Chapter 5 Merchandising Operations Study Objectives Identify The: Fill & Download for Free

History(1850–1969) - In 1844, 23-year-old Henry Lehman, the son of a Jewish cattle merchant, immigrated to the United States from Rimpar, Bavaria.He settled in Montgomery, Alabama, where he opened a dry-goods store, "H. Lehman". In 1847, following the arrival of his brother Emanuel Lehman, the firm became "H. Lehman and Bro." With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded.During the 1850s, cotton was one of the most important crops in the United States. Capitalizing on cotton's high market value, the three brothers began to routinely accept raw cotton from customers as payment for merchandise, eventually beginning a second business trading in cotton. Within a few years this business grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855, the remaining brothers continued to focus on their commodities-trading/brokerage operations.The Lehmans were also involved in the Atlantic slave trade in the 1850s.By 1858, the center of cotton trading had shifted from the South to New York City, where factors and commission houses were based. Lehman opened its first branch office at 119 Liberty Street and 32-year-old Emanuel relocated there to run the office. In 1862, facing difficulties as a result of the Civil War, the firm teamed up with a cotton merchant named John Durr to form Lehman, Durr & Co Following the war the company helped finance Alabama's reconstruction. The firm's headquarters were eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870; Emanuel sat on the board of governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business.Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 87. In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company.Despite the offering of International Steam, the firm's real shift from being a commodities house to a house of issue did not begin until 1906. In that year, under Emanuel's son Philip Lehman, the firm partnered with Goldman, Sachs & Co., to bring the General Cigar Co. to market, followed closely by Sears, Roebuck and Company. During the following two decades, almost one hundred new issues were underwritten by Lehman, many times in conjunction with Goldman, Sachs. Among these were F.W. Woolworth Company, May Department Stores Company, Gimbel Brothers, Inc., R.H. Macy & Company, The Studebaker Corporation, the B.F. Goodrich Co. and Endicott Johnson Corporation.Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. During Bobbie's tenure, the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered.Traditionally a family-only partnership, in 1924, John M. Hancock became the first non-family member to join the firm, followed by Monroe C. Gutman and Paul Mazur in 1927. By 1928, the firm moved to its now famous One William Street location.In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont, and helped fund the Radio Corporation of America (RCA). It also helped finance the rapidly growing oil industry, including the companies Halliburton and Kerr-McGee. In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation. Later, it arranged the acquisition of Digital by Compaq.(1969–1984) - Robert Lehman died in 1969 after 44 years as the patriarch of the firm, leaving no member of the Lehman family actively involved with the partnership. Robert's death, coupled with a lack of a clear successor from within the Lehman family left a void in the company. At the same time, Lehman was facing strong headwinds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973, Pete Peterson, chairman and chief executive officer of the Bell & Howell Corporation, was brought in to save the firm.Under Peterson's leadership as chairman and CEO, the firm acquired Abraham & Co. in 1975, and two years later merged with the venerable, but struggling, Kuhn, Loeb & Co., to form Lehman Brothers, Kuhn, Loeb Inc., the country's fourth-largest investment bank, behind Salomon Brothers, Goldman Sachs and First Boston. Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment-banking industry.By the early 1980s, hostilities between the firm's investment bankers and traders (who were driving most of the firm's profits) prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.Upset bankers who had soured over the power struggle, left the company. Stephen A. Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm.Merger with American Express (1984–1994) - Shearson/American Express, an American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express. In 1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc.From 1983 to 1990, Peter A. Cohen was CEO and chairman of Shearson Lehman Brothers, where he led the one billion dollar purchase of E.F. Hutton to form Shearson Lehman Hutton. During this period, Shearson Lehman was aggressive in building its leveraged finance business in the model of rival Drexel Burnham Lambert. In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco but were ultimately outbid by private equity firm Kohlberg Kravis Roberts, who was backed by Drexel.Divestment and independence (1994–2008) - In 1993, under newly appointed CEO, Harvey Golub, American Express began to divest itself of its banking and brokerage operations. It sold its retail brokerage and asset management operations to Primerica and in 1994 it spun off Lehman Brothers Kuhn Loeb in an initial public offering, as Lehman Brothers Holdings, Inc.Despite rumors that it would be acquired again, Lehman performed quite well under chairman and CEO Richard S. Fuld, Jr.. By 2008, Fuld had been with the company for 30 years, and would be the longest-tenured CEO on Wall Street. Fuld had steered Lehman through the 1997 Asian Financial Crisis, a period where the firm's share price dropped to $22 USD in 1998, but he was said to have underestimated the downturn in the US housing market and its effect on Lehman's mortgage bond underwriting business. Fuld kept his job as the subprime mortgage crisis took hold, while CEOs of rivals like Bear Stearns, Merrill Lynch, and Citigroup were forced to resign. In addition, Lehman's board of directors, which included retired CEOs like Vodafone's Christopher Gent and IBM's John Akers were reluctant to challenge Fuld as