Chapter 4

Data Analysis

4.1 The case study analysis of Lehman Brothers

4.1.1. Lehman Brothers - historical background information

Lehman Brothers was founded in 1850 in Montgomery, Alabama, by the brothers

Henry, Emmanuel and Mayer Lehman. The brothers - sons of the lower franconian

cattle merchant Abraham Löw Lehmann - emigrated 1844-1850 from Rimpar near

Würzburg to the USA. Prior to the establishment of Lehman Brothers, in 1844, Henry

Lehman opened a general retail store in Alabama. His brother Emanuel joined the

business in 1848. The business was soon shifted into a cotton trade company. From this,

the banking activity developed(McDonald & Patrick 2010).

After the American Civil War the business was relocated to New York.

1977 Lehman Brothers merged with Kuhn, Loeb & Co. and changed its name

temporarily to Lehman Brothers Kuhn Loeb & Co. In 1984, Lehman Brothers was

bought by American Express and merged with Shearson and in 1988 with E.F. Hutton

&Co. In 1993, American Express sold the well-developed company to the Travelers

Group. The Travelers Group parted from the investment banking, and in 1994 it became

an independent company again under the name Lehman Brothers and went public. In

recent years, until to the insolvency the independent company was able to consolidate

its market position in the competition.

On 15September 2008, the U.S. investment bank Lehman Brothers collapsed - and

triggered a devastating chain reaction(Spiegel Online 2011).

4.1.2. The failed business model of Lehman Brothers

1 2

3

It was the largest bankruptcy case in United States history, but it also came after

repeated assurances from the company’s chief executives that finances were

healthy, liquidity levels were high, and leverage was manageable. Due to the

collapse, consumer confidence shattered during a time of uncertainty, and later on, a

number of questionable moves came to light. This analysis will proceed in two parts:

First, a recapitulation of the series of events leading to Lehman Brothers’ failure, then

the identification of several choices made by its management team and how the results

led to the bank’s final downfall(Lieven 2009).

On 29 January 2008, Lehman Brothers Holdings Inc. presented profits of $4 billion for

the accounting year 2007 which was a record. The business model seemed successful.

1 http://gallery.hd.org/_exhibits/money/_more2008/_more09/bankruptcy-failure-collapse-of-Lehman-

Brothers-US-investment-bank-20080915-worldwide-first-few-days-of-news-headlines-and-images-mainly-from-UK-perspective-10-DHD.jpg http://static.guim.co.uk/sys-images/Guardian/About/General/2012/4/12/1334269125617/Lehman-Brothers--008.jpg 2 http://static.guim.co.uk/sys-images/Guardian/About/General/2012/4/12/1334269125617/Lehman-

Brothers--008.jpg 3 http://static.guim.co.uk/sys-images/Business/Pix/pictures/2010/3/12/1268355047409/Lehman-

Brothers--001.jpg

In January Lehman shares reached a value of 65.73 dollars. The stock market valued the

company $30 billion. About eight months later, on 12 September 2008, the share price

was less than $4. On 15 September Lehman filed for creditor protection. It was recorded

as the largest bankruptcy of U.S. economic history. The business model failed(Zingales

2008).

Many think the beginning of the fall for Lehman Brothers was when Washington

repealed the Glass-Steagall Act(Casserley, Macdonald & Härle 2009). This legislation

from the Great Depression which broke out in 1929, divided the interests of commercial

and investment banks, preventing them from competition among each other and taking

care of their balance sheets by letting these sectors focus on business and

transactions that they can do best. For investment banks, that characteristically meant

to be highly liquid, asset-light portfolios, letting commercial banks to handle capital-

intensive portfolios, such as real estate or corporate finance. In addition, the act

protected the economy from a domino effect in the case of one division’s

breakdown. In 1999, the law was repealed by former US President Bill

Clinton(Crawford 2011). The following opportunities for the market would prove to be

catastrophic for Lehman Brothers, the financial sector, and the worlds' economy.

With the repeal of the Glass-Steagall Act (Crawford 2011), Lehman Brothers became

an important actor in the US housing boom. From 2004 to 2006, the revenues from real

estate businesses increased by 56 percent. The profits increased and the company

achieved a record net income of $4.2 billion on revenues of $19.3 billion. Lehman

Brothers’ stock reached an all-time high of $86.18 per share. Market capitalization

reached almost $60 billion. Anyway, the real estate market started to show signs of a

bubble burst(Quiring et al. 2013).

In March 2007, the economy faced its biggest one-day stock market plunge since the

burst of the Dotcom bubble, and the number of mortgage defaults reached highest

percentage for almost 10 years. Conditions quickly deteriorated, but LehmanBrothers

still traded mortgage-backed securities while the domestic and global economies

were instable. Meanwhile, its operations were out of control. Its $11.9 billion in

tangible equity and $308.5 billion in tangible assets on balance sheets in 2003 yielded a

leverage ratio of 26 to 1. In 2007, its $20 billion in tangible equity and $782 billion in

tangible assets made its leverage ratio exorbitantly increase to 39 to 1. Even when the

collapse occurred most likely, Lehman Brothers didn't react by trimming its portfolio

of high-risk, illiquid assets. Instead of acknowledging this error, executives attempted

more likely to preserve a bright pretense(Mildner 2012).

By means of creative accounting, covering up the real situation, and misleading

information, until 2008 Lehman Brothers claimed that their business operations

were still successful(Der Spiegel 2010). The primary means by which Lehman

Brothers concealed its misery was through the utilization of questionable accounting

tools which helped to create positive net leverage and liquidity measures on the balance

sheet. These are the key figures by which rating agencies among others evaluate a

company and which help to gain confidence of the markets. By using those tools,

Lehman Brothers raised cash by selling assets to a ghost company called Hudson

Castle, which appeared to be independent but indeed was controlled by Lehman

Brothers. In accordance with the accounting tools used, assets were sold to the said

company and repurchased a couple of days later(Südwest Presse 2010). By this method,

the transactions were treated as sales, thus removing the assets from Lehman Brothers’

balance sheet.

Lehman Brothers utilized this technique among other things to transfer a combined

total of $100 billion, changing its leverage ratio from 13.9 to a more desirable 12.1.

