Risk Management at Lehman Brothers, 2007-2008

Lehman Brothers' September 2008 bankruptcy was the largest in U.S. history, with worldwide repercussions that persist today. The case takes an uncommon approach: it assumes a general management perspective and provides a unique 360º description of the firm's internal risk management system (RMS), i.e., the formal structures and processes managers had designed and were using to manage risk. This description serves as a vehicle for providing students of management with basic knowledge about the fundamentals of RMSs. It also facilitates a vivid discussion about relevant issues such as how Lehman's RMS might have contributed to its demise; the promises, perils, and "do's and don'ts" of RMSs; the problems associated with managing risk using generic risk measurement models; how managers could devise a simple tool to measure the risk of a given business strategy; and why RMSs should be a top management priority and be integrated into the corporate management control system. The case comprehensively covers the many specific management challenges associated with delegating risk-taking in a decentralized firm: the organization of risk governance, risk control and risk-taking responsibilities; the performance measurement framework employed to budget, measure and monitor risk-taking over time; and the provision of incentives to empowered, risk-taking frontline staff. It also helps students become acquainted with a financial firm's day-to-day practices and confronts students with a specific, non-trivial decision situation of applied risk management.