the firm's share price spiraled lower.Fuld had a succession of "number twos" under him, usually titled as president and chief operating officer. Chris Pettit was Fuld's second-in-command for two decades until November 26, 1996, when he resigned as president and board member. Pettit lost a power struggle with his deputies (Steve Lessing, Tom Tucker, and Joseph M. Gregory) back on March 15 that year that caused him to relinquish its COO title, likely brought about after the three men found out about Pettit's extramarital affairs, which violated Fuld's unwritten rules on marriage and social etiquette. Bradley Jack and Joseph M. Gregory were appointed co-COOs in 2002, but Jack was demoted to the office of the chairman in May 2004 and departed in June 2005 with a severance package of $80 million, making Gregory the sole COO. While Fuld was considered the "face" of Lehman brothers, Gregory was in charge of day-to-day operations and he influenced culture to drive the bottom line. Gregory was demoted on June 12, 2008 and replaced as president and COO by Bart McDade, who had been serving as head of Equities, and McDade would see Lehman through bankruptcy. McDade would later be one of a handful of Lehman executives offered a position with Barclays after their acquisition; he would step down after less than two months.In 2001, the firm acquired the private-client services, or "PCS", business of Cowen & Co.and later, in 2003, aggressively re-entered the asset-management business, which it had exited in 1989.[45] Beginning with $2 billion in assets under management, the firm acquired the Crossroads Group, the fixed-income division of Lincoln Capital Management and Neuberger Berman. These businesses, together with the PCS business and Lehman's private-equity business, comprised the Investment Management Division, which generated approximately $3.1 billion in net revenue and almost $800 million in pretax income in 2007. Prior to going bankrupt, the firm had in excess of $275 billion in assets under management. Altogether, since going public in 1994, the firm had increased net revenues over 600% from $2.73 billion to $19.2 billion and had increased employee headcount over 230% from 8,500 to almost 28,600.At the 2008 ALB China Law Awards, Lehman Brothers was crowned:• Deal of the Year – Debt Market Deal of the Year• Deal of the Year – Equity Market Deal of the YearResponse to September 11, 2001 attacks - On September 11, 2001, Lehman occupied three floors of World Trade Center where one of its employees was killed in the terrorist attacks of that day. Its global headquarters in Three World Financial Center were severely damaged and rendered unusable by falling debris, displacing over 6,500 employees. The bank recovered quickly and rebuilt its presence. Trading operations moved across the Hudson River to its Jersey City, New Jersey, facilities, where an impromptu trading floor was built in a hotel and brought online less than forty-eight hours after the attacks. When stock markets reopened on September 17, 2001, Lehman's sales and trading capabilities were restored.In the ensuing months, the firm fanned out its operations across the New York City metropolitan area in over 40 temporary locations. The investment-banking division converted the first-floor lounges, restaurants, and all 665 guestrooms of the Sheraton Manhattan Hotel into office space.The bank also experimented with flextime (to share office space) and telecommuting via virtual private networking. In October 2001, Lehman purchased a 32-story, 1,050,000-square-foot (98,000 m2) office building for a reported sum of $700 million. The building, located at 745 Seventh Avenue, had recently been completed, and not yet occupied, by rival Morgan Stanley.With Morgan Stanley's world headquarters located only two blocks away at 1585 Broadway, in the wake of the attacks the firm was re-evaluating its office plans which would have put over 10,000 employees in the Times Square area of New York City. Lehman began moving into the new facility in January and finished in March 2002, a move that significantly boosted morale throughout the firm.The firm was criticized for not moving back to its former headquarters in lower Manhattan. Following the attacks, only Deutsche Bank, Goldman Sachs, and Merrill Lynch, of the major firms, remained in the downtown area. Lehman, however, pointed to the facts that it was committed to stay in New York City, that the new headquarters represented an ideal circumstance where the firm was desperate to buy and Morgan Stanley was desperate to sell, that when the new building was purchased, the structural integrity of Three World Financial Center had not yet been given a clean bill of health, and that the company could not have waited until May 2002 for repairs to Three World Financial Center to conclude.After the attacks, Lehman's management placed increased emphasis on business continuity planning. Unlike its rivals, the company was unusually concentrated for a bulge-bracket investment bank. For example, Morgan Stanley maintains a 750,000-square-foot (70,000 m2) trading-and-banking facility in Westchester County, New York. The trading floor of UBS is located in Stamford, Connecticut. Merrill Lynch's asset-management division is located in Plainsboro Township, New Jersey. Aside from its headquarters in Three World Financial Center, Lehman maintained operations-and-backoffice facilities in Jersey City, space that the firm considered leaving prior to 9/11. The space was not only retained, but expanded, including the construction of a backup-trading facility. In addition, telecommuting technology first rolled out in the days following the attacks to allow employees to work from home was expanded and enhanced for general use throughout the firmJune 2003 SEC litigation - In June 2003, the company was one of ten firms which simultaneously entered into a settlement with the U.S. Securities and Exchange Commission (SEC), the Office of the New York State Attorney General and various other securities regulators, regarding undue influence over each firm's research analysts by its investment-banking divisions. Specifically, regulators alleged that the firms had improperly associated analyst