The Unethical Decisions Behind the Collapse of Lehman Brothers

In September, 2008, a financial crisis not seen in the United States since the Great Depression swept the nation. Some of Wall Street’s biggest firms, such as Goldman Sachs, Merrill Lynch, Lehman Brothers, and Morgan Stanley, faced serious financial issues that threatened the future and longevity of the renowned institutions. One firm, Bear Stearns, had already collapsed in March, 2008. This forced the Fed to intervene with a bail out, backing the sale of Bear Stearns to JP Morgan for a lowly $2 a share (Rose 6). However, Bear Stearns was only the tip of the iceberg of a financial crash unlike any seen in over 70 years. The Fed’s handling of JP Morgan’s acquisition of Bear Stearns was just the beginning of a series of government sponsored bailouts orchestrated by Federal Reserve Chairman Ben Bernanke and President of the Federal Reserve Bank of New York Tim Geithner in an effort to save Wall Street. Lehman Brothers entered 2008 with a stock price bordering on $70 a share (Rose 11), and declared for bankruptcy in the early hours of Monday, September 15, 2008. How could such a well-known staple of Wall Street suffer such a startling collapse in just nine months? The answer is directly tied to the firm’s unethical, shortsighted decisions that valued immediate profits for shareholders and compensation for executives over the overall health and longevity of the firm for it’s stakeholders.

Lehman Brothers began as a dry goods business in Alabama in 1849 (Rose 2). Lehman’s initial public offering took place in March, 1899, and the company grew to embrace investment banking activities shortly following the turn of the century. For the next 50 years, Lehman grew through successful underwritings such as Sears, F.W. Woolworth Co., and May Department Stores Company (Nicholas 6). By 1950, Lehman was the investment banker for over half of America’s 20 largest retailing enterprises. Almost 20 years later, Lehman had heavily expanded overseas and did $3.5 billion in underwriting. This made the firm one of the top four investment banking firms on a total volume basis (Nicholas 9). Lehman rose to prominence through savvy, responsible investments and decision making that benefited all of the firm’s stakeholders. However, the first signs of trouble arose in the mid 1980s, neatly coinciding with massive de-regulations coming from the US government.

In 1983, Lewis Glucksman became the CEO of Lehman Brothers. Glucksman represented a departure from the firm’s previous line of thinking. Glucksman was a former trader, and he butted heads with the bankers who had traditionally run the firm. The firm struggled, and Glucksman’s aggressive style created tensions within the firm (Nicholas 12). In need of new life in 1994, Lehman chose another trader, Dick Fuld, to take over as CEO. Fuld lead the firm to rapid expansion. Lehman’s size more than doubled, and its revenues increased sixfold (Nicholas 12). From the 1980s up until the firm’s collapse in 2008, Lehman grew at an astronomical rate, reaching the plateau of being seemingly “too big to fail”. However during this period of growth, Lehman transitioned in ways that were not beneficial for the firm’s long-term wellbeing. The firm became highly leveraged and heavily invested in subprime mortgages or mortgage-backed securities. During the boom of the late 1990s and early 2000s, big banks like Lehman enjoyed a high level of prestige, along with record breaking profits (Kakani 2). Lehman booked enormous profits during these times, which in turn lead to astonishing, unheard of bonuses for top executives such as Fuld and second-in-command Joe Gregory. These actions by the firm were incredibly risky. They left the majority of the risks on unknowing stakeholders, such as regulators, legislators, academicians, analysts, and investors, who mistakenly trusted that Lehman knew what it was doing. The mortgage backed securities and collateralized debt obligations (CDOs) that littered Lehman’s balance sheet were a powder keg waiting to go off. They were extremely risky, and represented just how overleveraged Lehman really was. If there were ever a significant downturn, Lehman would have trouble raising capital due to the substantial toxic assets it possessed.

