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ACCT602_International Accounting_2010 Semester Winter_Lecture role of Accounting in financial crisi
International Accounting
The role of accounting in the global financial crisis
What can we learn from the global financial crisis?
Lehman Brothers
Lehman Brothers were the largest underwriters of home mortgages. Lehman Bros borrowed $44 for each $1 it owned – highly leveraged, too aggressive a policy for a firm. Lehman Bros played property market with it’s borrowings – invested heavily into commercial property.
Dick Fold – Lehman Bros CEO had encouraged and pushed staff to chase high risk investments which offered high returns. This was the culture which Dick Fold had encouraged. As a result staff received millions in bonuses.
Questions: How do mortgage securities work?
Banks were borrowing funds at 2-3% and loaning these funds to sub-prime mortgagees (borrowers) at 8%.
Securitisation – the banks re-packaged and re-sold sub-prime loans to each other, i.e. turned mortgage loans into marketable securities. Everybody could now become mortgage holders.
Barclays bank were interested in buying Lehman Bros, but wanted guarantees for Lehman Bros existing debt. But nobody was willing to underwrite the debt and Lehman didn’t offer any liquidity guarantees in order to be rescued by Barclays.
Lehman Bros share price fell from $85.00 to $0.03c per share. Lehman Bros was the biggest bankruptcy in history, 10 times bigger than Enron.
The housing market damaged the financial system, which in turn damaged the economy. The Dow Jones decreased by 500 points. Confidence was destroyed. The banks would not even lend to each other.
The collapse of Lehman Bros brought the global financial system to its knees.
Greed took over. It was the boom before the bust. The fall of Lehman Bros was the tipping point into the financial recession. The trigger was securitised sub- prime mortgages. But if not for that, something else would have triggered it.
What lessons we have?
Financial markets do not work perfectly, but some people believe it’s still the best system we have
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