compensation with the firms' investment-banking revenues, and promised favorable, market-moving research coverage, in exchange for underwriting opportunities. The settlement, known as the "global settlement", provided for total financial penalties of $1.4 billion, including $80 million against Lehman, and structural reforms, including a complete separation of investment banking departments from research departments, no analyst compensation, directly or indirectly, from investment-banking revenues, and the provision of free, independent, third-party, research to the firms' clients.Rise of mortgage origination (1997-2006) - Lehman was one of the first Wall Street firms to move into the business of mortgage origination. In 1997, Lehman bought Colorado-based lender, Aurora Loan Services, an Alt-A lender. In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC. Lehman quickly became a force in the subprime market. By 2003 Lehman made $18.2 billion in loans and ranked third in lending. By 2004, this number topped $40 billion. By 2006, Aurora and BNC were lending almost $50 billion per month. Lehman had morphed into a real estate hedge fund disguised as an investment bank. By 2008, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its risky commercial real estate holdings were three times greater than capital. In such a highly leveraged structure, a 3 to 5 percent decline in real estate values would wipeout all capital.Collapse - A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firm’s financial condition in late 2007 and 2008."Subprime Mortgage Crisis - In August 2007 the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space".In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.In September 2007, Joe Gregory appointed Erin Callan as CFO. On March 16, 2008, after rival Bear Stearns was taken over by JP Morgan Chase in a fire sale, market analysts suggested that Lehman would be the next major investment bank to fall. Callan fielded Lehman's first quarter conference call, where the firm posted a profit of $489 million, compared to Citigroup's $5.1 billion and Merrill Lynch's $1.97 billion losses which was Lehman’s 55th consecutive profitable quarter. The firm's stock price leapt 46 percent after that announcement.On June 9, 2008, Lehman Brothers announced US$2.8 billion second-quarter loss, its first since being spun off from American Express, as market volatility rendered many of its hedges ineffective during that time. Lehman also reported that it had raised a further $6 billion in capital. As a result, there was major management shakeup, in which Hugh "Skip" McGee III (head of investment banking) held a meeting with senior staff to strip Fuld and his lieutenants of their authority. Consequently, Joe Gregory agreed to resign as president and COO, and afterward he told Erin Callan that she had to resign as CFO. Callan was appointed CFO of Lehman in 2008 but served only for six months, before departing after her mentor Joe Gregory was demoted. Bart McDade was named to succeed Gregory as president and COO, when several senior executives threatened to leave if he was not promoted. McDade took charge and brought back Michael Gelband and Alex Kirk, who had previously been pushed out of the firm by Gregory for not taking risks. Although Fuld remained CEO, he soon became isolated from McDade's team.On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank. Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank. The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.The next day, Lehman announced a loss of $3.9 billion and its intent to sell off a majority stake in its investment-management business, which includes Neuberger Berman. The stock slid seven percent that day. Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multimillion-dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."Short-selling allegations - During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman Henry Waxman said the committee received thousands of pages of internal documents from Lehman and these documents portray a company in which there was "no accountability for failure".An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to the demise of both Lehman and Bear Stearns. A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Lehman Brothers and Bear Stearns, and found "no evidence that stock price declines were caused by naked short selling".Bankruptcy - On Saturday, September 13, 2008, Timothy F. Geithner, then the president of the Federal Reserve Bank of New York, called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale; however, both Barclays and Bank of America ultimately declined to purchase the entire company, in the former case because the British government (in particular, the Chancellor of the Exchequer Alastair Darling and the CEO of the Financial Services Authority Hector Sants) refused to allow the transaction at the last minute, quoting stockholder regulations in the UK, despite a deal having apparently been completed.The next day, Sunday, September 14, the International Swaps and Derivatives Association (ISDA) offered an exceptional trading session to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day. Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.Shortly before 1 am Monday morning (UTC−5), Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. It further announced that its subsidiaries would continue to operate as normal. A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government. The morning witnessed scenes of Lehman employees removing files, items with the company logo, and other belongings from the world headquarters at 745 Seventh Avenue. The spectacle continued throughout the day and into the following day.Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant after clearing-houses terminated contracts with the firm. Lehman shares tumbled over 90% on September 15, 2008. The Dow Jones closed down just over 500 points on September 15, 2008, which was at the time the largest drop in a single day since the days following the attacks on September 11, 2001.In the United Kingdom, the investment bank went into administration with PricewaterhouseCoopers appointed as administrators. In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding company filed for civil reorganization on September 16, 2008, in Tokyo District Court. On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.On March 16, 2011 some three years after filing for bankruptcy and following a filing in a Manhattan U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek creditor approval of its reorganization plan by October 14 followed by a confirmation hearing to follow on November 17.LiquidationBarclays acquisition - On September 16, 2008, Barclays PLC announced that they would acquire a "stripped clean" portion of Lehman for $1.75 billion, including most of Lehman's North America operations. On September 20, 2008, a revised version of the deal, a $1.35 billion (£700 million) plan for Barclays to acquire the core business of Lehman (mainly its $960-million headquarters, a 38-story office building in Midtown Manhattan, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7-hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency."Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it."[citation needed] In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be $1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high-net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays. Barclays acquired a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days.Nomura acquisition - Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for $225 million and parts of the European division for a nominal fee of $2. It would not take on any trading assets or liabilities in the European units. Nomura negotiated such a low price because it acquired only Lehman's employees in the regions, and not its stocks, bonds or other assets. The last Lehman Brothers Annual Report identified that these non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.Sale of asset management businesses - On September 29, 2008, Lehman agreed to sell Neuberger Berman, part of its investment management business, to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15 billion. The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy Court, but a competing bid was entered by the firm's management, who ultimately prevailed in a bankruptcy auction on December 3, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known as Neuberger Berman Group LLC. In Europe, the Quantitative Asset Management Business has been acquired back by its employees on November 13, 2008 and has been renamed back to TOBAM.Financial fallout - Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years prior. Immediately following the bankruptcy filing, an already distressed financial market began a period of extreme volatility, during which the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain. What followed was what many have called the "perfect storm" of economic distress factors and eventually a $700bn bailout package (Troubled Asset Relief Program) prepared by Henry Paulson, Secretary of the Treasury, and approved by Congress. The Dow eventually closed at a new six-year low of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year. Durvexity spiked, due to funding issues at the major investment banks.The fall of Lehman also had a strong effect on small private investors such as bond holders and holders of so-called Minibonds. In Germany structured products, often based on an index, were sold mostly to private investors, elderly, retired persons, students and families. Most of those now worthless derivatives were sold by the German arm of Citigroup, the German Citibank now owned by Crédit Mutuel.Ongoing litigation - On March 11, 2010, Anton R. Valukas, a court-appointed examiner, published the results of its year-long investigation into the finances of Lehman Brothers. This report revealed that Lehman Brothers used an accounting procedure termed repo 105 to temporarily exchange $50 billion of assets into cash just before publishing its financial statements. The action could be seen to implicate both Ernst & Young, the bank's accountancy firm and Richard S. Fuld, Jr, the former CEO. This could potentially lead to Ernst & Young being found guilty of financial malpractice and Fuld facing time in prison.According to The Wall Street Journal, in March 2011, the SEC announced that they weren't confident that they could prove that Lehman Brothers violated US laws in its accounting practices.[In October 2011 the administrators of Lehman Brothers Holding Inc. lost their appeal to overturn a court order forcing them to pay £148 million into their underfunded pensions plan.As of January 2016, Lehman has already paid more than $105 billion to its unsecured creditors. In addition, JPMorgan will pay $1.42 billion in cash to settle a lawsuit accusing JPMorgan of draining Lehman Brothers liquidity right before the crash. The settlement would permit another $1.496 billion to be paid to creditors and a separate $76 million deposit.Source: Lehman Brothers - Wikipedia

I don’t think any of the answers so far, know what Utopian socialism is and is not.Real socialism is not Utopian but a practical alternative.Socialism as a Practical Alternative Pamphlet.Utopian socialism was pre-Marxian.The following is by Solomon Goldstein writing in the Socialist Standard, in the 1940’s, Britain’s oldest socialist journal published since 1904,The Basic Fallacy Underlying Utopian SocialismWhether we take Robert Owen, Thompson, Hodgskin, Bray or Rodbertus, we shall find underlying each of their writings a basic economic fallacy. This fallacy is associated with the view that what the worker sells to the capitalist is in reality his labour—instead of, as we know to be the case, his labour-power.The Utopians contended that the worker is robbed in the process of exchange, inasmuch as the capitalist buys his labour but does not pay for it at its full value. Let us illustrate their contention by giving an example: —A tailor, shall we say, has worked fifty hours for his employer, during which period he has produced suits to the monetary value of £10 (we assume that the raw material, etc., have also been made by him). The value of his labour, i.e., his product, is therefore, expressed in terms of money, equal to £10. In this case the Utopians would have reasoned, quite wrongly, “The tailor