Paper Example on Lehman Brothers: Largest Bankruptcy in US History and Moral Problem of False Business

The moral problem that is presented in the case study of Lehman Brothers is the issue of violation of business ethics by knowingly creating a false business. In an unprecedented move, which significantly impacted on the financial industry, Lehman Brothers filed for chapter 11 bankruptcy protection. It should be noted that this was the largest bankruptcy case in United States history. Lehman Brothers was a key part of the US housing boom. From 2004 to the year 2006, the company had experienced about 56% a surge in revenue from the real estate business alone (Leynse, 2009). According to the records, the entity has recognized profits from 2005 to 2007 with a net income of over $4.2 billion on revenue of about 19.3 billion (Leynse, 2009). Despite the rapidly deteriorating marketing conditions due to the global recession of 2008, the company continued to write mortgage-backed securities as well as touting the financial strength to press and shareholders while it was decrying the notion that the domestic and the global economies were in danger. However, this was not the actual situation at the institution. Through the means of deliberate accounting sleight of hand, concealment, as well as the communication of misleading information until 2008, the company was able to tend to maintain an appearance of the underdog success regarding the investment community (Lubben, 2011). The company mainly disguised the distress through the implementation of a "Repo 105." This was a legal but a shady accounting device that helped to create favorable net leverage as well as liquidity measures as demonstrated in the balance sheet, which would be key for the credit rating agencies as well as consumer confidence (Lubben, 2011). Through the use of Repo 105, the company was able to raise cash through the sale of the assets behind the scenes phantom company Hudson Castle. When the bankruptcy investigation was conducted by the global finance controller of the company, it was revealed that there was no substance regarding the Repo 105 transactions and that their respective teams had concealed the use of the tactic from the rating agencies, investors, and even the board of directors. This sets the ground for the moral bankruptcy financial decisions that impacted the Lehman Brothers.

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In this paper, I will argue and defend that financial institutions should not conceal any accounting information or manipulate it in any way to create a false impression to the potential investors or the public. On this ground, it is possible to hold Lehman Brothers accountable regarding a moral responsibility that they did not fulfill in their financial operations. The morality of the actions by Lehman Brothers can be evaluated using the basis of utilitarianism. Utilitarianism refers to an ethical theory that tends to determine the right from the wrong by focusing on the outcomes, hence depicting a form of consequentialism (Mill, 2007). According to the ethical theory, the most ethical choice is the one that tends to produce the greatest amount of good for the greatest number of people (West, 2004). It should be noted that the collapse and bankruptcy of Lehman Brothers in 2008 did not only affect firm's stakeholders only, but the situation also had an immense impact on the economy of the United States as well as profound impacts of the global economies that launched the US into the Great Recession (Lubben, 2011). Many institutions collapsed, a lot of financial losses were incurred and uncountable jobs lost, just because of a morally unacceptable and unjustifiable action just to please the regulating bodies. According to the utilitarianism theory, a morally justifiable action is the one that maximizes happiness as well as the wellbeing of the majority of the people (West, 2004). This means that this approach can be used to justify some of the business decisions if they have to produce some impacts based on the costs and benefits of accounts. However, it should be noted that the future cannot always be predicted, and there could be uncertainty as stipulated by the ethical theory. As demonstrated by the case of Lehman Brothers, the consequences were detrimental not only in the United States but also globally.

Conclusion

This analysis shows that the use of utilitarianism is more effective in demonstrating the moral obligations and wrongs of Lehman Brothers compared to the deontological ethics that posit that an action is either bad or good according to a clear set of rules. According to the moral philosophy of deontology, a moral obligation can arise from an external or an internal source, including the set of rules that are inherent to the universe that can be contrasted with the professional codes that are applicable in a particular situation (Hooker, 2012). For example, Lehman Brothers would have been needed to file the appropriate information, whether it has a detrimental impact on the organization, the society, the stakeholders, or not. While the ethical theory postulates that people must act on duty, it suggests that the consequences are not important but the motives. This means that the Lehman Brothers would defend some of their actions based on the motives. However, such an analogy is an ethical fallacy considering that the motive can be good, but the consequences are detrimental. In business, like many other aspects of life, the purpose is to improve life. Therefore, utilitarianism is more effective in this case as it demonstrates the purpose of morality as to making life better and creating a large amount of good for the majority in the whole world (Mill, 2007). As such, the theory suggests that the world should reject all moral codes and even systems that are based on customs that do not benefit humanity. The actions by Lehman Brothers defied the morality of good, and the actions could not be justifiable based on their detrimental contribution to humanity in the United States and across the globe that led to the global recession.

References

Hooker, B. (2012). Developing deontology: New essays in ethical theory. Malden, MA: Wiley, Blackwell.

Leynse, J. (2009). "Three Lessons of the Lehman Brothers Collapse." Time.com. Retrieved from: http://www.time.com/business/article/0,8599,1923197,00.htm.

Lubben, S. (2011). "Lehman Brothers Holdings, Inc." New York Times. Retrieved from: http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.htm

Mill, J. S. (2007). Utilitarianism. Mineola, NY: Dover Publications.

West, H. R. (2004). An introduction to Mill's utilitarian ethics. Cambridge, U.K: Cambridge University Press.