In that way, Lehman Brothers reported a positive image of its net leverage, including

a deep liquidity pool. Each of the balance sheet published at the end of the first two

quarters in 2008 were intended to equalize a loss of $2.8 billion from write-downs on

assets, decreased revenues, and losses on hedges (Mildner 2012). Thereby, Lehman

Brothers was able to avoid having to report selling assets at a loss.

Due to investigations after the collapse, Lehman Brothers' global finance controller

added that, “there was no substance to these transactions”(Knapp 2013, p. 31). The

financial executives hid these actions from rating agencies, investors, and other

stakeholder. The only other actor that was aware of these issues was Ernst & Young,

financial auditor of Lehman Brothers, which screwed up to inform all participants

to the manipulation that was going on(DiePresse.com 2012). In September 2008,

Lehman Brothers’ situation came to the top.

A few weeks before, the CFO, began to make correction with the firms’ negative

position. He tried to yield $6 billion in new capital by making a public offer. However,

fiscal quarter financial statements 3/2008 had to be presented, in which Lehman

Brothers released additional losses of $3.9 billion. Its stock price had dropped 94%

since the beginning of 2008 to $3.65 per share. On 13 September, the United States

Treasury announced that Lehman Brothers will not be rescued(Lieven 2009).

Barclays and Bank of America as well as other financial institutions, tried to take over

the instable company, with the goal to strengthen it with fresh money, and save it from

the collapse. None of the banks endorsed this step. On Sept. 15, 2008, the CEO couldn't

deny the disastrous situation anymore and filed for bankruptcy protection(Spiegel

Online 2011).

In the days following the largest bankruptcy since the Great Depression, the market

was shocked. The Dow Jones fell by 504 points when the stock market opened.

Lehman Brothers’ United States capital markets division was taken over by Barclays'

Bank for the price of $1.75 billion. Later, the insurance company AIG had to be rescued

from the collapse forcing the government to react with a rescue operation that cost $182

billion(Quiring et al. 2013). On Sept. 16, the Lehman price per share had collapsed to

less than $1. The collapse of Lehman Brothers was devastating and led to a

confidence crisis in global financial sector. Credit markets came to a

standstill(Steinmann 2013); governments all over the world had to react and try to take

away the fear.

With $613 billion debt, the Lehman collapse was the first bankruptcy of the crisis of

that size - and is until today the largest one in the history of the banking sector.

Lehman followed its high risk strategy until the end and whitewashed the books in

many ways.

Due to several investigations against the bank, a lot of details came up that showed what

the business model really looked like. It was characterized by Sprave (2009)as :-

- No separation of commercial and investment banking

o Since former US President Bill Clinton repealed the Glass-Steagall Act in 1999

- Ignore and hide risks

o Showing profits, hiding losses,

o Leverage ratio (debt burden) exceedingly high, and

o Liquidity other age.

- Benefit from subprime mortgage

o Low interest rates - everyone could afford to pay for a housing loan, and

o No strategy in housing loan business - almost everyone could get a credit for a

house.

- High value approach for houses

- Bad management decisions - but no legal prosecution possible

- High bonuses and management salary - Incentives incorrectly set

The situation of Lehman Brothers before the crisis didn't seem different from other

banks. It was a bank, which had its own business (investment banking), giving housing

loans to customers (commercial banking), lending money from the capital market and

nothing seemed suspicious. Obviously no one had an idea what exactly was happening

within the bank.

Nevertheless, there were several problems the bank had, which occurred after the

collapse.

By September 2008, America had reached the age of the rescue operations, but still

insisted there would be no money to save Lehman Brothers from the collapse. American

authorities told Lehman to solve its problems by itself, for example by raising cash or

selling divisions. There was no plan for a rescue mission. For everyone, that was a quite

unbelievable declaration.

The scenes of employees walking out of the buildings in New York and London with a

box under the arm became a symbol for the financial crisis 2008. Lehman Brothers had

25,000 staff around the world. The world was looking at the symbolic end of the life on

Wall Street as it was known(Steins 2014).

Lehman Brothers had survived repeated financial crises around the turn of the 19th

century and succeeded even in the Great Depression. The bank had over $600bn of

assets and huge, intangible trading relations. All other companies in the financial

sector maintained trade relations to the bank. Almost everyone agreed that

Lehman Brothers was "too big to fail"(Goldstein & Véron 2011).

"It's unconscionable what they did – or more accurately what they didn't do", says

Joseph Stiglitz(Stieglitz 2012), Nobel prize-winning economist. "They didn't do their

homework. People started talking about the failure of Lehman Brothers from the

moment of the failure of Bear Stearns in March, or before, and they didn't do a

thing. If they knew there was systemic risk, why didn't they do anything about

it?"(Foley 2009).

Lehman's fate was sealed in the Wall Street branch of the US Federal Reserve. Almost

exactly 10 years before, Dick Fuld, CEO of Lehman Brothers, had sat in the Fed's

conference room and decided with other CEO's to rescue Long-Term Capital

Management (LTCM). When one of the largest hedge funds waggled and threatened

to collapse, they launched a rescue mission(Swagel 2013).

Like all other Wall Street investment banks, Lehman Brothers had been overwhelmed

by the profits from bundling packages of America's mortgages into securities for

worldwide trading. Lehman established this business quite fast, and ignored the

warnings that the housing market in America became an enormous bubble and

that mortgage brokers gave out loans to people who weren't creditworthy at all

and couldn't repay the loans(Sprave 2009).

Lehman had taken more risks than most of the other financial institutions: to achieve

high profits and gain market share from their competitors, the Bank had to make

large debts. There was less than a dollar in savings for every $30 of debts(Bloss et

al. 2009). Since there were enough assets to balance that circumstance, it would have

been acceptable. Most investors started to doubt the value of the assets Lehman

affirmed to have.

In March 2008, The Treasury had managed the sale of Bear Stearns to JPMorgan,

financed with money from the Fed. The week before Lehman's bankruptcy, The US

Treasury had ordered the compulsory acquisition of Fannie Mae and Freddie Mac

which were two of the largest mortgage finance institutions in the US(The

Economist 2014).

