Business Environment: Lehman Brothers Failure - A Detailed Case Study

This case study provides a comprehensive analysis of the factors contributing to the failure of Lehman Brothers, an investment bank that faced bankruptcy in 2008. The report examines the political, economic, social, and technological (PEST) factors that impacted the firm, along with an assessment of its competitors and public opinion following the collapse. Key reasons for the failure, including credit swaps, high risks, leverage, liquidity issues, and losses, are discussed in detail. The study also explores the effects of the external environment on Lehman Brothers, frameworks to resolve the challenges faced by the firm, and considerations for decision-making processes. It concludes with a discussion of potential growth opportunities based on an analysis of external environmental factors.

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Table of Contents
Introduction................................................................................................................................1
PEST Analysis...........................................................................................................................1
Competitors................................................................................................................................2
Public Opinion...........................................................................................................................3
Reason for Lehman business failure.......................................................................................3
The effect of the external environment on Lehman brothers.....................................................5
Frameworks to resolve the challenges faced by the firm...........................................................5
Factors of Lehman Brothers in decision-making processes.......................................................7
Business case for potential growth opportunities based on analysis of external environmental
factors.........................................................................................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
Lehman Brothers, Inc. is an investment bank that serves all the institutes, government
authorities and individual clients. The main process of the organisation includes corporate
finance, equality investment and trading of foreign exchange. The company operates in three
sectors that are in investment banking, client services and capital market. The division of
investment banking covers all the corporate advices and government clients. The company is
working from last 15 years. Suddenly, due to a bankruptcy in 2008 it faced a massive loss in
its stock and asserts. The bankruptcy was immediately protected by taking following actions.
It helped the company to gain the market value immediately. The reason of collapse was
repurchase agreement that removed security from the balance sheet of the company. This
agreement affected the brand image of the firm by making financial conditions worse.
Federal Reserve Bank conducted a meeting for the future of Lehman brothers that covered all
the possible threats and risk that can exist on the liquidation of assets. Thus, it can be clearly
stated that Lehman’s bankruptcy was the largest failure in the history and also collapsed with
many firms. The failure of Lehman brothers also affected many private and small firms due
to investment banks. In this report, all the political, economic, environmental and logical
factors are discussed along with the reason due to which the business of Lehman brothers
failed. All the effects of the external environment on Lehman brothers were identified. The
framework is discussed that help in resolving all the issues faced by the firm. There are
various factors that affect the company in making decisions and the business case for
potential growth opportunities based on analysis of external environmental factors is listed
below in the report. This report is completed by focusing the entire scenario of Lehman
brothers.
PEST Analysis

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The Pest analysis of Lehman Brothers Inc. is carried out; the factors include political,
economic, social and technological concerns.
 Political factors- The political issues that are faced by the Lehman Brothers relate to
all the government issues that are faced by the economy of the country like tax
policies, environmental laws and political stability. It also involves the operations that
need to be considered by the nation like health education and awareness among
people. The political party of the country will keep a track of trade regarding both the
import and export conditions. . It is researched that, Lehman brothers have faced
various political issues with Federal Reverse to balance out the entire refusal to the
public. The economy of the country is directly related to export and import of the
goods (Adu-Gyamfi, 2016). The political factors that affect the business are based on
increase and decrease of tax based conditions. They work on the fact that other
courtiers shout start up new ventures so that unemployment ratio is reduced. The
political factor also works on focusing on monitoring the educational quality and
efficiency as they are the pillars for future development.
 Economic factors- It can be clearly stated that, economic factor is more important for
the growth of the country. Thus, the change in interest rate and inflation rate will have
direct impact on the company. The exchange rate of the organisation also affects the
capital cost of the country. The trading concept, like how far goods get exported to
other country also contributes in the overall economy. The change in currency also
affects the organisation as high income of the country boost the demand of the
product in the market. The population of the country also plays an important role in
deciding whether a company should invest it or not. The presence of employees who
are unemployed and poor stake holders affect the economy of the country. The
economic factor also looks for cheap labours so that country could make higher

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revenues. The economic factor of Lehman Brothers were affected by the terrorist
arrack in 2001, that lowered the interest rate of the country and that directly affected
the economic growth. To overcome such issues they escalated towards the can be by
encouraging investment limits.
 Social factors- The social factors in which company operates also affects the growth
of the country. The social factors cover the friend, family and media. The social force
drives the organisation to change their strategies and demands of goods and services.
Considering the case of, Lehman brothers they do not work according to the change in
the society because of this reason company failed. Thus, it is necessary to look after
all the factor that is taking country to lower ranking (Adu-Gyamfi, 2016). The social
factor covers behavioural, beliefs, value and demographic trends that might affect the
organisation. The availability of lower interest rate promotes to investment in real
sectors of economy. In case of Lehman Brothers, they do not borrow from other
companies and work on a weak financial status.
 Technological factors- The advancement in tools and technology plays an important
role for the growth of an organisation. The technology adopted by Lehman Brothers
helps in reducing the overall cost and helped in providing feasibility to the customers.
The communication process of the company became fast due to internet and digital
gadgets. They have used and delivered technology of other counties so that place in
the market could be made. The reason of failure of Lehman Brothers was they did not
adopted to new and innovative technology (Adu-Gyamfi, 2016). Thus, it is important
to first analyse the market condition and then develop the strategies so that economy
of the country is improved. The technological factors played an important role in the
Lehman Brothers firm as they made the services available to eh user at a single touch.

