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Introduction
The investment bank Lehman Brothers filed for bankruptcy in September 2008. Some of its business decisions leading to bankruptcy were in retrospect poor decisions, but not unusual given the investment climate. Many financial entities experienced financial trouble as the housing bubble burst and mortgage-backed securities lost significant value. Lehman's path to bankruptcy nevertheless was paved with an increased appetite for risk in the pursuit of increased revenues. Lehman Brothers' balance sheet grew rapidly beginning in 2006, and included many long-term investments financed through short-term borrowing ([1] Examiner's Report, 2010, Vol. 1, pp. 3-4). These assets included substantial amounts of residential and commercial mortgage-back securities, the same type of securities that precipitated the 2008 financial crisis, and resulted in the Federal Troubled Asset Relief Program.
During 2007, the market for residential mortgage-backed securities began to show signs of trouble. Lehman however continued its aggressive growth expecting to benefit from the countercyclical crisis. During this time, Lehman executives took on more risk, ignoring its own risk models and excluding some assets from their risk analyses. These assets and other investments became increasingly difficult to sell without incurring significant losses ([1] Examiner's Report, 2010, Vol. 3, p. 763). Furthermore, a sale of some of these securities at a loss may have indicated to potential counterparties (i.e. lenders, investors and other contract parties) that the remaining assets were overvalued ([1] Examiner's Report, 2010, Vol. 3, p. 737). This would have precipitated a loss of confidence by counterparties at the very time Lehman needed their confidence to keep its heavily leveraged operations afloat. These counterparties evaluated Lehman by review of its leverage ratios. Therefore, it was in Lehman's interest to have low leverage ratios compared to its competition.
Upon Lehman's bankruptcy filing in the US Bankruptcy Court of the Southern District of New York, the court hired Anton R. Valukas, Examiner, to provide a detailed report on the facts and circumstances surrounding the Lehman Brothers bankruptcy. A significant portion of the examiner's responsibility was to report whether there were "colorable causes of action"[1] (Docket No. 08-13555, p. 3) ([3] Bankr, 2009) that resulted from the actions of corporate officers and Lehman's auditors, Ernst & Young. The final report submitted to the United States Bankruptcy Court consisted of nine...