Banks that consciously do high-risk trades should take responsibility for their

actions. If the government would guarantee a bailout for everyone, then what's to

stop the risky game and the exorbitant high bonuses when succeeding (and partly

loosing) in gambling? There is no bailout for Lehman Brothers. This should be the

time to restore moral hazard(Hett & Schmidt 2012).

Lehman was considerably more complex than LTCM many years before. It was

clear that the follow-up of not achieving a deal could be disastrous.

There was an important pattern in the loan crisis. Market panic, investors and clients

withdrew money from the dangerous banks in order to keep their money from

further losses. No one could predict the dimension of a potential chain reaction. Other

banks tried to prevent themselves from the same fate like Lehman. Merrill Lynch

wanted to save itself and was willing to sell the company. Shortly, Merrill was

taken over.

The analysis of the survey questionnaire will provide the information about what

were the causes of the breakdown of the financial system and Lehman Brothers.

4.2 What do you think are the reasons for the breakdown of the financial crisis?

4.2.1. Interdependences on the financial market

The majority thought that interdependences on the financial market were not the reason

for the breakout of the crisis (value=2,38disagree). About 60% slightly disagree,

disagree or strongly disagree and 40% thought that if there were no interdependences,

there wouldn't be a chain reaction like the financial sector faced since 2007.

12%

20%

8%

24%

20%

16%

Interdependences on the financial market

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

1 2 1 4 5 8 2.38

4.2.2. Not meeting the requirements of Digitalization

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

3 4 9 2 2 1 4.05

Many of the traditional banks missed the trend to more digitalization of the business

model. The competition intensity increased because internet banks entered the market

having a very low cost structure and reaching a large target group. That was the reason

why the respondents slightly agree to the hypothesis that ongoing digitalization was one

aspect causing the crisis because the banks customer reduction. 76% thought that this

could be a reason for the breakout. 4.05 slightly agree.

4.2.3. More intensive competition

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

8 7 4 1 1 0 4.95

The answers of the last hypothesis reflected the answer of this question. More intensive

competition was a reason for the crisis because of shrinking profits were due to fewer

customers. 90% thought that more competition caused the crisis. 4.95 agree.

14%

19%

43%

9%

10% 5%

Not meeting the requirements of Digitalization

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

38%

33%

19%

5% 5% 0%

More intensive competition

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.2.4. No contemporary business models in banking sector

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

10 4 3 1 2 1 4.76

If banks did not have a contemporary business model, it meant that the authorities

believed that the direction they moved to decades ago could still be taken because

nothing changed. But that was wrong. Banking business is different nowadays.

Worldwide interdependences, growing online market, more regulation, liberalization

etc. created a new environment. That's why the respondents agreed with the hypothesis

(81%=4.76 agree).

4.2.5. Mixing of commercial & investment banking

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

7 4 4 3 2 1 4.38

So, after the Glass-Steagall-Act was repealed by former US-President Clinton, banks

were allowed to do commercial and investment banking in the same company. Before

that, it had to be separated. Most of the respondents (72%=4.38 slightly agree)

shared the opinion that this was one of the reasons why the crisis broke out. By the

48%

19%

14%

5% 9% 5%

No contemporary business models in banking sector

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

33%

19% 19%

14%

10% 5%

Mixing of commercial & investment banking

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

separation of the segments, the risky business could be treated differently from the

consumer segment.

4.2.6. Too big to fail - problem & too complex processes

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

3 6 4 4 3 1 3.95

Banks, becoming too big to fail, become systemic. This means, if this institution files

for bankruptcy, it will have unpredictable negative consequences for the whole financial

system (see Lehman Brothers). 62% (3.95 slightly agree) of the respondents agreed

with that hypothesis. Still 42% thought this was wrong and believed that complex

processes and too big banks did not lead to a crisis. During this survey, there were a few

banks that might be too big to fail was asked, but they are probably not interested in

giving an answer which would harm themselves.

4.2.7. Management failed in leading the financial institutions responsibly

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

3 4 2 3 5 4 3.29

14%

29%

19%

19%

14%

5%

Too big to fail - problem & too complex processes

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

14%

19%

10%

14% 24%

19%

Management failed in leading the financial institutions responsibly

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Indeed, most of the respondents (57%=3.29 slightly agree) did not agree to the

hypothesis that management failed in leading their company. Still, 43% agreed and

thought that management should have managed the firm more responsibly. Anyway,

most of the respondents wouldn't admit that management failed.

4.2.8. Lack of public regulation and supervision

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

6 8 3 2 1 1 4.62

More than 90% of the respondents agree (4.62 agree) with the hypothesis that

inadequate regulation and supervision caused the breakout of the crisis. This might be

one of the main problems in the evolution of the crisis. If there had been more public

attention, the crisis could probably have been prevented.

4.2.9. Collapse of Lehman Brothers

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

3 5 4 3 4 2 3.71

The collapse of Lehman Brothers and the fact that the financial sector is a highly cross-

linked system leads to the assumption that this event caused the chain reaction. Indeed,

the respondents tended to agree (3.71 slightly agree) but they were still at strife.

29%

38%

14%

9% 5% 5%

Lack of public regulation and supervision

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

14%

24%

19% 14%

19%

10%

Collapse of Lehman Brothers

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Many acted to the assumption that the US authorities would probably have rescued the

bank if they knew about the consequences.

4.2.10. Ignoring the systemic relevance of Lehman Brothers by US authorities

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

8 5 3 2 1 2 4.52

This hypothesis ties in with the last question if the collapse of LB was the reason for the

financial crisis. Here the answers were quite clearer. Most agreed (81%=4.71 agree)

with it and thought that if the authorities wouldn't have ignored the systemic relevance

and had decided to rescue the bank, the system wouldn't have collapsed. From the

statements of the US-authorities, it can be deducted that many people didn't even know

about the systemic relevance of LB.

4.2.11. Collapse of the real estate market in the USA

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

9 5 4 2 1 0 4.90

The researcher wondered if the collapse of the real estate market was the reason for the

breakout of the crisis. The results show that most respondents agreed. Of course, the

circumstances are more complex than one could imagine from the question. But

38%

24%

14%

9%

5%

10%

Ignoring the systemic relevance of Lehman Brothers by US authorities

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

43%

24%

19%

9% 5% 0%

Collapse of the real estate market in the USA

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

generally it has to do with this issue. The housing bubble (and the securitization of

housing loans) was the initial reason for crisis. 86% (4.90 agree) shared this opinion.