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It helped the company to find new borrowers easily that save the overall cost and
offers better growth options.
Competitors
The Lehman Brothers have various competitors in the market. Thus, it is important
for the company to bet all the banking, financial and insurance industries to make a good
position in the market. Some of the competitors are Revolut that provide secure and mobile
based service which adds flexibility to customers. Durchblicker is one of the companies that
allows user to calculate their deal, insurances deals this allows customers for the best service.
Pocketbook also adds tough competition to Lehman brothers as it support customers for
spending the money and managing all the finance personally. One of the competitors is M1
finances as they plan for long term plan by building savings and managing all the personal
wealth. It is also true that, company grew and expanded in various financial sectors. Yet, it
can be said that Lehman brothers stand at the fourth position among all the investment banks.
The revenue of the company is less as compared to the other competitors. The reason behind
this is size of the company as they remain focused in only some areas. Lehman focuses more
on net revenues gained from fixed income sources and trading. This helped Lehman brothers
to compete the competitors by increasing their trading efficiency and generating more
revenue than its competitors (Bongiovanni, De Vincentiis & Isaia, 2016). From the survey, it
was found that gross earning of the company was 19.3, pre-tax income is 6,013, one year
revenue growth of the company is 9.5 and equality revenue was found 1,337. The source of
Lehman sustainability in the market is of trading activities that is better than other peer
competitors. The diversification of business in last years has made the business to increase
their profit margins (Cohen, Krishnamoorthy & Wright, 2017. The Lehman investment
practises are comparatively less than other competitors, it is necessary to bet the competitors
and bring up more consistent result.

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Public Opinion
The image of Lehman brothers was spoiled after the collapse that was held due to
financial crises in 2008. The collapse affected the sociological perspective and had a huge
pressure in the public (Dodo, 2017). The opinion of public was oriented towards the
economic failure and all the risk that are associated with the organisation after the bank
collapse. The public critiqued that social changes were the reason behind the collapse and
loss of the company. In the public opinion, Lehman brothers were considered as bankrupt as
they putted thousands of jobs on risk. It was seen that the entire financial sector was changed
after the leman brothers ad it somewhere reflected the public interest rate. The public opinion
about the company was negative as it causes depletion in the prices of real estates. The
customers in the market had a fear of selling Lehman products due to the high risk associated
with it. The public gave importance to other companies due to lack of security and trust with
Lehman brothers (Ball, 2016). The bankruptcy by Lehman brothers opened the gate for many
banks by allowing them to handle the fiduciary duties. The crumple influenced the
sociological point of view and had a gigantic weight in the general population. The
assessment of open was situated towards the monetary disappointment and the entire hazard
that are related with the association after the bank crumple. The general population evaluated
that social changes were the purpose for the fall and loss of the organization. In the general
conclusion, Lehman siblings were considered as bankrupt as they putted a large number of
employments on hazard (Mensah, 2015). It was seen that the whole monetary part was
changed after the Lehman brothers’ advertisement it some place mirrored general society
financing cost. The popular conclusion about the organization was negative as it causes
exhaustion in the costs.

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Reason for Lehman business failure
The failure of Lehman Brothers is one of the largest bankruptcy cases in the history.
The negative impact of failure penetrated in the market. There is no single reason of failure
rather there are numerous reasons behind this disaster. The credit swap was one of the reason
behind eh failure of the firm. Other than that, there were high risks associated with a high
interest rate. The reason behind the failure was leverage, liquidity and losses. As, leman
brothers borrowed money from other companies so that they can invest in their assets and rise
their overall value (Fleming & Sarkar, 2014). It helped in magnifying all the returns. Thus, at
time of losses the assets prices also decreases. In case of, Lehman brothers it was leveraged
44 to 1 when asset prices began heading towards south. The prices of property and assets
increased or the interest rate moved up borrowers and customers boomed (Beccar-Varela,
Mariani, Tweneboah & Florescu, 2017). The other reason of the failure was lack of liquidity
that is issue with cash flow. This was faced by Lehman brothers as they lacked in the cash
flow and had easily sold assets (Hurley & Hurley, 2015). The liquidity of Lehman was lost as
other banks tried to save their interest ration by pulling their line of credit. Due to, poor
liquidity all the other businesses and banks denied to trade with Lehman brothers (Peck,
2016). This somewhere impacted on the growth and success ratio of the company. The poor
cash flow decreased the confidence about the company in the market. The other reason of the
failure was the terrorist attack in 2001 that was a boom in the prices of property.
There were number of factors that contributed to the failure of the firm. One of the major
reasons was lack of customers or buyers. The other companies like lynch, Washington
Mutual, and Wachovia was not declared as bankruptcy as they had buyers. Other than that,
the balance sheet that was designed by Lehman brothers was a disaster. The loan was not
sanctioned by the Federal Reserve Bank as they believed that Lehman didn’t have strong
capability to pay back the loan (Gehrig & Haas, 2016). The emergency loan was also mot

