INTERNATIONAL BUSINESS MANAGEMENT

GROUP MEMBERS

• ASAD ULLAH KHAN SWATI• ATTA UR REHMAN• IBRAR HUSSAIN

CONTENTS1.PROBLEMS OF LEHMAN BROTHERS CONCERNING :-

• FRANCHISING

•LICENSING

•EXPORTS•JOINT VENTURE•MERGER AND PROJECT BASED

2. GAP BETWEEN DOCUMENTATION AND PRACTICES

3. BLUNDER , CORRUPTION AND MALPRACTICES IN REALITY

4. ADVISED SOLUTIONS

INTRODUCTION

On September 15, 2008, Lehman Brothers Holdings Inc filed for bankruptcy. It filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. It filed with $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide.

BRIEF HISTORY OF LEHMAN BROTHERS

Henry Lehman, an immigrant from Germany, opens a small dry goods store in Montgomery, Alabama, in 1844.

PROJECT BASED LEHMAN BROTHER INC:

In 1850 Henry is joined by brothers Emanuel and Mayer and they name the business Lehman Brothers.

In 1858 The Lehmans -- who take cotton from farmers to settle accounts and trade the cotton for money and merchandise -- open a New York office.`

In 1860 After the Civil War, they move to New York and establish the New York Cotton Exchange.

In 1887 Become members of the New York Stock Exchange

In 1889 Lehman underwrites its first public offering, for the International Steam Pump Company.

PROJECT BASED LEHMAN BROTHERS

• In 1929 The Lehman Corporation is created, a closed-end investment company.

• In 1930 Lehman underwrites the IPO of DuMont, the first television manufacturer.

• 1950s Underwrites the IPOs of Digital Equipment and Hertz Rent-a-Car

• 1960 Opens a Paris office.

MERGERS AND ACQUISITIONS

• 1962 With Salomon Brothers, Merrill Lynch and Blyth and Company, Lehman forms an association nicknamed the "fearsome foursome" that challenges the major firms for underwriting business.

MERGERS AND ACQUSIITIONS

• Becomes one of the first investment banks to open an office in London to take advantage of the booming bond market in Europe.

• 1972

• Lehman acquires Abraham & Co.

• 1975

• American Express acquires Lehman Brothers and merges it with Shearson.

• 1984

• Seat on the London Stock Exchange

• 1986

MERGERS ACQUSISTIONS AND PROJECTS

• Seat on the Tokyo Stock Exchange

• 1988

• American Express divests Shearson, and the independent firm once again becomes known as Lehman Brothers.

• 1993

• Lehman becomes independent through a public stock offering and Lehman Brothers Holding Inc common stock begins trading on the New York & Pacific stock exchanges.

• 1994

• Fuld fights off rumors that the near collapse of Long Term Capital Management had caused a cash crunch at Lehman.

• 1998

• Lehman establishes an alliance with Bank of Tokyo-Mitsubishi for Japanese mergers and acquisitions.

• 1999

• Under pressure to cut costs, Fuld decides to pay staff less and in stock, rather than lay off employees.

• 2001

MERGERS ACQUSISTIONS AND PROJECTS

MERGERS AND ACQUISITIONS

• Lehman establishes its wealth and asset management division and acquires Lincoln Capital Management's fixed income business.

• 2002

• Lehman acquires Neuberger Berman and The Crossroads Group.

• 2003

• Lehman posts record-high net revenues, net income and earnings per common share (diluted) for a fourth consecutive year and the highest volume of trade on the London Stock Exchange for a third year in a row.

• 2007

• (BEFORE BANKRUPCY ON SEP 15,2008)

LEHMAN BROTHERS HOLDING INC

PROBLEMS RELATED TO MERGERS PROJECT BASE AND ACQUISITIONS

AN EVOLVING PARTNERSHIP (1969–1984): • Robert Lehman died in 1969 after 44 years as the patriarch of the firm, leaving

no member of the Lehman family actively involved with the partnership. Robert's death, coupled with a lack of a clear successor from within the Lehman family left a void in the company. At the same time, Lehman was facing strong head winds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973, Pete Peterson, Chairman and Chief Executive Officer of the Bell & Howell Corporation, was brought in to save the firm.

• Under Peterson's leadership as Chairman and CEO, the firm acquired Abraham & Co. in 1975, and two years later merged with the venerable, but struggling, Kuhn, Loeb & Co., to form Lehman Brothers, Kuhn, Loeb Inc., the fourth-largest investment bank of USA. Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment-banking industry.

• By the early 1980s, hostilities between the firm's investment bankers and traders (who were driving most of the firm's profits) prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.