4.2.12. Poor risk management in financial institutions

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

3 4 4 3 2 5 3.43

Essential for a financial institute is the risk management. Bank soften trade highly risky

products. This can generally lead to problems if there is no adequate division which is

continuously controlling the business. The respondents slightly disagree (the average

answer has the value of 3.43) with this hypothesis. Background is that most banks do

have a risk division. The problem is if risky positions become apparent, in some cases

management tries to hide them.

4.2.13. Low interest rates policy of the central banks

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

2 4 2 2 5 6 2.95

There is a question whether the low interest rate policy of the central banks would lead

to a financial crisis. The purpose of this policy is to stimulate the real economy. If the

rates are low, many people want to borrow and consume (e. g. buying houses in the

14%

19%

19% 14% 10%

24%

Poor risk management in financial institutions

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

9%

19%

9%

10%

24%

29%

Low interest rates policy of the central banks

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

US). Banks therefore lent money from the central banks and more people were able to

afford a loan because it was cheap. More consumers stanted to have higher demand as it

was the goal of a low interest rate policy, leading to high prices. When banks lent

money for real estate, they needed to collateralize it, at the higher value than the value

of a house. When the lender could not later afford to pay back the loan, a shortfall

occurred and the bank made a loss.

Indeed, the low rate policy promotes crises, but most respondents disagreed with this

hypothesis (63%; average 2.95 - slightly disagree). It is not the fact that rates were low

that led to a crisis, but the fact that a business policy was established in response to a

low interest rate policy.

4.2.14. Excessive management salaries & bonuses & moral hazard (incentive) problem

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

2 4 6 5 3 1 3.71

The problem is that the respondents were directly affected and would not like the

reduction in their salary and bonus. But, the answers were quite surprising. The average

answer was 3.71 (slightly agree) which means that the excessive compensation was seen

as a problem. In the investment division of a bank, profit was needed to generate a

bonus. If the bonus was endangered, the moral behavior of a banker would be shrinking

to a minimum level and he would sell even the most dubious product.

9%

19%

29% 24%

14% 5%

Excessive management salaries & bonuses & moral hazard (incentive) problem

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.2.15. Shortsighted focus on profits

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

3 3 2 2 5 6 3.00

This question ties in with the previous question. The last question focused on the

individual banker and the salaries and bonuses. This question has an overall view on the

whole bank. A healthy bank has to be presented to the shareholder, otherwise they

might lose their liquidity when they start to pull out their money. In many banks, due to

the profit expectations of the shareholder, there is a lack in sustainable banking. This is

the theory so far. In practice, the researcher asked banks and 21 answers were given.

The average of all answer (3.00 - slightly disagree) show that they did not agree with

this hypothesis.

4.2.16. Lack in transparency of business models of financial institutions

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

5 6 1 2 4 3 3.86

Banks these days are quite complex. The more complex, the more they becomes intrans

parent, not only for external but also for internal actors. If a system is not transparent

and hard to understand people need to make decisions under absolute uncertainty. The

14%

14%

9%

10%

24%

29%

Shortsighted focus on profits

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

24%

29%

5% 9%

19%

14%

Lack in transparency of business models of financial institutions

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

consequences can be that the banks act under wrong parameters which are taken as a

basis.

Within the respondents, there were managers or employees who perfectly understood

their business, and because of this they did not agree with this hypothesis. The average

of the respondents slightly agreed (58%; average value 3.86).

4.2.17. Moral hazard --> getting big enough to become too big to fail

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

6 6 1 2 3 3 4.05

There is a big moral hazard problem. Banks which are too big to fail, which means they

are too important for the economic stability to fail, need to be rescued. Not only the

public authorities, but also the private financial sector knows that, if the company

becomes too big and systemic, the government will not let it file for bankruptcy. The

financial institutions therefor feel safe when they reach a critical size, which can be

achieved by taking more and more risks and debts. When a bank is too big to fail, it can

put pressure on the government to rescue it. If the US-authorities had known (or

thought) about the drastic consequences before, Lehman Brother would probably had

been rescued. 63% tended to agree to this hypothesis (value 4.05 - slightly agree).

4.2.18. Poor evaluation of products & company by rating agencies

29%

29%

5% 9%

14%

14%

Too-Big-to-fail - Moral hazard Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

33%

29%

19%

9% 5% 5%

Poor evaluation of products & company by rating agencies

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

7 6 4 2 1 1 4.62

With this question, the researcher brought in a new actor of the crisis. The rating

agencies were criticized a lot by giving good ratings to products of Lehman Brothers,

and in some cases, downgrading countries creditworthiness in critical situations that led

to the consequence that the country had to pay very high interest rates for the issue of its

bonds. That led to the next level of the crisis. The economic crisis became a liquidity

crisis that almost forced countries like Greece to file for bankruptcy. Before the crisis,

rating agencies gave excellent ratings for products of Lehman Brothers or others which

allowed other institutions officially to trade these products 81% tended to agree with

this hypothesis (4.62 - agree).

4.2.19. Overvaluation of loan securities

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

10 5 2 3 1 0 4.95

As mentioned in the question before, the rating agencies evaluated many products better

than they actually were. It is even regulated by the public authorities that a product is

only allowed to be traded when "the Big Three" rating agencies have approved the

fungibility. Obviously, many well rated products figured out to be highly over evaluated

and 81% of the respondents agree with that (value 4.95 - agree).

48%

24%

9%

14%

5% 0%

Overvaluation of loan securities

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.2.20. Shrinking profits of banks

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

6 4 3 2 4 2 4.00

Indeed, the profits of banks were and still are shrinking. There were different reasons

for that: low interest rates (low margin), more competition (cheaper online competitors),

and higher costs. Still banks generated profits. Another problem is that the equity capital

was too low to compensate for the losses of the collapsing institutions. The lower the

profit, the lower the equity capital that can be accumulated. Most respondents tended to

agree (62%; value 4.00 - slightly agree).