As the housing bubble grew and grew, Lehman thrived during the mid 2000s. The firm was being rewarded for it’s risk taking, and nobody seemed to mind. Additionally, Fuld, Gregory, and other top executives were bringing home such large bonuses each year that they seemed willing to turn a blind eye to just about everything. However, any responsible leader at a massive financial institution such as Lehman Brothers had to know the risks the firm was taking. The decision makers at Lehman unethically and knowingly exposed Lehman’s infinite number of stakeholders around the world to enormous risks, and it was only a matter of time before everything hit the fan. In 2007 and 2008 (before the collapse), Lehman was reporting net leverage ratios of 12.5 to 16.1. However, these ratios were incredibly misleading because they ignored $40 to $50 billion of assets that were temporarily removed from Lehman’s balance sheet (Kakani 3). Additionally, Lehman was heavily involved in the unregulated commercial paper market. These investments lead to great growth for the firm up until the market’s collapse in mid 2007. Commercial paper is a short-term, unsecured fixed income instrument that is not backed by any collateral (Brandriff 3). When Lehman collapsed, the commercial paper market followed suit. Lastly, as the real estate bubble burst, Lehman was in a horrible position due to their immense exposure to the subprime mortgage market. A subprime mortgage is essentially a mortgage given out to a potential homeowner who realistically probably is not in a financial situation to receive a mortgage. These subprime mortgages often served as collateral for CDOs, and in early 2008 Lehman revealed $6.5 billion of CDO exposure that they previously had kept quiet (Rose 8). The risky investments listed above serve as examples of Lehman’s increasingly questionable strategies leading up to the firm’s collapse. The firm was essentially re-investing and leveraging people’s money over and over again in risky financial instruments, eventually causing their inevitable decline.


Lehman Brothers’ collapse and bankruptcy in September, 2008 did not simply effect the stakeholders of the firm itself. The collapse had a profound impact on the United States and global economies, and represented the single turning point that launched America into what is now known as The Great Recession. Fuld desperately tried to save his beloved firm. He attempted to arrange mergers with both Bank of America and Barclays (Brandriff 1). However, Fuld was far to stubborn and unrealistic during the negotiations, as both Bank or America and Barclays were willing to make a deal only if Lehman’s crippled, toxic real estate portfolio was not included. Additionally, little to Fuld’s knowledge Bank of America CEO Ken Lewis was secretly making a deal to purchase Merrill Lynch, another massive investment bank who served as one of Lehman’s key rivals (Brandriff 1). Merrill was in bad shape, but their balance sheet was not nearly as bad as Lehman’s. On top of that, many investors felt Lehman was safe despite their struggles since Bernanke and Geithner had essentially bailed out Bear Stearns by arranging the JP Morgan deal. By letting Lehman fall, the Fed shattered the widely held belief that important financial institutions were too big to fail (Brandriff 4). Given it’s enormous size and interconnectedness financial markets across the globe, Lehman’s bankruptcy shook the economy to it’s core. The stock market plummeted, and many saw a risk that the global financial system might collapse entirely. The government responded by creating huge stimulus packages that greatly increased national deficits and debts, and by loosening monetary policies by dropping interest rates close to zero. This action significantly expanded the money supply (Cadieux 1). With the economy sliding further into a recession, the government also had to bail out many prestigious banks, along with the insurance company AIG, by buying toxic assets such as mortgage-backed securities off of the firm’s balance sheets.