• Upset bankers, who had soured over the power struggle, left the company. Stephen A. Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Gluckman was pressured into selling the firm.

PROBLEMS RELATED TO MERGERS PROJECT BASE AND ACQUISITIONS

PROBLEMS RELATED TO MERGERS PROJECT BASE AND ACQUISITIONS

• Shearson/American Express, an American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express. In 1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc.

• From 1983 to 1990, Peter A. Cohen was CEO and Chairman of Shearson Lehman Brothers, where he led the one billion dollar purchase of E.F. Hutton to form Shearson Lehman Hutton. During this period, Shearson Lehman was aggressive in building its leveraged finance business in the model of rival Drexel Burnham Lambert.

GAP BETWEEN DOCUMENTATIONS AND PRACTICES

GAP BETWEEN DOCUMENTATIONS AND PRACTICES

• ACCOUNTING MANIPULATION:

• In March 2010, the report of Anton R. Valukas, the Bankruptcy Examiner, drew attention to the use of Repo 105 transactions to boost the bank's apparent financial position around the date of the year-end balance sheet. The New York attorney general Andrew Cuomo later filed charges against the bank's auditors Ernst & Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment.

• On April 12, 2010, Lehman had used a small company, Hudson Castle, to move a number of transactions and assets off Lehman's books as a means of manipulating accounting numbers of Lehman's finances and risks. One Lehman executive described Hudson Castle as an "alter ego" of Lehman. According to the story, Lehman owned one quarter of Hudson; Hudson's board was controlled by Lehman, most Hudson staff members were former Lehman employees.

GAP BETWEEN DOCUMENTATIONS AND PRACTICES

• Regulatory capture is not a theoretical concept

• Financial firms had so much money and power, they persuaded politicians and regulators to leave them alone. Such regulatory capture is not unusual but in the financial industry it caused global devastation. The lack of limits to leverage and the low capital requirements created a disaster waiting to happen. And that is without all the slicing and dicing allowed, credit rating agency failures etc.

• Weak regulation was highly beneficial to the banks short term but it has come at great economic cost to the countries those banks are supposed to serve. Also the failure of weak regulation of the past now ensures much stricter regulation in the future. Short term the banks and executives benefitted but in the long term the operating environment will be a lot tougher.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

WEAK GOVERNANCE FAILURE:

Lehman Brothers had weak corporate governance arrangements which failed to safeguard against excessive risk taking are partly to blame for the economic crisis. Such failures remained hidden in a prosperous market but the downturn has revealed a number of flaws. The key areas of weakness that have been highlighted are: •Corporate risk management;•Board of directors;•Remuneration scheme; and•Nomination committees.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

CORRUPTION:

Lehman Brothers had six committee, one of them

was a Finance and Risk Committee, which consists

of the Firm’s Executive Committee, the CRO and

the CFO, should meet weekly to discuss all risk

exposures, position concentrations and risk taking

activities, but it only met twice in both 2006 and

2007.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

RISK MANAGEMENT:

Timothy Geithner (Secretary Of The Treasury),said in

his report, “Lehman’s plunge into high-risk businesses

in the years before its bankruptcy has become a

familiar story. During this period of aggressive

growth, Lehman developed significant exposures to

risky subprime lending, commercial real estate,

structured products, and high-risk lending for

leveraged buyouts. Importantly, the Valukas Report

indicates that Lehman repeatedly breached its own risk

concentration limits in pursuit of higher earnings”.

Treasury Secretary Tim Geithner

BLUNDERS , CORRUPTIONS AND MALPRACTICES

RISK MANAGEMENT:

NEW YORK (CNNMoney.com), Failings by Lehman

Brothers executives and its auditor led to the bank

collapse that unleashed the worst of the financial crisis.

According to a report by a court-appointed investigator,

“Lehman repeatedly exceeded its own internal risk

limits and controls," and a wide range of bad calls by its

management led to the bank's failure, says the report,

authored by examiner Anton Valukas.`

BLUNDERS , CORRUPTIONS AND MALPRACTICES

RISK MANAGEMENT:

Anton Valukas, (Chicago Based Lawyer) said in his report, the bankruptcy examiner's massive report on the collapse of Lehman Brothers has found "credible evidence" that top executives, including the Chief Executive, approved misleading statements and used accounting gimmicks as drugs to hide the truth from investors and the public. Worse, the report raises serious questions about the behavior of auditors and regulators, who are supposed to protect the public. Specifically, the report's revelations include:

Inside Lehman Brothers, some executives were very concerned about the firm's Enron-like accounting practices as the company headed to the brink in September 2008. In May 2008, Matthew Lee, a former Lehman senior vice president wrote a letter to senior management warning that the company may have been masking the true risks on its balance sheet. His warnings, revealed in the bankruptcy report, show that Lehman's auditors knew of potential accounting irregularities and allegedly failed to raise the issue with Lehman's board.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