4.2.21. Instable banking sector

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

6 5 4 4 2 0 4.43

The banking sector is very instable. One significant event (collapse of LB) caused a

dramatic chain reaction, which led to a worldwide financial and economic crisis. The

banking sector was already overheating for a while, not least because they are under

29%

19% 14%

9%

19%

10%

Shrinking profits of banks

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

24% 19%

19%

9%

0%

Instable banking sector

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

pressure due to the reasons mentioned in the question before. 72% tended to agree to

this hypothesis (value 4.43 - slightly agree).

4.2.22. Inadequate instruments for banks to rescue each other

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

0 4 4 4 5 4 2.95

This question is targeting the issue of "banking union". This is being discussed in the

EU very intensively, especially during the crisis when the tax payer had to rescue

collapsing banks. There is for example a system within the national savings banks in

countries like Germany. About 425 savings banks are part of a liability system which

saves a member from the collapse. First the regional association has to jump in; the next

instance is the German federal association of the savings banks. This makes the

customer feel save and it does not force the government to support for the banks. 62%

tended to disagree to the hypothesis that there is no adequate instrument. Maybe the

question was misunderstanding because in Germany there are several systems in the

financial sector for banks to save each other. Indeed, in the German banking sector, it is

a dubious plan to implement a European Banking Union. Only 38% tended to agree

(value 2.95 - slightly disagree).

0%

19%

19%

19%

24%

19%

No adequate instruments for banks to rescue each other

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.2.23. The crisis would have been avoided if Lehman Brothers had been rescued

Strongly

agree

agree Slightly

agree

Slightly

disagree

disagree Strongly

disagree

5 4 2 3 2 5 3.62

As mentioned in some questions above, the hypothesis is that the crisis became that

disastrous when Lehman Brother filed for bankruptcy. Although, this was not the sole

reason for all the problems that occurred after that but ,because of this event, the chain

reaction started. The market was shocked and immediately many other financial

institutions started to struggle. Not only banks from all over the world invested in

products of Lehman Brothers and thereby into the US real estate market, but also

countries and private investors. LB was one of the largest investment banks in the world

and, so it was not only systemic for the US financial sector, but for the global financial

market. Thus, the question is, if the authorities would have decided to save the bank,

whether the world would be able to uncovered the deficiencies and fix the problems

without sliding into the most dramatic crisis since the Great Depression. 52% of the

respondents tended to agree. The value is 3.62, which means that the weighting shows

that they basically slightly agreed.

4.3. The reasons for the bankruptcy of Lehman Brothers

4.3.1.No adequate regulation & supervision

24%

19% 9% 14% 10%

24%

The crisis would have been avoided if Lehman Brothers had been rescued

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

19% 14%

5%

9%

24%

No adequate regulation & supervision

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 4 3 1 2 5 3.81

There is a call for more regulation and supervision to minimize the risks. The business

model should be transparent and the trade in financial products must be regulated. In the

newspapers during the last few years, it is often written about the failure of the federal

authorities. The mandate for supervision especially had to be fulfilled by the central

bank and the federal financial supervisory agency. There was a lack in regulation and

supervision which led to the failure of LB 62% tended to agree, the weighted value is

3.18 (slightly agree)

4.3.2. Low equity capital

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

11 4 2 1 3 0 4.90

It was definitely clear, that Lehman Brothers did not have enough equity capital to bear

the huge debt burden. The losses during the burst of the housing bubble could not be

compensated. 81% tended to agree to this hypothesis (value 4.90 - agree).

4.3.3. Accounting fraud

52% 19%

10%

5%

14% 0%

Low equity capital

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

19%

29% 9%

5%

19%

19%

Accounting fraud

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

4 6 2 1 4 4 3.67

Almost until the last day of the collapse, the CEO and CFO claimed that Lehman

Brothers was in a good condition. Nobody could in fact saw that the bank could not

really bear the debt burden and not able to survive. They issued even more asset backed

securities hoping that this might finally save the business. Then there was an affiliate

company in which the toxic papers were transferred to make cash for the company.

Loses were then eliminated through legal and also illegal creative accounting. 57%

tended to agree. The value is 3.67 (slightly agree).

4.3.4. Bad management decisions

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

10 4 3 3 1 0 4.90

The management made bad decision when deciding to hide the disastrous condition of

Lehman Brothers (see last question). The risk policy of the bank was bad as well. The

regulations within the bank and the terms and conditions of the loan process were

excessively lax. 91% thought that the management was a main factor for the collapse of

the bank (value 4.90 - agree).

48%

19%

14%

14% 5% 0%

Bad management decisions

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.3.5. Management preserved a bright pretense to hide the actual condition

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

12 7 1 1 0 0 5.43

As mentioned before, the management tried to hide the actual condition vehemently.

They preserved a bright pretense, so that the business partners still trusted the bank and

continued trading. Almost all respondents agreed to that (95% agree; value 5.43 -

agree).

4.3.6. Poor risk management of the bank

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

7 8 2 2 2 0 4.76

In a retrospective view, the risk management of the bank miserably failed. Risks were

taken without even analyzing any possible consequences. There were risks in the US

real estate sector which became apparent already long time before the subprime crisis.

Loans were given out to people who could not even afford to pay the redemption. Even,

knowing about the bad loans, Lehman Brothers still continued selling them in CDO’s.

57% 33%

5% 5% 0% 0%

Management preserved a bright pretence to hide the actual condition

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

33%

38%

9%

10% 10% 0%

Poor risk management of the bank

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Most of the respondents agreed to the hypothesis (80%; Value 4.76 - agree - Most of the

banks asked by the researcher in some ways had a business relationship with LB).

4.3.7. Ethically and morally reprehensible salary and bonus policy

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

3 2 2 4 4 6 2.95

When trading successfully with business partners, the banker achieves a bonus. The

management earned a very high salary plus a huge bonus and various other benefits.

This policy of "higher and more" led to the fact, that the bankers were interested only in

making a deal in a business transaction. If the trade was risky, it was presented as a high

profit product and the risks were minimized. But even if they didn't assess the risks, the

rating agencies certified the products at the best grade. The morally and ethically

excessive compensation policy resulted in a lower moral and ethical behavior in a bank.

More deals led to more money rewards. The majority did not agree to this hypothesis, as

the respondents benefited from their own salary compensation. The average value

answer is 2.95 (slightly disagree).

