Risk Management At Lehman Brothers, 2007-2008

1. Based on your assessment of the elements of the risk management system at Lehman, analyze how the firm managed its risk?

1. Structure from discussion post:

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• The firm addressed risk management by having a division dedicated to risk assessment and evaluation called the Global Risk Management Division (GRM)

• The firm established risk tolerance levels by having a Risk Tolerance Committee

• The firm considered risk management as one of its core competencies. As such, it established groups specializing in the market, credit, liquidity, operational, reputational, and other risks. A Chief Risk Officer (CRO) reported to the Head of Strategic Partnerships

• The organizational structure placed the head of GRM directly under the CEO and established three main branches of risk management that included CRM, Market Risk Management (MRM), and Quantitative Risk Management (QRM) department.

• The key performance indicator (KPI) the firm used for value at risk (VaR) was based on historical data weighed by other current risk factors such as market risk changes. Stress tests and scenario analysis were used for senior management to make on risk appetite usage.

• Lehman established a risk appetite framework. This was a budget set aside annually and updated quarterly. This budget was to capture the amount Lehman was prepared to absorb due to adverse losses due to risks taken. The budget was shared between each division, and the amount was determined by the upper management layers and The Executive Committee.

 

2. Analysis – Chapter 6: Causal Business Model of Book: Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences, 3rd Edition by David Larcker and Brian Tayan

3. Overall structure/plan is good

4. If it is implemented correctly, it should work

5. Used by SEC as a model of what should be done

6. What works/what doesn’t

7. Did they have a tip line/reporting structure for concerns? Independent/anonymous service for whistleblowers?

 

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