Chapter 4

Data Analysis

4.1 The case study analysis of Brothers

4.1.1. - historical background information

Lehman Brothers was founded in 1850 in Montgomery, , by the brothers Henry, Emmanuel and Mayer Lehman. The brothers - sons of the lower franconian cattle merchant Abraham Löw Lehmann - emigrated 1844-1850 from near Würzburg to the USA. Prior to the establishment of Lehman Brothers, in 1844, opened a general retail store in Alabama. His brother Emanuel joined the business in 1848. The business was soon shifted into a cotton trade company. From this, the banking activity developed(McDonald & Patrick 2010).

After the the business was relocated to New York.

1977 Lehman Brothers merged with Kuhn, Loeb & Co. and changed its name temporarily to Lehman Brothers Kuhn Loeb & Co. In 1984, Lehman Brothers was bought by American Express and merged with Shearson and in 1988 with E.F. Hutton &Co. In 1993, American Express sold the well-developed company to the Travelers Group. The Travelers Group parted from the investment banking, and in 1994 it became an independent company again under the name Lehman Brothers and went public. In recent years, until to the insolvency the independent company was able to consolidate its market position in the competition.

On 15September 2008, the U.S. investment bank Lehman Brothers collapsed - and triggered a devastating chain reaction(Spiegel Online 2011).

4.1.2. The failed business model of Lehman Brothers

1 2

3

It was the largest bankruptcy case in United States history, but it also came after repeated assurances from the company’s chief executives that finances were healthy, liquidity levels were high, and leverage was manageable. Due to the collapse, consumer confidence shattered during a time of uncertainty, and later on, a number of questionable moves came to light. This analysis will proceed in two parts: First, a recapitulation of the series of events leading to Lehman Brothers’ failure, then the identification of several choices made by its management team and how the results led to the bank’s final downfall(Lieven 2009).

On 29 January 2008, Lehman Brothers Holdings Inc. presented profits of $4 billion for the accounting year 2007 which was a record. The business model seemed successful.

1 http://gallery.hd.org/_exhibits/money/_more2008/_more09/bankruptcy-failure-collapse-of-Lehman- Brothers-US-investment-bank-20080915-worldwide-first-few-days-of-news-headlines-and-images- mainly-from-UK-perspective-10-DHD.jpg http://static.guim.co.uk/sys-images/Guardian/About/General/2012/4/12/1334269125617/Lehman- Brothers--008.jpg 2 http://static.guim.co.uk/sys-images/Guardian/About/General/2012/4/12/1334269125617/Lehman- Brothers--008.jpg 3 http://static.guim.co.uk/sys-images/Business/Pix/pictures/2010/3/12/1268355047409/Lehman- Brothers--001.jpg

In January Lehman shares reached a value of 65.73 dollars. The stock market valued the company $30 billion. About eight months later, on 12 September 2008, the share price was less than $4. On 15 September Lehman filed for creditor protection. It was recorded as the largest bankruptcy of U.S. economic history. The business model failed(Zingales 2008).

Many think the beginning of the fall for Lehman Brothers was when Washington repealed the Glass-Steagall Act(Casserley, Macdonald & Härle 2009). This legislation from the Great Depression which broke out in 1929, divided the interests of commercial and investment banks, preventing them from competition among each other and taking care of their balance sheets by letting these sectors focus on business and transactions that they can do best. For investment banks, that characteristically meant to be highly liquid, asset-light portfolios, letting commercial banks to handle capital- intensive portfolios, such as real estate or corporate finance. In addition, the act protected the economy from a domino effect in the case of one division’s breakdown. In 1999, the law was repealed by former US President Bill Clinton(Crawford 2011). The following opportunities for the market would prove to be catastrophic for Lehman Brothers, the financial sector, and the worlds' economy.

With the repeal of the Glass-Steagall Act (Crawford 2011), Lehman Brothers became an important actor in the US housing boom. From 2004 to 2006, the revenues from real estate businesses increased by 56 percent. The profits increased and the company achieved a record net income of $4.2 billion on revenues of $19.3 billion. Lehman Brothers’ stock reached an all-time high of $86.18 per share. Market capitalization reached almost $60 billion. Anyway, the real estate market started to show signs of a bubble burst(Quiring et al. 2013).

In March 2007, the economy faced its biggest one-day stock market plunge since the burst of the Dotcom bubble, and the number of mortgage defaults reached highest percentage for almost 10 years. Conditions quickly deteriorated, but LehmanBrothers still traded mortgage-backed securities while the domestic and global economies were instable. Meanwhile, its operations were out of control. Its $11.9 billion in tangible equity and $308.5 billion in tangible assets on balance sheets in 2003 yielded a leverage ratio of 26 to 1. In 2007, its $20 billion in tangible equity and $782 billion in tangible assets made its leverage ratio exorbitantly increase to 39 to 1. Even when the

collapse occurred most likely, Lehman Brothers didn't react by trimming its portfolio of high-risk, illiquid assets. Instead of acknowledging this error, executives attempted more likely to preserve a bright pretense(Mildner 2012).