4.3.8. Lack in transparency of the bank business model

14% 9%

10%

19% 19%

29%

Ethically and morally reprehensible salary and bonus policy

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

19% 24%

9% 19%

0% Lack in transparency of the bank business model

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 4 5 2 4 0 4.29

The problem came from the fact that the banks became too big and too complex.

Another problem that comes along with it is the lack in transparency. The more

complex the process, business model and structures, the harder it is to have an overview

and to coordinate every process and every employee. Indeed, the different segments

start to act independent from each other. This unclear structure results into an

uncoordinatable business model what causes an in transparent profit/earnings situation.

72% agreed to this hypothesis. The others might probably have a very big bank and can

successfully lead it and that's why they disagreed. The average weighted value still is

4.29 (slightly agree).

4.3.9. Participation in commercial banking as an investment bank

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

5 4 1 3 4 4 3.57

Lehman Brothers used to be a pure investment bank for decades. Soon the bank

management realized that the profits in commercial banking were quite high. They

therefore started to diversify. LB became one of the biggest players in real estate sector.

But still LB was basically specialized in investment banking. Profit driven, the banker

gave out loans to almost everyone who applied for a credit to buy a house. The bank

had a lack in competency and the wrong incentives were given. The risks were therefore

completely suppressed. The value approach for evaluating the houses was absolutely

disproportionate and a check for credit-worthiness almost did not exist. The respondents

on average slightly agreed (3.57). 48% tended to agree.

24%

19%

5%

14%

19%

19%

Participation in commercial banking as an investment bank

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.3.10. Debt burden became too big (exorbitant high leverage ratio)

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

12 5 4 0 0 0 5.38

The fact that Lehman Brothers was hopelessly overleveraged was for sure. At the end,

the debt burden caused the failure. If the equity capital level was high enough and the

leverage ratio at a healthy level, the bank probably could have survived. 100% of the

respondents tended to agree (value 5.38).

4.3.11. Rating agencies made "wrong" ratings --> sugarcoating securitized mortgages

so the bank could continue trading high risk CDO's

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 4 3 1 5 2 3.95

Within the financial system, there are institutions and the rating agencies, that have been

established to assess certain products or companies, to evaluate the risks. In the history

of the financial system, there are three main agencies which could assert themselves in

the world. The "Big Three" (Moody's, Standard &Poor’s and Fitch) have an enormous

influence on the market. When the rating was Triple A, the product or company was

declared highly reliable and profitable. In the case of LB they obviously gave the wrong

ratings. Until the downfall of LB, the ratings were good, so the client companies

continued to do business with LB. Indeed, the rating agency market was an oligopoly so

57% 24%

19%

0%

0%

0%

Debt burden became too big (exorbitant high leverage ratio)

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

19% 14%

5%

24%

9%

Rating agencies made "wrong" ratings --> sugarcoating securitized mortgages so the bank could continue trading high risk CDO's

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

the rating of the “Big Three” was very powerful. 62% agreed with the hypothesis (the

value is 3.95 - slightly agree).

4.3.12. Too complex and abstruse products

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

5 3 2 1 4 6 3.33

In many cases the products, which were traded by Lehman Brothers, were extremely

complex and abstract. Many brokers even did not understand what exactly they were

selling or buying. There were bundles of papers (in the case of LB - housing loans)

securitized and sold. The rating agencies sealed these "CDO's" with an "AAA" and the

banks started to trade. 53% disagreed with the hypothesis that the products were too

complex. The average answer is 3.33 - slightly disagree. Probably most of the

respondents knew the products which were claimed to be a reasons for the collapse.

4.3.13. Conflict of interest of rating agencies (consulting & rating at the same time)

24%

14%

9%

5%

19%

29%

Too complex and abstruse products

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

14%

33% 19%

5%

24%

5%

Conflict of interest of rating agencies (consulting & rating at the same time)

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

3 7 4 1 5 1 3.95

Ernst & Young, a top accounting firm, was engaged as consultants and as an auditor at

the same time for Lehman Brothers. The Chief Prosecutor of New York indicted E&Y

for detaining facts about the actual situation of LB4. One reason for that misbehavior

may be that LB was one of the biggest clients of E&Y. The rating agencies say that they

trusted in the report of the auditor. But the problem with the rating agencies is that the

rating is ordered and paid for by the company that has to be rated. This has a lot of

potential for tortious interference. 66% believed in the possibility of an influenced

rating (3.95 - slightly agree).

4.3.14. No reaction to the trend to more digitalization

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

0 4 2 3 7 5 2.67

It is advocated that the digital trend within the financial sector and the fact that banks

did not react adequately to this was one reason for the collapse of Lehman Brothers. The

rising online market in fact increased the competition but it did not lead to the

breakdown. 71% of the respondents shared this opinion and tended to disagree (2.67 -

slightly disagree).

4.3.15. Trade with "dubious" financial products

4 http://www.focus.de/finanzen/news/banken-anklage-gegen-ernst-und-young-wegen-lehman-

pleite_aid_584182.html

0%

19%

10%

14% 33%

24%

No reaction to the trend to more digitalization

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

19% 14%

5%

19%

14%

Trade with "dubious" financial products

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 4 3 1 4 3 3.90

Trading in the complex and abstruse products is comparable to gambling and deemed

morally and ethically reprehensible. Lehman Brothers securitized toxic papers and

traded them, and they knew about it. Most of the respondents tended to agree (62%,

3.90 - slightly agree).

4.3.16. Repealing Glass-Steagall Act by Pres. Bill Clinton 1999

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

7 3 1 2 3 5 3.71

The Glass-Steagall Act was the law that separated commercial and investment banking

since 1933. The repeal of the Act in 1999 made it possible for Lehman Brothers,

basically an investment bank, to start participating in financing the private real estate

market. It was a fast growing segment and LB soon became one of the biggest actors in

real estate sector in the USA. At the end, this law was one main aspect in the history in

the chain of causation for the LB-failure when the housing market collapsed. 52% of the

respondents tended to agree and still 48% tended to disagree.