has sold ten pounds worth of goods to his employer (his labour). The latter, however, because he owns the means of production, takes advantage of his position and pays the tailor, say, only £5 for the goods—thus perpetrating a fraud in exchange.”This reasoning led the Utopians to the view that it was necessary, in order to abolish the possibility of fraudulent exchanges, to make the workers possessors of their own means of life. It was essential, they held, to establish communist settlements, in which every worker who laboured for a definite period would be entitled to exchange the goods he had produced for other articles embodying an equivalent amount of labour. Only in such communist settlements, they maintained, would the fraudulent transaction of an exchange of more labour for less labour, practised under capitalism, no longer be possible.It would take us too far afield to dwell on the intricacies of their communist Utopias, many of which were tried and failed. Suffice it to point out that the Socialism of the Utopians lacked scientific content for the following three reasons: —(1) Because of the undeveloped conditions of capitalism in which the ideas arose.(2) Because the Utopians were under the illusion that Socialist society had always awaited discovery and did not grow out of particular circumstances.(3) Because of the Utopians’ misunderstanding of the way in which the workers are robbed and, consequently, their inability to grasp the mechanism of capitalist production.Moreover, when all these factors have been taken into consideration, Utopian Socialism still remains valuable for its brilliant critique of bourgeois society. Let us now examine this critique.ROBERT OWEN (1771-1858) is generally classified as the founder of English Utopian Socialism. Owen was originally a factory owner and actually arrived at his Socialist conclusions as a result of studying the conditions in his own works. His advocacy of Socialism and his struggles to improve the conditions of life for the masses resulted in his becoming outlawed by supporters of capitalist society. Owen’s life and work have, however, been so ably treated by Engels in “Socialism, Utopian and Scientific,” that we cannot do better than refer the reader to that excellent pamphlet. In this review we shall deal in detail mainly with Owen’s disciples.WILLIAM THOMPSON (1785-1833) was a native of the county of Cork. He was a friend of Jeremy Bentham, the philosopher, and to a considerable extent under the influence of the latter’s radical teachings. Thompson’s principal work is an “Inquiry into the Principles of the Distribution of Wealth most conducive to Human Happiness (1824),” a book that runs into some six hundred pages. The essential theme of this work is that rent, profit, etc., are wealth forcibly and unjustly appropriated by the capitalists from the workers. But let Thompson himself speak: —“But as long as the labourer stands in society divested of everything but the mere power of producing, as long as he possesses neither the tools nor machinery to work with, the land or materials to work upon, the house and clothes that shelter him—as long as any institutions or expedients exist by the open or unseen operation of which he stands dependant, day by day, for his very life on those who have accumulated these necessary means of his exertions; so long will he remain deprived of almost all the products of his labour, instead of having the use of all of them/’ (Page 590. Longman, Hurst Ed.)And how are we going to alter this state of affairs ?“In the usual course of things then the productive labourer is deprived of at least half the products of his labour by the capitalist. . . . No doubt if the productive labourers acquired knowledge, and could trace the immense abstractions made under the name of profits from the products of their labour, they must see the injustice of such an arrangement and endeavour to become themselves possessed of all the articles under the name of capital or of the means of commanding the use of such articles necessary to make their labour productive. . . . As long as two hostile masses of interests are suffered to exist in society, the owners of labour on the one side and the owners of the means of labouring on the other, as long as this unnatural distribution is forcibly maintained—for without force wielded by ignorance it could not be maintained—so long will perhaps as much as nine-tenths of obtainable human production never be brought into existence, and so long will ninety-nine hundred parts of attainable human happiness be sacrificed.”(Pages 160-175.)Remember that the above was written over a century ago!And shall we appeal to the capitalists to introduce Socialism?“The excessively rich as a class, like all other classes in every community, must obey the influence of the peculiar circumstances in which they are placed, must acquire the inclinations and characters, good or bad, springing out of the state of things surrounding them from their birth. Having always possessed wealth without labour they look upon it as their right and their family’s right always to possess it on the same terms.” (Page 211.)In concluding this review of economic theory before Marx, mention must be made of John Stuart Mill (1806-1873), who accepted the labour theory of value but attempted to compromise between Vulgar Economy and Utopian Socialism.The Utopian Socialists, notwithstanding their shortcomings, were men of outstanding intellect and clarity of vision. But as Utopian Socialism is itself a detailed subject.Thomas Hodgskin was joint honorary secretary of the London Mechanics’ Institute. According to Marx, his writings are outstanding in the realm of economic science. In his work,. “The Natural and Artificial Rights of Property Contrasted,” Hodgskin says: —“At present, all the wealth of society goes first into the possession of the capitalist, and even most of the land has been purchased by him; he pays the landowner his rent, the labourer his wages, the tax and tithe gatherer their claims, and keeps a large, indeed the largest, and a continually augmenting share of the annual produce of labour for himself. The capitalist may now be said to be the first owner of all the