- 21 Mar, 2021
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Washington’s Farewell Address Analysis
Institutional Affiliation
Why Lehman Brothers Failed
One of the major reasons linked to the failure of the Lehman brother’s failure is that there was no political palatability for bailouts. At
that time, the public was already impatient with the industry and the notion that the treasury or the government would step in to bail a
firm of this caliber and stick the taxpayers with billions of dollars in losses did not just fly politically. With other acquisitions, it was
evaluated that that the losses were less significant and as a matter of fact, a willing acquirer was on board. This didn’t imply that it was
saved but instead failed since another bank bought it. Additionally, the finance company’s balance sheet was also a disaster. At the
moment, there was no buyer and as a result, the Federal Reserve had to come in to give them an emergency loan. It did not happen
this way because the government thought that the Lehman brothers did not have enough collateral to back up the loan. Despite the
fact that the fed had the capacity to provide this amount of loan, they chose not to because their analysis showed that the company
would fail ultimately even if they bailed them out.
Ethical Issues
From an ethical point of view, it is expected that the executives at big firms like Lehman Brothers are tasked with a responsibility to do
what is right to their stakeholder even if it means the company will incur a loss or they will get slightly lower profits. Because of their
vast interconnectedness and the influence that the firm has in the nation, it is vital that they uphold their standards and act ethically. As
it was seen with the Lehman Brothers, a collapse of big firms comes with devastating consequences. Classically, the executives at the
firm failed to be accountable and responsible with their actions and as a result of their deeds, they triggered the great recession. The
leaders of the company ought to have acted with a deontological focus to their deeds. Classically, they made decisions without looking
what is right on broad. It is evident that they lacked abstract universal values like promise keeping, honesty, and fairness among others
in their decisions. For instance, the company’s management did not do the right thing when they leveraged the investors’ money into a
risky financial tool. Also, at some point they were not honest when they did not disclose the full financial statement as referenced by
the 6.5 billion dollars of CDO exposure and this was not included in the company’s financial statement for some time. In the case of a
company with much influence and power worldwide, decision maker ought to act morally and responsibly. This was not the case for
Lehman and it contributed to a larger extent to their failure. Typically, the firm had responsibility to its infinite number of stakeholders
but this was not the case as its decision makers sacrificed integrity
[26 words matched from 4 Reasons Why Lehman Failed – The Atlantic]
… There Was No Political Palatability for Bailouts. And that wasn’t a politically desirable option. The public was already becoming
impatient with … like Lehman, and stick taxpayers with billions of dollars in losses, just didn’t fly politically. With other acquisitions, …
the losses were calculated
and stability for them to get short-term profits but it eventually led to the firm’s failure.
Explain how Dodd Frank Act and the Volcker Rule are intended to prevent future failures of the Lehman type
One of the major goals of the Dodd-Frank act is to have banks subjected to several rules and regulations having in mind that there is a
possibility of being broken up in case they are evaluated and determined to be too big to fail. Classically, it does this by looking out for
risks that have impact to the entire financial industry. There is also the Financial Stability Oversight Council which has members from
the Treasury, Federal Reserve and the Securities and Exchange Commission. If the council determines that the bank is getting too big
to fail, they could be regulated by the Federal Reserve that asks the bank to increase its reserve thus preventing its failure.
On the other hand, Volker rule only seeks to undo the mess caused when Congress repealed the Glass-Steagall Act. The act
separated investment banking from commercial banking. Classically, investment banks were private and small companies that played
a vital role in raising capital for corporations by issuing debts or stock market. On the other hand commercial banks were classically a
safe place for depositors to place their money and get some interest. In return, they good get loans at regulated interest rates.Amendments
One of the amendments that were made to the Dodd Frank act includes increasing the asset threshold for more strict regulatory
necessities from 50 billion dollars to 250 billion dollars. This has the implication that the major Dodd Frank provisions will only be
applied in thirteen United States largest banks. On the other hand an amendment made to the Volker rule is reduced obligation
meaning that only 25 banks currently facing stress tests will never face such requirements and also they will not be subject to liquidity
and capital requirements in future.
[20 words matched from Dodd-Frank Act: CNBC Explains]
… One of the main goals of the Dodd-Frank act is to have banks subjected to a number of regulations along with the possibility of
being broken u