4.3.17. High risk - maximum profit strategy

33%

14%

5%

10%

14%

24%

Repealing Glass-Steagall Act

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

29%

19% 14%

9%

10%

19%

High risk - maximum profit strategy

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 4 3 2 2 4 3.90

A traditional bank usually exists to generate profits. But, at Lehman Brothers, the

running of business became quite excessive. The goal was growing more and more and

making more and more profits. But for Lehman Brothers, growth and the profits were

reached by borrowing money from the market. But when the market learnt of the

problems of Lehman Brothers, it stoped lending money. And this business model of

high risk for maximum profit collapsed at this point. 62% tended to agree that this

strategy led to the breakdown while the others thought that this strategy was

appropriate. The average of all answers is 3.90 - slightly agree.

4.3.18. Inflationary contracting of mortgage loans even to customers who couldn't afford to

repay

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

9 7 4 1 0 0 5.14

As mentioned, after repealing the Glass-Steagall Act, Lehman Brothers entered the

commercial market and became an important player in financing the real estate market.

But this fast growing business was blown up with a huge debt mountain. The problem

was the risk policy in this segment, as the credit check almost did not exist. That was

why almost everyone got a housing loan, and the real estate market was overheated. The

risk management completely failed. At the end, LB had its books full of bad loans

which could not be paid back. 95% tended to agree, that Lehman Brothers' loan policy

was one main factor for its bankruptcy (5.14 - agree).

43%

33%

19%

5% 0%

0%

Inflationary contracting of mortgage loans even to customers who couldn't afford to repay

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.3.19. Too high value approaches for houses

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

8 7 4 1 1 0 4.95

The first misbehavior mentioned in the question above was the inflationary contracting

of housing loans. Another problem is the inappropriate high valuation (hypothecary

value) for the houses. The higher the value, the higher is the loan the banker can grant to

the customer. That should be regulated in the risk policy of a bank and should be

controlled by the internal auditing department and by the public institutions for

supervision and regulation. But obviously it did not happen. In case of a credit default,

the loan was not secured sufficiently and the bank had to book a loss. 90% tended to

agree which is an average of 4.95 (agree).

4.3.20. Housing bubble and ignorance to signs of an occurring bubble

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 3 4 3 2 3 3.95

As mentioned, the real estate market was highly overheated. Not least because of the

low interest and the lack of alternative possibilities of investment due to low capital

investment interest rates. It therefore seemed to make sense for customers to buy a

house. The prices of houses increased due to higher demand and that led to prices which

were higher than the factual value. Due to high loans in the housing sector and the low

38%

33%

19%

5% 5% 0%

Too high value approaches for houses

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

14% 19%

14%

10% 14%

Housing bubble and ignorance to signs for an occurring bubble

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

recoverability, the real estate market became a high risk sector and a housing bubble

developed. At the end, the bubble burst and it came out that the money invested will not

be paid back. Normally, if investors and private households put their money into the

housing sector and the prices seem to be much higher than the real value, a bank should

react by implementing a more restrictive loan policy. But instead, Lehman Brothers

ignored the first signs (like many others as well) and continued with their strategy. 62%

tended to agree to this hypothesis. This is an average of 3.95 (slightly agree).

4.3.21. Public authorities refusing to rescue Lehman Brothers to restore moral hazard

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

8 4 2 2 3 2 4.29

Critics of the case of Lehman Brothers blamed the government authorities for letting the

bank go bankrupt. The reason for the authorities was that, to rescue LB, was to restore

moral hazard and ignore the widespread consequences. On the other hand, the

authorities could not even imagine that the collapse would be so dramatic. Indeed, 66%

of the respondents thought this hypothesis was true and this act should only send out a

message to the other financial institutions to know that they would not be saved in any

case. This is an average of answers of 4.29 (slightly agree).

4.3.22. Lehman Brothers would have been rescued, if the authorities would have known

about the disastrous consequences for the global financial sector & the would economy

38%

19% 9% 10%

14%

10%

Public authorities refused to rescue Lehman Brothers to restore moral hazard

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

8 3 4 2 3 1 4.38

This question is linked to the previous one, whether LB would have been rescued had

the authorities foreseen the consequences for the world financial sector and the global

economy.71% tended to agree to this hypothesis, this is 4.38 - slightly agree. The crisis

which broke out with full force after the LB collapse cost billions of dollars. It might

probably have been cheaper to rescue LB and start stabilizing the financial sector and

the world economy. And that is why it can be assumed that, the bank would have been

saved, if it was known of the consequence.

4.4. Possibility that the crisis could have been prevented

4.4.1. Not letting Lehman Brothers go bankrupt

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

8 3 4 1 3 2 4.29

The picture of this question reflects the result of the previous question, whether the

crisis could have been avoided if LB had been rescued. 71% tended to agree. 4.29 in

average - slightly agree.

4.4.2. Limitation of the size of a bank to avoid systemic risks

38%

14% 19%

10% 14%

5%

Lehman Brothers would have been rescued, if the authorities would have known about the consequences

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

38%

14% 19%

5% 14%

10%

Not letting Lehman Brothers go bankrupt

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

7 5 1 2 3 3 4.10

The keyword is "too big to fail". The question is whether the financial crisis could be

avoided, when the size of a bank is limited, so that the institution does not have the size

to become systemic. If a bank of a small size faces bankruptcy and not rescued, it will

not have dramatic consequences like the case Lehman Brothers. 62% of the respondents

shared this opinion. But, a limitation will have the consequence to the present banks.

That is was why 38% still did not share this opinion. And some of the banks asked are

already systemic. The average is 4.10 - slightly agree.

4.4.3. Need for higher equity capital quota + capital surplus

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

5 7 2 1 2 4 4.00

The biggest problem in the case of Lehman Brothers was that there was almost no

capital equity which could have been adequate for the bank to pay at least a part of the

debt burden. This debt overload and the fact that LB was not able to borrow any money

at the market led to the collapse. 66% tended to agree (4.00 - slightly agree).

33%

24%

5% 10%

14% 14%

Limitation of the size of a bank to avoid systemic risks

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

24%

33%

9%

5%

10%

19%

Need for higher equity capital quota + capital surplus

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.4.4. More transparency on assessment criteria of rating agencies

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 3 2 1 6 3 3.67

The rating agencies played a big role within the crisis. Critics blamed them for

evaluating products and companies with best grades although they were highly risky

and about to collapse. This is why temporarily many politics and critics claim for more

transparency in the rating processes. 52% tended to agree. Still 48% tended to disagree.

