On 2008 Lehman Brothers Holdings Inc had faced the world's biggest bankruptcy and collapse. The examiner had recognized some reasons for the disastrous. The increased risk and huge leverage investment type banking with continuing assets and interim liabilities. Counterparty assurance was vital in banking business but they drop poise in daily funding. Lehman's incompetent choice on the growth strategy on residential mortgage business and their ineffective forecasting on the financial crisis go beyond its own internal control risk limits and control.
Lehman presented a false image on leverage rating to keep up investors and counterparties confidence as a substitute of real low rating it exposed a healthy and forceful liquidity pool. Lehman didn't reveal the accurate accounting device to explain a high leverage ratio. They with the help of a function called Repo 105 tried to keep away from the downbeat crash of leverage ratios. They didn't release it to any of the users and government and its own board of directors, but their auditors know about it and didn't report to auditing committee.
In the second quarter Lehman was capable to lift up $ 6 million of new capital, but government analysis restricted them saying they have no lawful power to make a direct capital investment in Lehman, and assets were inadequate to maintain a loan huge and sufficient to evade collapse. Their funds were not satisfactory to maintain its liquidity to finance every day functions.
Corporate Governance lessons as per the examiner's report
Inappropriate disclosure of financial statements
Banking business is mostly based on the confidence of the counterparties as consider to the disclosure they prepared ambiguous and unreliable carry out in the financial statements with the support of senior officers and auditors that leads to lose the confidence of counterparties. They used an accounting device Repo 105 transaction to persuade its balance sheet ,they failed to disclose the accounting device used and presented a low leverage rate that was misleading to its investors.CEO and other senior officers those who are answerable for the balance sheet disclosure signed and authorized an fictitious balance sheet .The auditor Ernst & Young know about this but didn't took action because he got instruction from the executives he also act in a manner unfair to users and depended to the management. They did Repo 105 because they were in a situation that their massive number of illiquid assets that could not voluntarily sell, so they can diminish the net leverage via the Repo 105.
The senior officers were unsuccessful to do their fiduciary obligations, the response to subprime lending crisis and economic events, the directors are believed to take appropriate decisions on crucial risky events if they are not familiar with the high risky matters they have to search for advice from the experts.
Business and risk management
On 2006 Lehman accepted new multifarious business strategy which is extremely risky and profitable, but that dissimilar from the current investment performance. It applied a capital system of having obtained illiquid assets which may incapable to sell in recession. They persistent on storage business from altering moving business, which assisted to uphold longer term investments using Lehman's own balance sheet. But their subsidiaries BNC and LLC sustained in the mortgage business raise quantity of illiquid assets on Lehman's balance sheet.
Management assumed subprime crisis would not reach to other markets and they have the prospective to get better its forceful place. Lehman's liquidity had agreements with its mount up assets not only residential real-estate assets but also to a slighter degree the leveraged loan arrangement. They dismissed some senior officers who contrasted with the elevated risk management, particularly about commercial real-estate investments. There were possibilities that Lehman's officers violate duty of care in the risk management system in connection to achievement of the illiquid assets and break of duty of good faith in notify Board the length of the risk and illiquidity in recent strategy. Lehman's senior managers gave only significance to profit creation not regard as the risk policies and procedures. They followed the old risk control system even after they changed their business strategy. They have organized chain of stress tests with circumstances of past events it couldn't comprise any real-estate investments.
At the end of 2006 Lehman unexpectedly improved its risk appetite limits that were conflict-ridden. For rationalize the limit Lehman transformed the mode it calculated the limit. The single transaction limit they followed was in part a function of Lehman's equity. They granted to the rating agencies they adopt a single transaction limit and they reserved a choice to ignore this single transaction limit. But then they decided not to follow single transaction that was contentious within Lehman's management. All Board members permitted the Lehman's new growth strategy when it was accept. Lehman's FID resisted some of leveraged loans arrangements with that period, but regardless of those opposition executive members decided to continue several of a few contracts. On 2007 financial crisis widened on the whole subprime residential mortgage market where Lehman was particularly active and that effect lead to a collapse.
American situation compared to Australia
The global financial crisis had a considerable collision in Australia with other countries universally, but below than other nations. National government had sufficient surplus to overcome the crisis. None of the chief commercial banks had considerable revelation to the financial mechanisms, the dullness of which grounds solidify.
In Australia the number of investors in subprime finance securities was less that compared with in England and United states, illustrates that global relationship of the finances sector. Lehman brothers collapse has also generate lawsuit within Australia. Insolvencies generally guide to clash between secured and unsecured creditors.
