Lehman – A Case of Strategic Risk

The bankruptcy of Lehman Brothers in 2008 was a critical event in the Global Financial Crisis, exposing serious fault lines in the structure of global financial markets and leading to widespread economic disruption. But how did Lehman, a company of over 150 years’ experience in commodities markets, reach such a precarious position? The underlying reason for the failure goes back to a change in corporate strategy in 2006 in which Lehman decided to shift from a “moving” or securitization business to a “storage” business, with the firm making and holding longer-term, riskier investments. This “strategic positioning” was fully endorsed by the board, although certain senior risk management executives had expressed concerns about the extent of the change to the firm’s “risk appetite.” Using the official report into the firm’s bankruptcy, this paper describes how Lehman overextended itself in its “strategic execution,” failing to put in the place the proper governance structures needed to manage, arguably, the greatest risk to any firm, “strategic risk.” To prevent similar failures in future, there is a demonstrable need for banking regulators, especially of “significantly important” banks, to address such critical deficiencies in corporate governance and strategic risk management.