System Analysis of Lehman Brothers Leading Up to Their Collapse

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Quality and reliability problems are found everywhere. They are found in every process, product and service and their problems are occurring all the time. The goal of any process, product, or service is to increase their reliability and minimize risk. However, the fall of Lehman Brothers was the cause of reliability problems that had a tremendous impact on the global economy when they filed for Chapter 11 bankruptcy on September 15, 2008, making it the largest bankruptcy filing in the United States where Lehman Brothers has incurred a large debt, totaling more than $600 billion dollars. The reason for the collapse for Lehman Brothers was because of the housing market. However, the true issues at Lehman Brothers were within its system, mainly dealing with the decision makers and their method to evaluate risk.
What really toppled this investment bank was the housing market collapse. According to the BBC Documentary “The Fall of Lehman Brothers” , Clinton and Bush Administrations supported home ownership making it easier to obtain mortgages. Especially in the early 2000s, house prices sky rocketed and gave birth to “subprime” mortgages. With these mortgages, interest rates were slashed and the housing market was fueled. These mortgages were known as NINJA mortgages, where the mortgage holders had No Income, Job, or Assets, and these mortgages were given solely relying on house prices. The way Lehman Brothers became involved in the NINJA mortgages was this, as described by Oxford University PhD Candidate Horatio Boedihardjo:
“On a sunny morning in 2001, a piece of investment plan landed on the desk of Dick Fuld, the then Chief Executive of Lehman Brothers. The document, compiled by a team of maths and physics PhDs, included a calcula...

... middle of paper ...

...s so many similarities with all of the past cases at Enron, Worldcom, and Parmalat.” The lowered government regulation during this housing market boom allowed financial firms to be irresponsible.
Having a decision maker such as Fuld, driven by his own ambitions and ego, to lead a company is not healthy. A decision maker needs to be rational and be able to solicit an expert’s opinion if they are unfamiliar with a topic. Also, the decision maker needs to be open to criticism to see the potential blind spots in a decision. Lehman Brothers was a complex system that was a part of a bigger, more complicated system. It is not wise for one person to make the decisions that could potentially have a tremendous impact on a global scale. Lehman Brothers is a great example of a bad decision maker relying on one risk management tool to make their decisions for a complex system.

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