The problem with transparent criteria is that the main goal of an agency is to evaluate

the companies and products without letting them know what exactly is relevant. If it

would be transparent, the evaluated object (but only these objects) can be prepared to

exactly fulfill the relevant goals. The average answer is 3.67 - slightly agree.

4.4.5. Supervision of rating agencies

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

9 3 3 1 3 2 4.38

An alternative to the demand for more transparency is to put the rating agency under

supervision of an independent institution. The respondents answered more clearly with

4.38 - slightly agree. Having a given standard can make the ratings more reliable for the

public.

29%

14% 9%

5%

29%

14%

More transparency on assessment criteria of rating agencies

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

43%

14% 14%

5%

14% 10%

Supervision of rating agencies

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.4.6. Creating a European rating agency to balance the power of the Big Three from the

USA

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

8 3 2 1 3 4 4.00

Another idea is to create a new European rating agency to break the power of "The Big

Three". The reason is that they seem to do one-sided ratings for the advantage of the

US-economic area and against the European economy. While countries like Portugal,

Ireland, Spain and especially Greece slid into an economic and financial crisis, the

rating agencies harassed the markets by downgrading them. To the European politics

and economists, it seemed suspicious that the ratings came up when the countries

already struggled, resulting in higher interest rates for them to borrow money from the

markets and made the situation more dramatic. 62% (4.00 - slightly agree) tended to

agree to the hypothesis that a crisis could be avoided by having a new European rating

agency to balance the power of the US agencies.

4.4.7. Implementation of a regulated and sustainable payment system

38%

14%

10%

5%

14%

19%

Creating a European rating agency to balance the power of the Big Three from the USA

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

0% 5% 10%

14%

33%

38%

Implementation of a regulated and sustainable payment system

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

0 1 2 3 7 8 2.10

For the question whether the implementation of a regulated and sustainable

compensation system could avoid crises in the future, 85% tended to disagree (2.10 -

disagree). The respondents thought it was not the compensation system itself that

caused crises.

4.4.8. Creating a legal framework to allow an orderly restructuring of financial

institutions

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

5 8 0 3 2 3 4.10

This topic was discussed in the European politics intensively. Many claimed for a

framework that allowed the orderly restructuring of financial institutions in case of

systemic relevance. The problem was that there were many banks that were "too big to

fail", and for this reason they were systemic. In case of bankruptcy, it would have not

been foreseeable consequences for the economy of a country. 62% tended to agree that

it might help to prevent economic crises that the world had faced since 2007. At least,

this is necessary to have a framework which could act as a contingency plan. The

average answer is 4.10 - slightly agree.

4.4.9. Implementation of a maximum leverage ratio

24%

38%

0%

14%

10% 14%

Creating a legal framework to allow a orderly restructuring of financial institutions

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

29%

24% 14%

19%

9% 5%

Implementation of a maximum leverage ratio

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 5 3 4 2 1 4.29

Setting a maximum leverage ratio will help to minimize risks in financial institutions.

The lower it is, the better a bank can react when sliding into a crisis. In the case of

Lehman Brothers, there was no equity capital at all and the leverage ratio was too high

to pay the debts. And by implementing a maximum leverage ratio the financial sector

would be more stabilized. 67% of the respondents thought that a crisis could be avoided

significantly when implementing a maximum leverage ratio (4.29 – slightly agree).

4.4.10. Limitation and regulation of trades with CDO's and other high risk products

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

0 2 2 3 9 5 2.38

Another idea is to limit and regulate the trade with high risk products like CDO’s. The

problem of the present crisis is that securities were traded which were highly toxic,

implying that they were bad loans. The securities traded by LB were bundled housing

loans. The housing loans were highly risky, because on the US real estate market, a

bubble arose which made many of the loans fail, making the CDO’s more or less

worthless. In addition, LB had many houses in its books which did not have the value

that was evaluated by the bankers. 81% tended to disagree to the plans to limit and

regulate the trade with high risk products (2.38 – disagree).

0% 9% 10%

14%

43%

24%

Limitation and regulation of trades with CDO's and other high risk products

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.4.11. Fair value evaluation / adequate assessment for loans

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

6 5 3 2 3 2 4.14

The experiences from the collapse of Lehman Brothers show that there is a need for a

fair value evaluation. Indeed, the valuation approaches were not adequate, making the

bank book having assets that were lower in actual value. To have a standardized

assessment approach for real estate and other objects to finance may be the solution.

The idea was shared by 67% which is an average value of the answers of 4.14 – slightly

agree.

4.4.12. Reimplementation of the separated banking system model (Glass-Steagall Act)

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

5 3 3 2 4 4 3.57

The question is whether the implementation of the Glass-Steagall Act could avoid the

crisis. This act would separate the commercial from the investment banking segment

and makes it possible to liquidate one segment without affecting the other. The

respondents were quite indifferent about this idea, so 52% tended to agree which is a

slim majority (average answer 3.57 – slightly agree).

29%

24% 14%

9%

14%

10%

Fair value evaluation / adequate assessment for loans

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

24%

14%

14%

10%

19%

19%

(re-)implementation of the separated banking system model (Glass-Steagall Act)

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree

4.4.13. Banking union to shift the responsibility and the risks to the banks and away

from the public.

Strongly

agree

agree Slightly

agree

Slightly

disagree

Disagree Strongly

disagree

1 1 2 4 7 6 2.43

This topic was discussed by the authorities of the European Union since the breakout of

the crisis, to let the banks form a union and implement a fund to create a mechanism

that will be activated when a European bank faces bankruptcy. By this act, the

responsibility will be shifted from the governments to the origin. This idea does not

really find supporters within the financial sector because of the fact that, for example, a

bank in Germany cannot supervise a bank in France and vice versa. 81% tended to

disagree (2.43 – disagree). Meanwhile, parts of this law have been passed.

5% 5% 9%

19%

33%

29%

Banking union to shift the responsibility and the risks to the banks and away from the public.

Strongly agree

agree

Slightly agree

Slightly disagree

disagree

Strongly disagree