BLUNDER:

Lehman Brothers adopted a new strategy to

overcome their problems but this led to business

risks because its investments in long term assets

like the commercial real estate, private equity and

leveraged loans had more vague prospects and

were less liquid than its usual investments.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

The House of Representatives Committee offered

the following observations on the composition of

the board: “Nine are retired. Four of them are over

75 years old. One is a theater producer, another a

former Navy admiral. Only two have direct

experience in the financial services industry”.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

• Board of directors at Lehman Brothers were paid well for their services in

fees that range from $325,000 to $397,000.

• Independent directors may lack the incentive and the time to take care of the

corporation, because, most of them were very busy and had many

responsibilities. For instance, Marsha Johnson Evans serves as a director of

Weight Watchers International, Huntsman Corporation and Office Depot, as

well as chairman of Lehman’s nominating and governance committee and a

member of both the compensation committee and the finance and risk

committee.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

REMUNERATION SCHEME:

A study from researchers at Harvard University,

“The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008,”

shows that the top executive managers of Lehman

Brothers received about $1 billion respectively from cash

bonuses and equity sales between 2000 and 2008.

The Board at Lehman Brothers awarded total

remuneration of close to $500 million to Chairman Fuld,

just four days before its collapse and following an

announcement that the firm lost almost $4 billion in the

third quarter, Fuld told the media that "the Board's been

wonderfully supportive."

BLUNDERS , CORRUPTIONS AND MALPRACTICES

REMUNERATION SCHEME:

• Fuld (CEO) received nearly half a billion dollars in total compensation Between 1993 and 2007.

• In 2007, Fuld earned a total of $22 million, including:

- a base salary of $750,000;

- a cash bonus of $4.25 million; and

- stock grants of $16 million.

• The staff received a disproportionately high percentage of their pay in Lehman stock and options. When the firm went public, employees owned 4 per cent of the firm, worth $60m. By 2006, they owned around 30 per cent,

equivalent to $11billion, at least on paper.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

NOMINATIONS:

Four of the ten members board at

Lehman Brothers were over 75 years

of age and only one had current

financial sector knowledge

BLUNDERS , CORRUPTIONS AND MALPRACTICES

TECHNICAL CAUSE OF LEHMAN BROTHERS FAILURE:

• One of the main failure cases in Lehman Brothers was the misbehavior of top

executives and the inaction of both the board and the auditing firm (Ernst &

Young).

• There are many similarities between the collapses of Enron in 2001 and

Lehman Brothers in 2008, that they managed to reduce leverage on the right-

hand side of the balance sheet and, at the same time, reduce assets on the left-

hand side. In Lehman Brothers, Repo 105 transactions doubled between late

2006 and May 2008, were known inside the corporation, exceeded the firm's

self-imposed limits and typically happened at the end of each quarter, when

financial information had to be released.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

TECHNICAL CAUSES OF LEHMAN BROTHERS

FAILURE:

• Lehman in the last year was unable to retain the

confidence of its lenders and clients, because it did not

have sufficient liquidity to meet its current obligations,

and on two consecutive quarters with huge reported

losses, $2.8 billion in second quarter 2008 and $3.9

billion in third quarter 2008, without news of any

definitive survival plan.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

MISLEADING:• The Wall Street equivalent of a coroner’s report,

mention that Richard S. Fuld Jr, Lehman’s former chief executive, certified the misleading accounts, the

report said.• Mr. Valukas (one of the examiner) wrote in the report

“Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of

directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,”. The report

states that Mr. Fuld was “at least grossly negligent”.• Henry M. Paulson Jr., who was then the Treasury

secretary, warned Mr. Fuld that Lehman might fail unless it stabilized its finances or found a buyer.`

Henry M. Paulson Je.Shannon Stapleton/Reuters

BLUNDERS , CORRUPTIONS AND MALPRACTICES

• THE PRIME CULPRIT:• In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way,

Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation). Lehman's acquisitions at first seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion.

BLUNDERS , CORRUPTIONS AND MALPRACTICES

ADVISED SOLUTIONS

• Risk Management is a misnomer:

• The management of risk has appeared to be anything but, and not just at Lehman. Basic risks were also badly understood. Classic economic theory explains the benefits of diversification – don’t put all your eggs in one basket. And yet that is what many employees at Lehman did. Their source of income – their job – was dependent on the firm’s success (even more so as Lehman paid bonuses). But then on top of that, Lehman staff also had far too much exposure to the bank through their investments – Lehman stock. And so, when Lehman went under, they lost not only their jobs but also all their savings. And yet most employees at Lehman should have realized they needed to spread their (nest) eggs wider.

