Lehman Brothers and Risk Management

This report examines the Lehman Brothers collapse and discusses issues of investment bank risk management. The report considers factors which contributed to Lehman's failure, from financial engineering as practiced by CEO Richard Fuld and other executives to lax auditing by Ernst & Young to the influence of an industry characterized by excessive risk-taking. In particular, the report focuses on the presence of inherent conflicts of interest, as well as the existence of multiple instances of moral hazards and principal-agency conflicts.

This report discusses the findings of the Lehman Brothers bankruptcy examiner and considers other analyses as well. A survey of the literature shows the investment banking industry has long been vulnerable to the risk management challenges that led to Lehman Brothers' bankruptcy. Motivated by greed and enabled by lax government regulation and ineffective corporate governance, Lehman gambled heavily on the performance of the subprime mortgage...
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