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Posted on Mon, Mar 12, 2012 : 5:59 a.m.

4 ethical lessons of Lehman Brothers' collapse from bankruptcy examiner

By Nathan Bomey

The bankruptcy examiner whose 2,200-page report revealed the gory details behind the 2008 collapse of financial giant Lehman Brothers will deliver the keynote address Friday at the Eastern Michigan University College of Business' annual Ethos Week event.


Attorney Tony Valukas led an investigation into the collapse of Lehman Brothers.

The week of events, developed by students and faculty and launched in 2007, highlights ethical issues affecting businesses.

Anton Valukas, chairman of law firm Jenner & Block in Chicago, will deliver a lunchtime address Friday. The event costs $5 for students and $35 for non-students, but the other Ethos Week seminars throughout the week are free and will be held at the College of Business at 300 W. Michigan Avenue. Seminars will take place throughout the week.

The demise of Lehman Brothers, which technically emerged from its $639 billion bankruptcy earlier this month, accelerated the global financial crisis and sparked debate in Washington over ethical issues on Wall Street.

"There were significant ethical breaches that occurred and students can now have first hand someone tell them the significance of ethical problems that have led to the financial meltdown that we’re still recovering from," said David Mielke, dean of EMU's College of Business.

"I don’t think there’s any better way to reinforce the importance of ethical behavior in business than to have someone come who's been there, seen it and dealt with it and can relay what it’s meant in this total picture. He’s a very bright guy."

Valukas said Lehman's collapse offers several lessons for EMU business students interested in ethical reform.

For one thing, he's concerned that the controversial Dodd-Frank financial reform law — championed by President Barack Obama as a way to prevent similar financial disasters from wreaking havoc on the economy in the future — has not been implemented efficiently to ensure no similar situation will arise.

"No one is quite sure whether the reforms are sufficient, whether they go far enough, whether they're dealing with the right issues," Valukas said in an interview. "I'm not at all comfortable that the issues have been resolved."

Here are four ethical lessons of Lehman's demise, gleaned from a conversation with Valukas:

1. Watch out for balance sheet tricks. Companies — and governments — often employ balance-sheet trickery to avoid full disclosure of their financial problems. That was certainly the case with Lehman, which temporarily shipped assets to London during a difficult stretch to make loans appear like revenue, according to Valukas' investigation.

"One of the key issues people need to think about is if conduct can be technically within the rules and technically legal, does that still raise questions as to whether it's ethical conduct?" Valukas said. "That's a very subtle and nuanced question but it's a question the students should focus on."

2. Boom times can foster mischief. Conventional wisdom may be that mischief occurs when the economy is in bad shape, but often times it's the opposite. To maintain an aggressive pace of growth, executives are often tempted to hide troubles.

"After there's a financial disaster like a recession and companies start to fail, we start to see misconduct that may have happened during the boom," Valukas said. "During the boom times when things are going well, there's a tendency not to question things."

He added: "We should be asking those questions during the time of disparity instead of waiting until the end."

3. Ethical problems should be exposed and rectified in the public square as they are discovered, so that the market has a chance to digest the news. Valukas said one of the problems with Lehman's collapse was that it was so shocking and sudden, which led to panic in the market. He said a better example of how to handle a financial crisis is the European community's open, collaborative way of discussing how to address Greece's debt crisis.

He said an open process like that can "moderate the consequences" of a financial disaster. "In Lehman, there was no forewarning that it was going to happen. It just happened," he said.

4. When implementing ethical reforms, the actual process of implementation is just as important as the wording of the original legislation. In other words, you can design reforms well — but if you don't implement them intelligently, they won't be effective and could be detrimental.

Valukas said he likes the "framework" of the Dodd-Frank legislation but is not sure whether regulatory officials are appropriately implementing and enforcing it.

Contact's Nathan Bomey at (734) 623-2587 or You can also follow him on Twitter or subscribe to's newsletters.



Mon, Mar 12, 2012 : 5:45 p.m.

As this speaker probably suspects, the Dodd-Frank legislation will fail in its implementation and we will certainly see another economic catastrophe that was supposed to be prevented. Part of the problem is people will let down their guard because they think the federal regulators have everything under control. The other part is that Dodd-Frank still provides a government guarantee that it will step in and cover the losses, something that inevitably leads to risky behavior in any case. As a commenter above stated, getting out of the way and allowing these companies to go bankrupt is the only true solution. I agree that most Republicans probably do not have the common man's welfare in mind when they oppose these regulations, but they are correct that the costs outweigh the benefits. For a different perspective on Dodd-Frank, read this article: <a href="" rel='nofollow'></a> It's biased in favor of the free market, but it's only fair to balance out the bias of the Brookings Institution and NYT, which are almost always in favor of government control.