wealth of the community. . . . The capitalist was originally a labourer, or the descendant of a villein, and he obtained profit on what he was able to save from the produce of his own labour, after he had wrested his liberty from his masters, because he was then able to make them respect his right to use the produce of his own industry. But what he then received, and now receives, under the name of profit, is a portion of the wealth annually created by labour. In fact, the capitalist has obtained the whole of the landlord’s power, and his right to have profit is a right to receive a portion of the produce of the landlord’s slaves.” (PP. 98-99, Steil Edition, published in 1832.)In another work entitled “Labour Defended Against the Claims of Capital” Hodgskin writes:“The capitalists and labourers form the great majority of the nation, so that there is no third power to intervene betwixt them. They must and will decide the dispute of themselves. . . . I am certain, however, that till the triumph of labour be complete, till productive industry alone be opulent and till idleness alone be poor, till the admirable maxim that he who sows shall reap be solidly established, till the right of property shall be founded on principles of justice and not those of slavery, till man shall be held more in honour than the clod he treads on or the machine he guides—there cannot and there ought not to be either peace on earth or good-will amongst men.” (P. 105, Labour Publishing Co. Ed.)Like Thompson, however, Hodgskin advocates the establishment of communist colonies with “just exchanges.”J. F. Bray (1805-1895) is the author of “Labour’s Wrongs and Labour’s Remedy” (1839). In this work he uses vitriolic language against what he contends to be the forcible and unjust robbery of the working class. In the opening chapter he writes:“Throughout the whole universe, from the most stupendous planet to the individual atom, changes are perpetual—there is nothing at rest— nothing stationary, to affirm therefore that governmental institutions require no reformation—that social systems need no alteration—is just as absurd as to say that the man shall wear the swaddling clothes that befitted his infancy and be pleased in maturity with the rattle which charmed his childhood. . . . What are the working classes of every nation but beasts of burden without hearts and without souls whose doom it is to labour and to die? If they complain of tyranny and dare to resist they are slaughtered like wild beasts. The very marrow of their bones and the life blood of their children is drunk up with incessant toil.” (London School of Economics Ed.)Bray repudiates any attempt to solve the workers’ problems by reforming Capitalism. His comments in this connection would be very well directed to the Labour Party of to-day.“Slavery in nature, if not in name, has ever been, is now, and ever will be, the portion of the working classes in every country where inequality of property exists in connection with the gradation of classes (p. 21) . . . . from this it will follow that the present state of things cannot be remedied unless we change at once our whole social system, for alter our forms of government as we will, no such change can affect the system and no such change can prevent inequality of possessions and the division of society into employers and employed—and therefore as a necessary consequence no such change can remove the evils which this system and this division of society engender.” (P. 37.)The following statements by Bray are humorous as well as fiery:“In all civilised communities, as they are called, society is thus divided into idlers and producers, into those who obtain double allowance for doing nothing and those who receive only half-allowance for doing double work.” (P. 23.)“No other than the present social system could by any possibility create and perpetuate the gross injustice which is now inflicted upon the great body of exchangers—the working class. They form, like their parent earth, a common pasture-ground, on which all crawling and creeping things may feed and fatten.” (P. 88.)Finally, have we not often been confronted with the objection that there will he no incentive to invent things under Socialism? We shall let Bray reply to this point:“The inventor will ever receive, in addition to his just pecuniary reward, that which genius only can obtain from us—the tribute of our admiration.” (P. 45.)Karl Rodbertus (1805-1875) is in many respects a spiritual ancestor of the Nazi “theoreticians,” who to-day, prattle so much about “True German Socialism.” (Wahrer Sozialismus.) Like the English Utopians, Rodbertus deduced his “Socialism” from the implications of the Ricardian theory of value, but he differed with them in this respect : In his work “Zur Erkenntniss unserer Staatswirtschaftlichen Zustande,” 1842 (On the Explanation of our Economic Position), he maintained that the collective ownership of the means of life was something to be established in five hundred years to come. In the meanwhile, he contended, rent, interest and profit (Rodbertus called all three “Rente”) would still have to exist, but the Prussian State would have to take over the means of life and distribute the products of labour equally among the three classes of the German community. That is to say that for having laboured twelve hours the worker would receive under Rodbertus’s scheme a certificate entitling him to the product of four hours’ work, the Junkers and Capitalists receiving the other two thirds. In his “Zweiter Brief an Von Kirchmann” (1850-51, published in English by Swan, Sonnenschein & Co., 1898, under the title of “Overproduction and Crises”), Rodbertus writes:“. . . . Present-day society may indeed be well compared to a band of travellers in the desert. Suffering with thirst they find a spring which would suffice to refresh and strengthen them all, but a small number constitute themselves masters of the spring; they grudge giving the majority more than a few drops to quench their thirst; they themselves take long draughts, but the stream flows faster than they are able to drink, and so from satiety and want of good-will they let half of the gushing stream waste itself in the sand.” (PP. 