Investors in Lehman brothers subsidiaries prepared allege for debt requirement devices based on common law but the court held 'the constitutional method could not be used in such a means as to facilitate claims of uncooperative creditors against an outsider .According to Michael Stutchbury, economic editor for Rupert Murdoch's Australian news paper, the banking institutions are those who had the top line resistance against financial crisis and Australia has the world's largely flexible and successfully controlled financial sector
Ross Gittins, writing for Sydney Morning Heral, he states that just a small number of Australian financial institutions have failed match up with American and other Europeans that is because Australian Banks have been 'rock solid'. He gives the credit for this to the countries financial overseer, who blocked Australian banks from connecting the so called toxic asset trade. (Australia's "rock solid" banks: the financial crisis one year on By Alex Messenger, 11 November 2009)
Australian banks were not dependent on the operation of valueless assets to make profit as a substitute steady inflow of abroad capital. Australian financial institutions highly developed from the crisis in 1990 that time so many Australians defeat in Swiss currency loans. But at present it is not repeated in the 2009 global crisis .Australian financial institutions have favoured to implement a cooperative move towards. Main Australian financial institutions proved prospective potency in their balance sheet by keep away from smaller amount viable financial disinterested parties. Australian law is very harsh about the corporations facing liquidation and segregating insolvency trading. If the directors attempt to do insolvency trading that enforces a personal liability on the directors for the debts. Directors must forcibly assign an administrator , who will be in charge of settling the debts of the creditors and he will take charge of all the performance of the director. Australian insolvent trading law is very stringent than American law.
ASIC's role in financial services
ASIC is in charge for captivating actions in the Australian financial markets in opposition to those who are doing unlawful activity.
Standards
ASIC put elevated standards for financial carry on to guard customers whenever contract with banks and other financial institutions that are managing funds of people. In Australia FIDO enclose mainly significant standards that are;-
All business must possess a licence
This is because all licensed business is supposed to function resourcefully, truthfully and moderately. It gives assurance that there are perfectly trained staffs working and complaints are treated agreement to the dealings and giving damages if they break any law. Even there are exemptions for loans ASIC confirms that firms are not giving any deceptive information about loans.
Proper disclosure about services
That provides customers all details about the type of financial services and financial advice and about what you are going to buy from them.
Other obligations
Other obligations of the financial business are related to the treatment of money, promotion validate contacts, etc.
ASIC's Legislative provisions and Regulation on financial services
ASIC is in charge of Australia's corporate, markets and financial service regulator. The main areas of responsibilities of ASIC are to integrate authority, finance, derivative securities, and insurance.
The main roles of ASIC are on the base of Australian Securities and Investment Commission Act 2001 that are;
-preserve, assist and advance presentation of financial system
-encourage positive and knowledgeable contribution by investors and customers
-direct the law successfully with lower technical desires
-implement and give achievement to law
-accept, practice and lay up information
-construct information about companies and other institutions accessible to the pubic
ASIC standardize Australian companies, financial markets, financial service organisations and investment advisors and other professional advisers. ASIC builds assurance to the company directors and officers to carry out their obligation sincerely, carefully and for the significance of the company. It controls markets by measuring the usefulness of financial markets fulfil with its lawful commitment to activate reasonably arranged and visible markets. It gives assurance about financial service business work economically, truly and comparatively.
ASIC have the authority to shelter consumers against ambiguous or unreliable and unconscionable behaviour upsetting all financial commodities and services together with credit. Legislative amendments are a significant ladder towards dipping regulatory overlap and contradiction, and slighter the trouble of red tape of entities. As per the exposure draft of regulations released by minister on 13 may 2010 ASIC have the liability for organization of Australian financial markets.
Stephen Long, economic correspondent commented about the Lehman brother's collapse, in his view on the basis of examiners report the executives used an accounting system that for the short term drive assets off the balance sheet to give a fake intuition of the financial state of the company. The accounting device Repo 105, in fact was a system used worldwide banks, but in Lehman brothers they enclosed the actuality and exposed an extremely liquid assets and low leverage rate that the investors wants to see, but that was solely anticipated to misinform investors.
Dick Fuld, former chief executive and a series of senior executives were at the back of sketch out work of these with the consent of auditor. Later they argued that it was absolutely lawful, but Stephen didn't think creditors and justice of united state will agree this. He said, the examiner not found Lehman's directors reasoned for financial crisis, he identify that all over the industry there was a rehearsal of funding long -term debt, long term lending with short term debt and went into heavier the most. They access ramp up in 2007 when the render down in the mortgage market was happening in serious in an essentially miscalculate business strategy known double down.
CONCLUSION
From the examiner's report it is known that Lehman Brothers Inc didn't caused global financial crisis but its collapse and activities of worthless selling of assts affected the industry as whole. Even Australian finance sectors and banks didn't affect the crises as much of others only few got affected. Mainly the investors who have done margin lending collapsed in the 2008 global crisis some of them lost their houses. Margin lending is made-up only for the knowledgeable and complicated investors. Lehman Brothers were new in their growth strategy and they did misleading things and hesitated to disclose their balance sheet properly. Senior executives tried to overcome the crisis and the side effect of the new strategy but they did that in a wrong way. It is true that the directors are authorised to do things for the benefit of the company but their decision and forecasting were just based on the past they didn't try to look for the future and didn't changed any of their management and risk control strategy.
The regulating authorities' takes place an important role to control the illegal activities. Here government interfered in a wrong way that they couldn't overcome the insolvency. In Australia ASIC regulations and proper action from the finance overseer and enough fund in the treasury helped to overcome the crisis and do not affected any major banking business. Australian government passed a law of whole sale lending guarantee to assist financial sector from the crisis. Lehman's certain valuation procedures were irrational for principle of bankruptcy solvency analysis. They did some dealings to their subsidiary companies, lBI's main part of assets to Barclays. Those are voidable and illegal transactions.