Tue, Mar 13, 2012 : 12:22 p.m.

Veracity - Likely what you are assuming is the &quot;free market&quot; is no such thing. It's a market manipulated through government/big business collusion (or more simply known as &quot;crony capitalism&quot;). The free market is essentially responsible for making things that were once expensive luxuries (TV's, cell phones, refrigerators, cars, computers, etc.) widely affordable through competition and technological innovation. In areas of the economy where government has a heavy hand (think health care, education, agriculture), you see almost the opposite - prices consistently going up and becoming less affordable without corresponding increases in quality. If a centrally controlled market was the ideal situation, the Soviet Union should still be thriving and North Korea should be a utopia. I'm not a purist. There is a place for government in prosecuting fraud and protecting contractual rights. But the kind of micromanagement suggested by Dodd-Frank will lead to nothing but strangling markets altogether.


Tue, Mar 13, 2012 : 2:20 a.m.

The &quot;free market&quot; will never favor the average citizen.


Mon, Mar 12, 2012 : 4:52 p.m.

Why does the GOP so ardently revile the Dodd-Frank Act? Very likely the Republicans are doing the bidding of the Banking and Investing Community on Wall Street who generously fund their campaign coffers and PACs. These major donors do not want any restrictions on their modes of generating profits. As is quite evident with the recent financial collapse, the bankers and investment houses have proven that &quot;profits are privatized while liabilities are socialized.&quot; Meanwhile, Republicans in Congress can not directly repeal the Dodd-Frank Act but they can certainly delay instituting many of its provisions and weaken its effectiveness by underfunding, which is what they are doing. For detailed documentation of Republican obstruction of financial regulation implementation and the potential dire consequences please read Sarah N. Lynch's and Christopher Doering's article, entitled &quot;House GOP tries to slow Dodd-Frank express,&quot; published by Reuters on May 4, 2011 and whose link is below. <a href="" rel='nofollow'></a>


Mon, Mar 12, 2012 : 4:31 p.m.

The GOP has championed the Dodd-Frank Act as a campaign issue against President Obama and Democrats even as experts like Tony Valukas (to speak at EMU) and Douglas J. Elliott, an economic studies fellow at the Brookings Institution, laud the regulatory package. Everyone should read Edward Wyatt's article, entitled &quot;Dodd-Frank Act a Favorite Target for Republicans Laying Blame,&quot; which appeared in the September 20, 2011 edition of the New York Times. In the informative article, Mr Elliott states: "Dodd-Frank is adding safety margins to the banking system," said Douglas J. Elliott, an economic studies fellow at the Brookings Institution. "That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer." Furthermore, the article explains: &quot;Dodd-Frank aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff. It creates a bureau to protect consumers from financial fraud, cuts the fees banks charge for debit card use, and sets up a means for the government to better supervise the nation's largest financial institutions to avoid expensive and catastrophic failures. And it calls for swap execution facilities, or exchanges on which derivatives and other complex financial instruments are traded.&quot; Republican Presidential candidates' opposition is staunch. As the Wyatt article quotes: Mitt Romney, who calls for the laws repeal, said "It created such uncertainty that the bankers, instead of making loans, pulled back." Newt Gingrich said it is "a devastatingly bad bill" that is "killing small banks, killing small business, killing the housing industry." <a href="" rel='nofollow'></a> And Rick Santorum wants to repeal Dodd-Frank as well as &quot;the burdensome Sarbanes-Oxley law.&


Mon, Mar 12, 2012 : 3:06 p.m.

I think it was good for Lehman Brothers to go bankrupt. Perhaps it wasn't practical to allow all of the &quot;too-big-to-fail&quot; firms to actually fail, but in throwing at least one over the side, a message was sent that such behavior IS risky and has consequences. A corollary to Point 2 is &quot;Boom times also mask poor practices&quot;. You things are going very well, one doesn't notice if you aren't running as tight a ship as one could be.

Stan Hyne

Mon, Mar 12, 2012 : 2:44 p.m.

One other way to correct unethical behavior is to have the company go bankrupt. Hopefully the persons responsible for the behavior will no longer be employed on this type of job. The persons who's job it was to keep the company solvent should also find it difficult to find similar employment.


Mon, Mar 12, 2012 : 11:28 a.m.

Over-zealous ambition and desperation create opportunities for financial malfeasance. If all business leaders subscribed to being accountable and responsible for their actions we wouldn't have a Lehman Brothers type of an event. And this is why some measure of regulation is required. Dodd-Frank may be overly arduous, but has anyone proposed something better than no regulation whatsoever? History has proven that even adult men cannot play nice.