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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.

Core historical concepts reconsidered

Act (Betriebsverfassungsgesetz) was much more moderate. It largely re-enacted the legal framework of 1920 which had been abolished by the Nazis in 1933. The unions had demanded more influence in works’ councils, including for works’ councils to have ‘significant veto powers over management decisions’, and for trade union nomination rights for the workers’ representatives on supervisory boards (in companies with more than 500 employees outside iron, coal and steel, one-third of the members of these boards had to be workers’ representatives). But these demands could

in In search of social democracy

includes various traditional banking activities, such as commercial paper, private placements, asset-backed securities and derivatives. The Federal Reserve set out its Framework for Financial Holding Company Supervision a year later. Limits are imposed by law on the ability of banking regulators to impose capital requirements on a functionally regulated securities firm. Functional regulation where financial companies increasingly offer a wide range of financial services is fraught with problems, as many regulatory authorities, including those of the

in Lehman Brothers
Open Access (free)

crisis can be traced back to failures of corporate governance and risk management systems. At some institutions, boards of directors and senior managers did not sufficiently comprehend aggregate risk within their firms and lacked a sufficiently robust risk framework – that is, the people, systems and processes for monitoring a complex set of risks’. Other problems included inadequate and fragmented technology infrastructures, hindering the assessment of risk. 41 He reiterated the same point in a later speech to a conference on Governance, Compliance and Operational

in Lehman Brothers
Why China survived the financial crisis

deposits. Establishing the institutional framework of a modern financial system has been particularly difficult because economic decentralization has not been accompanied by parallel political and institutional reforms. Specifically, the fiscal and administrative devolution gave provincial and local governments broad discretionary authority regarding economic investment and allocation without simultaneously enhancing the banking sector’s regulatory and supervisory capabilities.24 Over time, this dense network of local political machines made of party officials, bureaucrats

in The Asian financial crisis
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January to September 2008

supervisory standards’. He added that ‘what neither the CSE regulatory approach, nor any existing regulatory model, has taken into account is the possibility that secured funding, even if it is backed by high quality collateral, such as US Treasury and Agency securities, could become unavailable.’ 22 Liquidity risk was not on the regulatory agenda. The SEC was not in a position to extend credit or liquidity facilities to any regulated entity. That was in the hands of the Federal Reserve. Erik Sirri's stringent criticisms of the weak regulatory structure

in Lehman Brothers
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effect decided that most of their number would cede day-to-day supervisory authority to a subgroup of the most powerful – the Quints. Within this caucus, the key decisions about target approval were often made by an even smaller grouping of three – the US, UK and France. What really counted during Operation Allied Force were not the formal structures of NATO, which reportedly were soon substantially cast

in The Kosovo crisis and the evolution of post-Cold War European security
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Crisis, reform and recovery

the following sections illustrate, the hastily implemented liberalization plan, biased towards short-term borrowing, and without effective prudential regulation and supervision in place, was hardly designed to rein in the chaebols. Indeed, these “mostly half-baked measures, often not backed up by improvements in the supervisory and disclosure framework would have a profoundly negative impact on the economy” (Claessens, Ghosh and Scott 1999, 83). In short, they made Korea vulnerable to the financial firestorm that eventually swept East Asia in 1997. Liberalization

in The Asian financial crisis

Guidelines Further guidelines were issued in December 2006, with the focus this time on concentrations in commercial real estate lending and on sound risk management practices in particular. 10 The regulators had observed the increased concentration and that this added ‘a dimension of risk that compounds the risk inherent in individual loans, making the institutions more vulnerable to cyclical CRE markets’. 11 There should be a risk management framework to identify, monitor and control CRE concentration risks. The responsibilities

in Lehman Brothers
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The evolving international financial architecture

on all key issues. Second, in recognition of the fact that banking system weaknesses have been a significant feature of financial crises, a key element in the architecture reforms is the development of frameworks to strengthen banking systems and to promote more effective risk-management capacity within them. In this context, a number of initiatives are under way to strengthen the supervisory arrangements applicable to banking systems. The Fund, along with the World Bank, the regional development banks and the Basle Committee for Banking Supervision (BIS) has taken

in The Asian financial crisis