and on its risk management procedures. It considered three questions. The
first is what exactly was the Lehman board expected, indeed, required to do.
The second is whether Lehman's board was able to carry out its duties.
The third is whether the board actually meet the corporate governance
requirements. What the Examiner's analysis of corporate governance
shows is that, for a company incorporated in Delaware's General
Corporation Law, as well as the Sarbanes-Oxley Act, it is very difficult to
find colourable claims against Lehman Brothers. Lehman informed the
Securities and Exchange Commission in their regular meetings that the
firm-wide risk appetite limit was a real constraint of Lehman's
risk-taking, although it was treated as a 'soft' target within the
This chapter examines the regulation of the Big Five investment banks in the
context of the changes which took place in the structure of banking after
the repeal of the Gramm-Leach-Bliley Act 1999 (GLBA). It also examines the
introduction of the European Union's Consolidated Supervision Directive
in 2004. The Act did not 'repeal' the Glass-Steagall Act in its
entirety, but only repealed sections 20 and 32, which prohibited member
banks from affiliating with organizations dealing in securities. The Federal
Reserve became the 'umbrella' supervisor for any Financial Holding
Company owning a bank; under its 'streamlined supervision' remit,
the Federal Reserve was limited in its day-to-day authority to oversee
functionally regulated non-banking subsidiaries of the holding companies.
Though the Securities and Exchange Commission had adequate tools and
statutory backing for taking on the consolidated supervision of the Big Five
investment banks, its inability to carry out effective supervision was
The chapter discusses the increasing international scepticism over the sustainability of the Greek debt during the first half of 2011, despite an agreement by the European Council to improve the repayment terms of Greece’s 110billion Euro loan. The commitments undertaken by the Greek government in the field domestic economic reform (particularly privatisations) were unrealistic. At the EU level, the launch of the Euro Plus Pact, failed to calm nerves in the financial markets.
The chapter discusses the efforts of the European Council to articulate a holistic plan for the resolution of the Eurozone’s problems. The proposals of the German government on a Competitiveness Pact, however, met with opposition within the EU, leading to further delays in its response to the crisis.
The chapter discusses the implementation of the provisions surrounding Greece’s second bailout package. It is argued that the successful completion of the PSI programme offered important breathing space to both Greece and the Eurozone, but did not fully dispel concerns over the sustainability of Greece’s debt. At the European level a network of provisions were now in place as ammunition against the crisis, but their suitability to provide a holistic response to the root causes of the crisis was contested.
The chapter traces the early economic record of PASOK following its electoral victory in 2009. It argues that the new government failed to act quickly and convincingly in order to calm fears over the health of the Greek economy. Instead the government wasted its energies in diverting attention away from the real economic problems facing the country.
The chapter discusses the circumstances under which the Greek government was forced to seek a bailout from the EU and the IMF. It is argued that the economic measures taken by the Greek government did not prove sufficient to restore conference in the international markets, leaving Greece with no alternative but to seek external rescue. It is also argued that the Eurozone itself was unprepared to deal with the severity of the unfolding Greek crisis.