• Regulatory capture is not a theoretical concept

• Financial firms had so much money and power, they persuaded politicians and regulators to leave them alone. Such regulatory capture is not unusual but in the financial industry it caused global devastation. The lack of limits to leverage and the low capital requirements created a disaster waiting to happen. And that is without all the slicing and dicing allowed, credit rating agency failures etc.

• Weak regulation was highly beneficial to the banks short term but it has come at great economic cost to the countries those banks are supposed to serve. Also the failure of weak regulation of the past now ensures much stricter regulation in the future. Short term the banks and executives benefitted but in the long term the operating environment will be a lot tougher.

ADVISED SOLUTIONS

• Stocks always recover; people don’t:• Investors have been able to tap anywhere from 4% all the way up to 10% of

their savings annually based on how markets fared in this all-important first decade of retirement. It’s time to dial down the risks in your portfolio before the next downturn.

• Diversification works — but in diverse ways:

• In 2008, only one type of diversification seemed to pan out: your basic mix of stocks and bonds. Among equities, everything pretty much fell in lockstep. Fast-forward more than three years, when the financial crisis unfolded in a different guise — this time with the debt crisis. Fear of government defaults peaked in early 2012, with rates on Greek debt reaching 29%.

ADVISED SOLUTIONS

Mergers & Acquisitions• Lehman Brothers (1994, spun off by

American Express;2008, bankrupt)

• Shearson Lehman Hutton (merged 1988)

• Crossroads Group (est. 1981, acq. 2003)

• Neuberger Berman (est. 1939, acq. 2003,sold to management 2009)

• Shearson Lehman Brothers (merged 1984)

• E. F. Hutton & Co (est. 1904)

• Shearson/American Express (merged 1981)

• Lehman Brothers Kuhn Loeb (merged 1977)

Mergers & Acquisitions• Lehman Brothers (merged 1975)

• Shearson Loeb Rhoades (acquired 1981)

• Kuhn, Loeb & Co (est. 1867)

• Lehman Brothers (est. 1850)

• Abraham & Co (est. 1938)

• American Express (est. 1850)

• Shearson Hayden Stone (merged 1973)

• Loeb, Rhoades, Hornblower & Co (merged 1978)

• Hayden Stone, Inc. (formerly CBWL-Hayden Stone, merged 1970)

Mergers & Acquisitions• Loeb, Rhoades & Co (merged 1937)

• Hornblower, Weeks, Noyes & Trask (merged 1953–1977)

• Cogan, Berlind, Weill & Levitt(formerly Carter, Berlind, Potoma & Weill, est. 1960)

• Hayden Stone, Inc (formerly CBWL-Hayden Stone, merged 1970

Mergers & Acquisitions• Paul H. Davis & Co.(est. 1920, acq. 1953)

• Spencer Trask & Co.(est. 1866 as Trask & Brown)

• Hemphill, Noyes & Co.(est. 1919, acq. 1963)

• Hornblower & Weeks(est. 1888)

• Rhoades & Company(est. 1905)

• Carl M. Loeb & Co (est. 1931)

• Shearson, Hammill & Co (est. 1902)

• Shearson, Hammill & Co (est. 1902)

• Hayden, Stone & Co

LEGAL ACTION AGAINST LEHMAN’S OFFICIALS• Five years after Lehman’s collapse hastened a worldwide economic

panic, the government faces lingering questions about the decision to spare executives like Richard S. Fuld Jr., who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government’s deadline for filing most charges will expire this year, providing a reminder of the case and its unpopular outcome.

• Federal prosecutors and the S.E.C. have never officially announced their decision to close the Lehman investigation. The S.E.C. also debated the culpability of top Lehman executives. But Mr. Canellos’s team argued that Mr. Fuld did not know that Lehman was using questionable accounting practices despite testimony from another Lehman executive that suggested otherwise.

• There is widespread agreement that Lehman failed under the weight of risky real estate investments and an inability to finance its operations amid the economic turmoil of 2008. It has been less clear, especially after Mr. Valukas released his report, whether the government did a thorough review of the firm’s collapse.

• Yet The Times’s examination reveals new details about the breadth of the government’s effort — S.E.C. officials reviewed more than 15 million Lehman documents and interviewed some three dozen witnesses. The decision not to bring charges came despite early hope among investigators, whose careers likely would have benefited from bringing such a prominent case.

• It’s not like a murder case, where you have a dead body and you know a crime has been committed. The Lehman case once seemed like the exception.