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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.

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balance sheet risk, reinforcing our focus on our client-facing business and returning the Firm to profitability. 1 The early announcement included an increase in total stockholders' equity of $28.4bn, up from $26.3bn, an estimated liquidity pool of $42bn, and plans to sell a majority stake in its asset management unit. Lehman also revealed that it would separate off a ‘vast majority of the firm's commercial real estate assets from our core business by spinning off those assets to our

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

their commercial real estate assets and selling them. Analysts were not convinced at the apparent failure to write down their commercial real estate, which should have revealed that the company would have to raise further capital. 7 Lehman's claim about the size of its liquidity pool, some $45bn, the highest on record, was accepted by analysts and the markets. To bolster liquidity and to help the financial markets function more effectively, the Federal Reserve had established the Primary Dealer Credit Facility. This was an

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

the Bankruptcy Report, Valukas examines the valuation procedures for Lehman's commercial real estate portfolio, which included commercial mortgage loans and commercial mortgage-backed securities, backed by real estate properties generating cash flow. Lehman's intention was to syndicate, securitize and/or sell these assets to investors shortly after their origination or acquisition. Lehman's assets included highly leveraged debt or equity investments in real estate assets that Lehman intended to hold for its own account while a developer improved or developed the

in Lehman Brothers
Open Access (free)

inspire confidence in the valuation of their real estate assets, especially in 2007 and 2008, when prices in the real estate market were falling. Recognized procedures have been developed by standard-setting bodies for valuation in the USA and in the UK. International standards are in the process of being established by the International Valuation Standards Council, a long-time partner of the Appraisal Foundation. This chapter draws on the procedures as set out by the Royal Institution of Chartered Surveyors in London, and the Appraisal Foundation

in Lehman Brothers