57-58.)Rodbertus falsely laid claim to be the founder of Scientific Socialism. Engels, however, has aptly categorised him as the “veritable founder of Prussian State Socialism.” In his preface to the second volume of “Capital” Engels says amongst other things:“Marx began his economic studies in Paris, in 1843, starting with the prominent Englishmen and Frenchmen. Of German economists he knew only Rau and List, and he did not want any more of them. Neither Marx nor I heard a word of Rodbertus’ existence, until we had to criticise in the ‘Neue Rheinische Zeitung,’ 1848, the speeches he made as the representative of Berlin and as Minister of Commerce. . . . On the other hand, Marx showed that he knew even then, without the help of Rodbertus, whence came the ‘surplus value of the capitalists,’ and he showed furthermore how it was produced, as may be seen in his ‘Poverty of Philosophy,’ 1847, and in his lectures on wage-labour and capital, delivered in Brussels in 1847.” (P. 14, Kerr Ed.)On page 24 of the same preface Engels continues :“Marx stands in the same relation to his predecessors in the theory of surplus-value that Lavoisier maintains to Priestley and Scheele The existence of those parts of the value of products, which we now call surplus-value, had been ascertained long before Marx. It had also been stated with more or less precision that it consisted of that part of the labourer’s product for which its appropriator does not give any equivalent. But there the economists halted. Some of them, for instance the classical bourgeois economists investigated, perhaps, the proportion in which the product of labour was divided among the labourer and the owner of the means of production. Others, the Socialists, declared that this division was unjust and looked for utopian means of abolishing this injustice. They remained limited by the economic categories which they found at hand.“Now Marx appeared. And he took an entirely different view from all his predecessors. What they had regarded as a solution, he considered a problem. He saw that he had to deal neither with dephlogisticized air, nor with fire-air, but with oxygen. He understood that it was not simply a matter of stating an economic fact, or of pointing out the conflict of this fact with ‘eternal justice and true morals,’ but of explaining a fact which was destined to revolutionise the entire political economy, and which offered a key for the understanding of the entire capitalist production, provided you knew how to use it.”Marx’s “Capital”In our survey we have ranged over the entire field of political economy prior to Marx. Let us now turn our attention exclusively to the economic writings of Marx himself. We have already indicated (see May Socialist Standard) that the central theme of all political economy is the theory of value. This theory is intended by Marx not merely to solve the riddle of the determinant of prices, but also to reveal the economic law of motion of modern society. Apart from his earlier writings on economics Marx’s main works are “Capital,” volumes I, II and III, and “Theories of Surplus Value” (three volumes). Only the first volume of “Capital” was published during Marx’s lifetime. Volumes II and III were issued by Engels in 1885 and 1894. “Theories of Surplus Value” (Theorien über den Mehrwert—not yet translated into English) were issued by Karl Kautsky, Engels’ literary executor.The works published after Marx’s death were compiled from his remaining fragmentary manuscripts, and consequently are not so rounded-off as the first volume.Notwithstanding this they remain to this day the most exhaustive scientific analysis of Capitalism that has yet been published.In preceding passages we have discussed at some length the writings of the most outstanding economists and Socialists prior to Marx, and have, in addition to this, touched upon the scheme of Marxian Political Economy. Let us now consider the Marxian analysis more closely.The Nature of Wealth Under CapitalismBourgeois economists have expressed divergent views concerning the true nature of wealth. The Mercantilists, for example, identified wealth with money, whereas the Physiocrats thought that only the products of agriculture could be regarded as real wealth.Marx’s view on the subject is expressed clearly in the opening chapter of his famous work, “Capital,” where he says:—The wealth of those societies in which the capitalist mode of production prevails, presents itself as an immense accumulation of commodities, its unit being a single commodity.— (Vol. I, p. 41, Modern Library Edition.)Commodities are articles produced for exchange or sale. In the May Socialist Standard we pointed out that every commodity is a combination of use-value and value, and that it is the latter quality which determines the commodity’s average price on the market, and not the former. The vendor of commodities is, as we know, primarily interested in the exchange value of his articles, and not in the fact that they will satisfy human needs of some kind. That the prime motive of Capitalist production is not the satisfaction of human wants, but rather “sale at a profit,” has been demonstrated only recently by the tremendous destruction of coffee and cocoa, that has taken place in the colonies.The Function of MoneyQuite a number of people have misunderstood the rôle played by money. Britain has been literally overrun by miscellaneous currency cranks— from Major Douglas to the Imperial Fascist League—who either regarded money as the be-all and end-all of human existence, or else thought it an absolutely worthless object, perpetuated as a trick on society by unscrupulous financiers. In reality, however, money is the all-important medium of exchange—the resultant of the evolution of commodity exchanges. According to Marx the germ of money is to be found in the earliest accidental exchange of articles between one tribe and another—in barter. This elementary exchange Marx refers to as—The Accidental Form of Value: 5 shells = 2 skins. In the, example cited above the value (i.e., the socially necessary labour) of one given commodity (shells) is expressed in terms of another (skins). With improved methods of production and, as a consequence, greater