ON SEPTEMBER 15 2008 Lehman Brother’s Bank filed for bankruptcy, in what was one of the key moment of the Global Financial Crisis.
Ten years on experts from the University of Salford Business School look at what went wrong and assess whether something similar could happen again.
Ghulam Sorwar, Professor in Finance at the University of Salford Business School, leads the new MSc in Fraud and Risk Management course, just launched by the university.
Professor Sorwar said: “At the time policymakers were afraid of the increase in systemic risk in the aftermath of the Lehman collapse – that is risk where the failure of single institutions leads to a cascading action which ultimately results in the whole system collapsing, may become a reality.
“Policymakers alleviated this through two main routes; quantitative easing and lowering interest rates.
“So what has been the impact? First quantitative easing has led to increases in asset prices such as houses and the stock market. So the rich have become richer and the poor remained where they are, if not poorer. Growth has been modest, and salaries have not kept up with inflation, so despite almost full employment, the majority of people are worse off. To summarise, quantitative easing has been a subsidy to the rich, even if that was not the initial intention of the policy makers.
“Second, lowering interest rates meant that borrowing became cheaper not only for individuals but also for nation states. We are seeing the consequences of this with Turkey and Argentina. In the case of Turkey, it’s currency, the Lira, has collapsed almost by 50% resulting in currency outflow and cancellation of many mega projects. Argentina, on the other hand, are following their tried and tested route of going to the IMF with their begging bowl. It has worked for them in the past, why not now?
“The main problem now is asset prices are at a peak so they can only go one way and that is down; and the raising of interest rates by the Federal Reserve. Raising interest rates has resulted in money flowing back from the emerging economies back to the US. To put it in context, the major emerging market index has collapsed by almost a third since the beginning of the year and is causing severe disruptions in the market leading to increase in market volatility both in the emerging and developed markets.
“Have we fully recovered from the 2008 crisis? No. Is there going to be another crash? Most probably – but in what form and when that is the trillion dollar question.”
And Eileen Roddy, expert in finance governance and risk, at the Business School said:
“There are a number of stark lessons to be taken from the demise of Lehman Brothers. In reality, they became a victim of the time, their organisational paradigm, global greed and strategic myopia.
“The key areas that financial institutions should be considering in the fall out are around the role of the Board of Directors, culture and ethics (the role of management and stakeholders), governance and accounting regulation, remuneration and performance measurement and misconception of the past and present.
“The Board of Directors must feel that their role is one of stewardship and direction, responsible to a wide range of stakeholders. They must be internally and externally focused, drive ethical behaviours and lead by example. They must be constantly questioning their decisions and themselves, supported by their non-executive counterparts, to avoid ‘group think’ and myopic behaviour. If bad news arises, they should adopt best practice, acknowledge mistakes and provide transparent solutions. Reputational risk is at its highest when Boards sweep indiscretions under the corporate carpet. Here in 2018 more work is needed to ensure transparent cultures, manage out ‘group think’ and increase diversity at both the executive and non-executive levels.
“Governance and high quality accounting regulation are essential; Lehman Brothers should have realised that their corporate value was falling prior to the demise, so that the market was signalling problems before the collapse happened. The rules on liquidity, loan granting and asset valuation have improved considerably.
“Staff needed clear and comprehensive targets and performance measures that deterred managers from dysfunctional ‘get rich quick’ trading behaviour and short-term mentalities. An open, positive culture that will tolerate mistakes, providing lessons are learned and applied to future improvements, was sadly lacking.
“Hopefully the risk of global contagion has been reduced. However more work is still required around ethical finance, improving banking culture and attitudes to risk.”