How Risk Resulted in Bankruptcy of Lehman Brothers
Introduction
Risk management involves identification of possible risks in advance, carry out all the analysis and precautionary steps that are directed towards identifying the possible solution to gab curd or reduce the risk. For example, a decision on investment expose an organization to various financial risk that might later result of failure if not well managed or growth of the is all the requirement are put in place. An example of risk an organization can experience in Bankruptcy. Therefore, for an organization to conserve and reduce the exposure to absolute investment risk like Bankruptcy, the board of management carries out risk management frequently (Williams, 2019). Lehman Brothers’ failure or Bankruptcy was because the board of management exposed the organization to financial risk. The corporate governance of Lehman Brothers banks was fragile and failed to protect the banks against the excessive taking of risks. The management blamed the economic crisis for being responsible for the Bankruptcy of the Bank. The Lehman Brother bank was exposed to financial risk dues to weakness incorporate risk management, remuneration scheme, the board of director and nomination team.
Corporate of risk management
Risk management is a process that requires a frequent meeting to carry on the analysis of what is on board, how the possible risk is being monitored. The corporate of risk management is responsible for advising the board of management of the kind of risk that should be taken to avoid failure in the future. Lehman Brothers had approximately six committees and involved the finance executive, Chief financial officers, and Contract Research Officers. The committee was supposed to be arranged on a weekly basis to discuss the prevailing bank exposure to risks and how the team responsible for the management of that risk is moving and identify and perform other risk-taking activities. Unfortunately, both in the 2006 and 2007 financial year, the cooperate of risk management met twice. The gab was too big to manage to monitor and reduce business risks, which resulted in the failure of banks (Qatinah, 2019).
Additionally, the committee for risk management miss-leaded the banks on the kind of risk it should take. During Lehman brothers’ aggressive period of growth, it was to take some risks that later resulted in Bankruptcy. Some of the massive risk Lehman Brothers wrongly take include the risk of supreme lending. The business model for Lehman Brothers was not different from that of Wall Street. The Bank was allowed to lend at a higher rate. Also, the Bank had a higher rate of leverage model. The Lehman Brothers had over $700 billion of assets and approximately 25 billion dollars of liabilities, which require higher confidence of counterparties to sustain. The biggest problem was on the assets because they were predominantly on a long-term basis. Even though Lehman brothers had different critical counterparties such as short-term market that the Bank used to borrow a small amount of many days to fund itself back later the counterparties lost confidence to sustain the banks ( Lioudis, 2019)