In the aftermath of Lehman’s collapse and the ensuing financial crisis that hit the nation, the question has to be asked: how could this happen? Clearly, Lehman and other financial institutions made the questionable, risky investments described above that jeopardized the firm’s longevity. But where was the oversight of these decisions, and who was responsible? Although regulations of the financial industry should have been tighter, regulators have limits to the degree to which they can prevent all frauds. Even powerful new regulations such as the Sarbanes-Oxley Act, implemented following the Enron scandal in 2001, can only go so far to keep corporations and financial institutions in line. As long as corporations are willing to allow a company culture that permits employees to engage in unethical activities, financial disasters will inevitably recur (Cadieux 2). In the case of The Great Recession, and specifically Lehman Brothers, the Financial Crisis Inquiry Commission Report concluded that there was a systemic breakdown in accountability and ethics (FCIC 22). A perfect example of this was Lehman’s handling of subprime mortgages. It was clear that the original borrowers of these mortgages could not afford to pay them back in full, which would result in catastrophic losses for investors in mortgage securities. Lehman purchased mortgage backed securities in bunches from mortgage brokers. There was an erosion of standards of responsibility and ethics that exacerbated the decline of Lehman Brothers and the onset of the financial crisis (FDIC 22). Lehman’s executives valued their own temporary success over the future of the firm, and financially affected millions of people worldwide as a result.


From an ethical standpoint, executives at prestigious financial institutions such as Lehman Brothers have a responsibility to do what is right for their infinite stakeholders, even if it means slightly lower profits for the firm. Because of the vast interconnectedness and influence of these firms, it is absolutely critical that they act ethically. As seen with Lehman Brothers, a collapse of one of these firms can have devastating consequences. Executives at Lehman failed to be responsible and accountable with their actions, and they helped trigger The Great Recession as a result. The leaders of Lehman should have acted with a deontological focus to their actions. Deontologists base their decisions about what’s right on broad, abstract universal principles or values such as honestly, promise keeping, fairness, loyalty, rights, justice, compassion, and respect for persons and property (Trevino 91). For example, Lehman did not do what was right when it over leveraged and loaded investor’s money into risky financial instruments. Additionally, they did not honestly fully disclose their financial situation, as referenced by the $6.5 billion of CDO exposure that was kept off the firm’s financial statements for quite some time. Given the worldwide influence and power of massive investment banks like Lehman Brothers, decision makers at these types of firms have a duty to act morally and responsibly. Lehman did not follow that guideline, which directly contributed to their eventual collapse. The firm had a responsibility to it’s infinite number of stakeholders, and it’s decision makers sacrificed stability and integrity to pursue temporary short-term profits. These profits may have padded the bank accounts of top executives, but they left the firm exposed to an extraordinary amount of risk. Anyone corporate leader following a deontological philosophy would not allow their firm and it’s stakeholders to come into harms way the way Fuld and Gregory did. After evaluating the collapse of Lehman Brothers, it is clear that the best way for a firm to avoid a similar fate is to act with honesty, integrity, respect for persons and property such as the stakeholders who have put their trusts in the firm’s abilities.

Works Cited

Brandriff, Christopher, and George Allayannis. “The Weekend That Changed Wall Street.” Darden Business Publishing: University of Virginia (2009)

Cadieux, Danielle. “The Great Recession, 2007-2010: Causes and Consequences.” The University of Western Ontario (2010)

Conclusions of the Financial Crisis Inquiry Commission. Financial Crisis Inquiry Commission, 2011.

Kakani, Ram K. Lehman Brother’s Fall. U of Western Ontario, 2012.

Nicholas, Tom, and David Chen. “Lehman Brothers.” Harvard Business School (2011)

Rose, Clayton S., and Anand Ahuja. “Before the Fall: Lehman Brothers 2008.” Harvard Business School (2011)

Treviño, Linda Klebe., and Katherine A. Nelson. Managing Business Ethics: Straight Talk About How to Do It Right. 3rd ed. Hoboken, NJ: Wiley, 2011.

One thought on “The Unethical Decisions Behind the Collapse of Lehman Brothers”

  1. If we take duties seriously, what are the duties of a financial firm? Of its managers?

    Perhaps it includes a duty to create organizations and incentive systems that do not reward excessive risk-taking. Fuld and others would argue, I think, that they created incentive systems to reward performance. But, did they? Given what we know about human behavior, economics, and organizations, can we expect more from managers and leaders?

    I say this because it strikes me as always “too easy” to simply blame greed or self-interest as if that is an explanation independent of how it is shaped and molded by the environments we create.


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