The global financial crisis was, in part, triggered by the collapse of Lehman Brothers in America. A recent report has examined the reasons for the Lehman’s failure.

What are the lessons (if any) in that report so far as corporate governance is concerned? How does the American situation compare to Australia. Discuss, paying particular regard to the role of ASIC; prudential regulation; and legislative provisions on financial services.

Lehman Brothers Holding Incorporation was a firm which was globally recognised for providing financial services.and filed bankruptcy protection chapter 11(a chapter of bankruptcy codes in America which is avilable for every business –sole proeritery. individual or corporations and is mostly used by corporate entities ) on 15-09-2008 and their aasests valued prebankruptcy were 639,066,000,800. LBHI bankruptcy was the complex situation as ever happened in U.S. history since Drexel Burnham lambert collapsed 18 years before.

According to chapter 11 if the debts of the company exceeds its assets then result of bankruptcy willl be, the creditors of the company be the owners of the new reorganised company otherwise the company who is going in liquidation have protection from litigations as they have got automatic stay until the case they have filed be resolved in bankruptcy court.

Repo 105- LBHI increased the use of this transaction to borrow tens of billions of dollars and didnt disclose this as to lowering it leverage ratio. And they were using these borrowing for paying other debts, in this way they were reducing both assests and liabilties but still showing high leverage. keeping theirshelves safe under repo 105. And repo105 and repo 108 transactions are balance sheet devices to temporarily remove assests from balnace sheet as generally for 7 to 10 days. And LBHI used this transaction to misstate its financial position in late 2007 and 2008. They use repo 105 to refer both 105 and 108 differed only at overcollateralisation rate that was 5% and 8%.

CORPORATE GOVERENCE

There is a major change needed in corporate governance standards that operate at the highest levels of companies. Particularly about the structure and composition of Boards of Directors.

Corporate goverance is a way how corporation is goverened rather than the way business of corporation is managed and is regulated by both legal regulations and self-regulations. Here in this case LBHI directors failed to regulate corporate goverence as the misuse of repo 105 is major cause

Corporate Governance need a reform in regard to uncontrolled risk.

Collapse of lehman brothers raised so many questions on the corporate governance of such kind of companies and analysis of its failure showed a need for change in the regulations of their corporate structure in united states and around the world also.

Uncontrolled risk

Lehman brothers were aware of the risk they are taking as their officers were always making them conscious but they cannt control as there wasn’t any level for taking the risk. by keeping in view this weekness uncontrolled risk is a challenge to refurbish a logical and sound policy which is need of hour to restructure the corporate governance in regard to consider about the risk factor which should be controlled to avoid financial crisis of this kind which had effects of this kind all over the world as the size of the company was too big and it had many subsidiaries in different countries as well.

Another need for reform highlighted is there is need to adapt international financial reporting standards (IFRS) in a quicker and more uniform way .compliance is must to be up to date where there are different things in different jurisdictions .argument arise when national GAAP strongly moves away from IFRS as in lehman’s case subsidiary of Malaysia which had lead a dysfunctional system to follow arbitrage trading .

Standards such as in IFRS compelled managers to deal with question why there is need to develop an accounting policy to cover transactions that havnt any economic benefit like “repo 105” which lehman brothers had used for long time which finally results in their failure.

Short term profit shouldn’t be the target of the companies providing such kind of financial services and there should be well qualified people to work as on senior positions. as in this case CEO held the position of chairman of the board as well and most of the people were old aged which took decisions for the whole company just with the view to earn profit without seeing market situations. More over their clear point was to chase highly risky business strategy regardless of market conditions as during lehman brothers increased their short term property financing and except to resell it at a profit when property market was starting its downward trend in 2007 and 2008.

This shows how the whole power was hold by a man over the entire firm and worst thing was its ineffective, inexpert and ignorant board of directors.

In addition to it their auditor were also found guilt for not conducting ethically as they well know about the situation of the company but because the executives of the gave them instruction not to say anything about the manipulation of the transaction which they have used from years.

Corporate governance affects the reputation of the firm as whole and also of the country in which it originated and as of its worldwide operations affects also the economy as whole. So there is highly need of reform to regain market confidence for better performance by having ethics, productivity, survival in market and growth. increase quality of investments.

In Australia

Role of ASIC

Australian position is consistant with the situation which is in united states as there is no obligation for credit rating agencies under securities act 1933(us), sec 11 and rule 436(g.)

Before 1january 2010 there wasn’t any requirement by asic to companies providing financial services to have consent of credit rating agencies to mention about their credit rating in their disclosure document or product disclosure statement.

After this, the companies should check properly whether the credit rating agency is licensed by AFS or they have retail or wholesale license authorisation to give true statement about a particular company about their credit rating as according to sec 716(2) and 1013k

Australian Asic reviewed their pds requirements after viewing the global financial crisis as the obligation for the disclosures burdens only upon the person who have mentioned the statement in their financial reports. now the change makes the credit rating agencies liable as well to investors if anything unexpected happens inspite of their good credit rating about a particular company.

According to Asic. a credit rating agency who has obtained license from AFS must fulfil certain conditions

Must comply with and give an annual report on compliance to the IOSCO code

Properly disclouse its methods. assumptions and procedures used for credit rating.

Keeping records current as much as possible

Having authority to share information with foreign regulators

Further more ASIC is also having discussions with each rating agency and with industry on European and other international developments and the proposition for their Australian business and licensing.

In relation to rating. the rating should be current and subject to revision or withdrawal at any time. in addition to it isn’t reference to invest for the product.