contact between tribes, the accidental barter of articles gives way to an increasingly enlarged sphere of exchange which Marx calls—The Extended Form of Value: 5 shells = 2 skins = 50 beads = 2 sheep = 2 ozs. gold, etc. An illustration of this extended form can be found in the “Iliad,” where Homer say: “To Atreus’ sons, as he gave charge, where merchandise it was, the Greeks bought wine for shining steel, and some for sounding brass, some for ox-hides, for oxen some, and some for prisoners.” (Book VII, p. 102, George Roulledge. -Ed.) Following on the extended form, we get—The General Form of Value: 5 shells, 2 skins, 50 beads, 20 yards cloth, 2 ozs. gold = 2 sheep. In this third form the values of all commodities are now expressed in terms of one single commodity. At the dawn of civilisation it was cattle that predominantly functioned as the general equivalent in exchange, but this form was eventually supplanted by gold, silver and copper: articles that are easier to divide and transport. The expression of the values of commodities in terms of the precious metals Marx designates as—The Money Form of Value: 5 shells, 2 skins, 50 beads, 20 yards cloth, 2 sheep = 2 ozs. gold (or when coined).This money form is the price form of commodities. Between forms 3 and 4 there are no differences, except that in the one case it is cattle and in the other gold which serves as the general equivalent. Fundamental differences exist, however, between forms 1, 2 and 3. The illustrations I have presented show that gold became money because it had previously served as an ordinary commodity. The value of gold, like the value of any other commodity, is determined by the labour time socially necessary for its production. Gold is portable, divisible, endurable and non-corrosive; moreover, a small quantity of it incorporates comparatively a great deal of labour time—hence these qualities eventually forced it to the top as the money commodity, as the universal medium of exchange par excellence. As far as paper currency is concerned, Marx has this to say on the subject:—The State puts in circulation bits of paper on which various denominations, say £1, £5, etc., are printed . . . A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver, as the case may be) which would actually circulate if not replaced by symbols.—(Vol. I, page 143.)In recent years gold has ceased to function legally as money. The consequence of the abandonment of the gold standard has been precisely that which Marx pointed out would be the case, viz.:—If the quantity of paper currency issued be double what it ought to be, then, as a matter of fact, £1 would be the money name not of ¼ of an ounce, but of ⅛ of an ounce of gold.—(P. 144.)To-day gold sovereigns are bought and sold like any other commodity. This abandonment of gold as legal money in no way alters the basic economic laws of Bourgeois society. It can, however, be regarded as a disturbing feature—one symptom out of many of the underlying chaotic instability of recent international Capitalism.For the sake of simplicity in the points that follow, we shall express prices in terms of gold coin—thus assuming gold as still the money commodity. The reader can easily reduce our illustrations to terms of present paper currency.Capital and the Problem of Surplus ValueIt has already been pointed out that the circulation of commodities presupposes in its pure form an exchange of equivalent values. This exchange of equivalents can be designated with the Marxian formula—C—M—C or Commodity—Money—Commodity.Let us illustrate this formula with two examples: (1) A handicraftsman has, shall we say, taken eight hours to produce a chair. He exchanges his chair (commodity) with, say, a gold sovereign (money) embodying an equal amount of labour, and with the money obtained he purchases a clock (commodity) in which eight hours of labour are also incorporated. (2) A worker sells his labouring-power (commodity) for wages, and with the latter buys articles of consumption (some commodities).The formula for capital is, however:—£100—Commodities—£ 110M — C — Mand in this case it is no longer a question of recovering a mere equivalent, but of throwing into circulation a given amount of value for the purpose of recovering a greater amount. This increment obtained, or surplus of value over the original amount invested is what Marx calls surplus-value. Thus, capital is money invested with a view to gain or surplus-value. The problem Marx set out to solve was: on the assumption that in exchange only value-equivalents are given, where does the surplus-value come from?That capital is not merely wealth, as such, but wealth invested for the specific purpose of profit, has been either completely ignored or hotly disputed by the Bourgeois economists. Karl Kautsky, in his work, “The Economic Doctrines of Karl Marx,” has the following interesting observations to make in this connection:—It is value that breeds surplus value. Those who ignore this movement and try to conceive of capital as an inert thing will instantly involve themselves in contradictions. Hence the confusion in the orthodox text-books concerning the idea of capital, and the question as to which things should be regarded as capital. Some define it as tools, which implies that there were capitalists in the Stone Age. Even the ape, which cracks nuts with a stone, is a capitalist; likewise, the tramp’s stick, with which he knocks fruit off a tree, becomes capital, and the tramp himself a capitalist. Others define capital as stored-up labour, according to which marmots and ants would enjoy the honour of figuring as colleagues of Rothschild. Bleichroeder and Krupp. Some economists have even reckoned as capital everything which promotes labour and renders it productive, the State, man’s knowledge and his soul.—(Pp. 53-54, A. & C. Black Edition.)The prevailing form of capital is industrial capital. Commercial and financial capital are historically much older, but, to-day, play but a subordinate part alongside the capital of the industrialist.It is in industry that surplus value is produced. Precisely how this is done we shall need to read Marx (see May Socialist Standard).Solomon GoldsteinArticle on surplus value.