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A Crisis of Value

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.

4 Regulating the ‘Big Five’ This chapter will examine 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 and the introduction of the European Union's Consolidated Supervision Directive in 2004. Immediately after the financial crisis, various reasons were found for the failure of so many banks, and indeed for the collapse of Lehman Brothers. This is despite the obvious fact that the major investment banks were

in Lehman Brothers
Open Access (free)

role of large banks in the financial crisis prompted many to argue that there is an optimal size of banks or that the range of activities of banks should be restricted (the Volcker rule). 33 The argument is that market-based activities and organizational complexity increase systemic risk but not the individual bank risk. This implies that it is not possible to look at any one bank in isolation but that the connections between them may well increase systemic risk. It is quite clear that the connections between both the ‘big fiveinvestment banks and banks throughout

in Lehman Brothers

Five investment banks, only to banks regulated by the agencies: the Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). That left another regulatory gap. The SEC did not examine the real estate risks Lehman ran, lacking a mandate and regulations to do so. In other words, it was not the process of bankruptcy that destroyed value. Lehman's real estate assets did not have the value the company had attached to them. Ultimately, the value of the derivatives

in Lehman Brothers
Open Access (free)
January to September 2008

’ using horizontal reviews that look across a group of firms to identify common sources of risks and best practices for managing those risks, and the use of models and data analysis to identify vulnerabilities at the firm level and for the financial sector as a whole. 45 It was the lack of understanding of the linkages which led to the calamitous decision to allow Lehman Brothers to fail. One can only speculate on what might have been if the Big Five investment banks had been placed under the Federal Reserve's Consolidated Supervision in 2004. All

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