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granted as the calculation showcased in their balance sheet was not appropriate. The company
didn’t have any strong political palatability for bailouts. The reason behind the collapse was
subprime boom and the real state bubble. Lehman brothers mortgage the security of many
other firms and the leverage level is up to 20-35 per cent of their equality capital. The other
reason was excessive risk taking strategy that passes away all the investment through
unregulated credit default swaps where the company didn’t have any adequate capital behind
them. Lehman brothers faced subsidiaries all over eh world due to imprints in the global
market. These controversies arrived due to executive pay during the crises and manipulation
in the accounting field.
It can be stated that failure of Lehman brothers was due to weak governance
arrangements (Dosdall & Rom-Jensen, 2017). They were not able to safeguard the risk taken
by the firm and that future resulted in economic crises. The key reason behind this failure is
lack of corporate risk management, board of directors, remuneration scheme and nomination
of committees. Other than these, some of the technical failure in case of Lehman brothers was
misbehaviour between the executive of the firm and the auditing staff. They were unable to
retain the confidence in the market after the scandal (Kim & Song, 2017). The reason behind
this was obligation on the liquidity and losses in survival plan. Thus it can be concluded, that
Lehman brothers failed in the market due to various reason one of the main reason was
failure of corporate governance and most importantly risk management. The poor risk and
asset management also lead to the failure of the company (McNeil, Frey & Embrechts,
2015). In the starting of 21st century, firm borrowed the investment from the mortgage market
and crises became more and situation got worst. The complex structure of Lehman was one
of the causes along with other issues which lead to the bankruptcy of the company. Example,
they have more than 3000 legal entities present but still the management was poor and
ineffective. The company also struggled to gain the position in the commercial real estate

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market (Fernandez & Wigger, 2016). Lehman also faced an issue while designed balance
sheet as they removed approx. 50 billion dollar assets from the sheet for securing their taxes.
The ethical decision that was made by the company was not unique (Toporowski, 2016).
These decisions affected the Lehman’s financial statements. The external audits done fund
out all the manipulation that were done by the company in the balance sheet.
The effect of the external environment on Lehman brothers
The impact of all the political, environmental, social and ecological affected the
Lehman brothers and it caused a global economic depression. The impact of Lehman
Brothers failure also affected the financial market of other countries. All the countries that
were directly linked with the exposures from or to US suffered from the failure. The other
countries and the external environment was affected due to the financial linkage that caused
the trust and loyalty issue among the customers (Geiß, Weber & Quiring, 2016). The other
drawback was trade linkage for development of stock market. It also caused international
imbalance due to the poor flow of cash and liquidity. This decreased the overall net capital
outflow. Due to imbalance in the outflow, countries with higher financial outflow got
affected by the Lehman’s collapse. The credit swap that was done by the firm affected the
insurance and financial status. The swaps affected the brand image as it gave false sense of
security to the purchasers which added debt risk (Longworth, 2016). Apart from that, as they
have borrowed money from various companies and has not returned or paid back on item. It
caused negative image for the company as no one invested back for the firm. Due to,
increase in interest rate the sale of the company got affected the overall sale decreased.
External environment directly influence the performance of an organization. The
external environment helped the firm to identify all the factors and indicators to enhance the
performance. The environment condition of Lehman’s brother had affected relation between

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the stakeholders (Crosina & Pratt, 2018). It also became difficult to run the business in other
countries as it had less economic cash flow that discouraged the customers to spend their
money. The competition in the external market also impacted the status of the firm as they
were other companies who have gained trust among customers. The external environment has
direct impact on the customers and suppliers than impact the cost of the company.
Frameworks to resolve the challenges faced by the firm
The framework that can be used is a service recovery framework that helps in
identifying all the key elements that causes risk to the firm. The elements include measuring
all the outcomes and focusing on the customer satisfaction and retention. This could be done
by maintaining the cash flow in the firm and making the payments method faster and easier
(Wiggins, R., & Metrick, 2015). The other factor of this framework is successfully recovering
from all the failures and credit swap issues. The recovery can be achieved by modifying the
services and activities of the firm.

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This framework works on the motive of recovering from all the barriers and offering
customer satisfaction and loyalty in all the financial services. This framework helps in
bringing back the customers to the business and dealing with all the complaints and problems
(Schiereck, Kiesel & Kolaric, 2016). The motive behind this strategy is to make sure that
customers stay connected and the sale of the company is not affected. This framework works
after taking feedback from the customers and the compensation and frustration could be
resolved. This is used to remove the dissatisfaction by taking proper actions; the actions
could be legal or regarding business or government policies. All the problems are researched
and service problems are identified. The problems are resolved by learning from the past
experience and then setting up the problem by tracking the entire system. It helps in
identifying all the loop holes of the firm so that modification is done (Wiggins & Metrick,
2014). The loopholes are monitored on regular basis so that the entire negative situation is
turned into positive one. It clearly works on three A’s approach, first is acknowledging all the