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Lehman Brothers

A Crisis of Value

Oonagh McDonald

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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Oonagh McDonald

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

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Indonesia

Crisis, reform and recovery

Shalendra D. Sharma

Indonesia: crisis, reform and recovery 3 Indonesia: crisis, reform and recovery In Indonesia, state-owned banking gave way to a system where anyone with $1 million or so could open a bank (Little 1997, 10). In mid-1998, a World Bank study (1998) grimly noted that “Indonesia is in deep economic crisis. A country that achieved decades of rapid growth, stability, and poverty reduction is now near economic collapse . . . no country in recent history, let alone one the size of Indonesia, has ever suffered such a dramatic reversal of fortune.” There is bitter irony

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The domino that did not fall

Why China survived the financial crisis

Shalendra D. Sharma

worst banking system in Asia.”20 Sorely lacking in professional competence and institutional autonomy, burdened with balance-sheets that conceal many worthless assets, undercapitalized by international standards, unable to offer a wide range of services and products, and subject to political interference, it is arguably the 259 The Asian financial crisis Achilles’ heel of the entire economy. While the central reformers have instituted some important measures to create the institutional structures of a modern financial system, much more financial deepening is necessary

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Oonagh McDonald

Frederick Ehrman, who had been at Lehman Brothers since World War II. He was replaced by Peter Peterson, a former US Secretary of Commerce in the Nixon administration, who had little experience of banking, still less as a trader. Nevertheless, he turned the company around, and in the last five years of his stewardship the company became extremely profitable. His chief problem was Lew Glucksman, head of trading, who worked long hours and regarded the bankers (as opposed to the traders) with disdain. Peterson tried to keep Glucksman on-side but neither the additional

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The naive republic of aid

Grassroots exceptionalism in humanitarian memoir

Series:

Emily Bauman

-systematically. Even as humanitarian authority presupposes structured reasoning and methodical organisation, its mandate is still viewed through the lens of personal impulse and independence. Improvising in the midst of chaos, testing the limits of one’s endurance and ingenuity, following gut instinct even or especially when it flouts the rules: these are the core stories that acquaint the industry with its

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Beyond the Asian crisis

The evolving international financial architecture

Shalendra D. Sharma

the lead. Following on the request by G-7 leaders at the Lyons Summit in 1996, the Basel Committee developed “25 Core Principles for Effective Banking Supervision.” These principles cover seven broad headings, including preconditions for effective supervision, licensing and structure, prudential regulations, methods of ongoing supervision, information requirements, powers of supervision and cross-border banking (Basel Committee 1997; 1999; 1999a). Comparable principles were subsequently developed for securities supervision by the International Organization of

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Introduction

Issues, debates and an overview of the crisis

Shalendra D. Sharma

on the exchange rates. The subsequent pages will show that weaknesses in the private sector (in the banking, financial and corporate sectors) were at the heart of the Asian crisis. Specifically, weak corporate structures (where the focus too often was on increasing scale and market share rather than on economic returns), weak regulation of the financial system, connected and directed lending, and implicit and explicit guarantees of financial institution liabilities created an unprecedented degree of moral hazard. The banking sectors in the crisis-hit countries were

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Korea

Crisis, reform and recovery

Shalendra D. Sharma

development of a commercially-oriented and sound banking system, besides creating moral hazard. Within banks, lending decisions tended to be highly centralized, and the internal risk-control structures as well as credit analysis skills and procedures did not mature fully. As a result, credit decisions tended to rely on collateral and inter-company guarantees, as well as informal government guidance, rather than projected cash flows. Loan review processes and management information systems were rudimentary. Thus Balino and Ubide (1999, 16) succinctly note that “although

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From Hubris to Nemesis

January to September 2008

Oonagh McDonald

subsidiaries. 34 She and others have stated that the SEC was not a prudential regulator, which is undoubtedly true, but this simply emphasizes the fact that regulation of the investment banks was taken far too lightly by all the banking regulators. Mary Shapiro became Chairman of the SEC on 27 January 2009, and, although she had many reservations about the Office of the Inspector General's report, she instituted a wide range of reforms to the Commission's structure. These included modernization