By means of creative accounting, covering up the real situation, and misleading information, until 2008 Lehman Brothers claimed that their business operations were still successful(Der Spiegel 2010). The primary means by which Lehman Brothers concealed its misery was through the utilization of questionable accounting tools which helped to create positive net leverage and liquidity measures on the balance sheet. These are the key figures by which rating agencies among others evaluate a company and which help to gain confidence of the markets. By using those tools, Lehman Brothers raised cash by selling assets to a ghost company called Hudson Castle, which appeared to be independent but indeed was controlled by Lehman Brothers. In accordance with the accounting tools used, assets were sold to the said company and repurchased a couple of days later(Südwest Presse 2010). By this method, the transactions were treated as sales, thus removing the assets from Lehman Brothers’ balance sheet.

Lehman Brothers utilized this technique among other things to transfer a combined total of $100 billion, changing its leverage ratio from 13.9 to a more desirable 12.1. In that way, Lehman Brothers reported a positive image of its net leverage, including a deep liquidity pool. Each of the balance sheet published at the end of the first two quarters in 2008 were intended to equalize a loss of $2.8 billion from write-downs on assets, decreased revenues, and losses on hedges (Mildner 2012). Thereby, Lehman Brothers was able to avoid having to report selling assets at a loss.

Due to investigations after the collapse, Lehman Brothers' global finance controller added that, “there was no substance to these transactions”(Knapp 2013, p. 31). The financial executives hid these actions from rating agencies, investors, and other stakeholder. The only other actor that was aware of these issues was Ernst & Young, financial auditor of Lehman Brothers, which screwed up to inform all participants to the manipulation that was going on(DiePresse.com 2012). In September 2008, Lehman Brothers’ situation came to the top.

A few weeks before, the CFO, began to make correction with the firms’ negative position. He tried to yield $6 billion in new capital by making a public offer. However,

fiscal quarter financial statements 3/2008 had to be presented, in which Lehman Brothers released additional losses of $3.9 billion. Its stock price had dropped 94% since the beginning of 2008 to $3.65 per share. On 13 September, the United States Treasury announced that Lehman Brothers will not be rescued(Lieven 2009). Barclays and Bank of America as well as other financial institutions, tried to take over the instable company, with the goal to strengthen it with fresh money, and save it from the collapse. None of the banks endorsed this step. On Sept. 15, 2008, the CEO couldn't deny the disastrous situation anymore and filed for bankruptcy protection(Spiegel Online 2011).

In the days following the largest bankruptcy since the Great Depression, the market was shocked. The Dow Jones fell by 504 points when the stock market opened. Lehman Brothers’ United States capital markets division was taken over by Barclays' Bank for the price of $1.75 billion. Later, the insurance company AIG had to be rescued from the collapse forcing the government to react with a rescue operation that cost $182 billion(Quiring et al. 2013). On Sept. 16, the Lehman price per share had collapsed to less than $1. The collapse of Lehman Brothers was devastating and led to a confidence crisis in global financial sector. Credit markets came to a standstill(Steinmann 2013); governments all over the world had to react and try to take away the fear.

With $613 billion debt, the Lehman collapse was the first bankruptcy of the crisis of that size - and is until today the largest one in the history of the banking sector.

Lehman followed its high risk strategy until the end and whitewashed the books in many ways.

Due to several investigations against the bank, a lot of details came up that showed what the business model really looked like. It was characterized by Sprave (2009)as :-

- No separation of commercial and investment banking o Since former US President Bill Clinton repealed the Glass-Steagall Act in 1999 - Ignore and hide risks o Showing profits, hiding losses, o Leverage ratio (debt burden) exceedingly high, and o Liquidity other age.

- Benefit from subprime mortgage o Low interest rates - everyone could afford to pay for a housing loan, and o No strategy in housing loan business - almost everyone could get a credit for a house. - High value approach for houses - Bad management decisions - but no legal prosecution possible - High bonuses and management salary - Incentives incorrectly set

The situation of Lehman Brothers before the crisis didn't seem different from other banks. It was a bank, which had its own business (investment banking), giving housing loans to customers (commercial banking), lending money from the capital market and nothing seemed suspicious. Obviously no one had an idea what exactly was happening within the bank.

Nevertheless, there were several problems the bank had, which occurred after the collapse.

By September 2008, America had reached the age of the rescue operations, but still insisted there would be no money to save Lehman Brothers from the collapse. American authorities told Lehman to solve its problems by itself, for example by raising cash or selling divisions. There was no plan for a rescue mission. For everyone, that was a quite unbelievable declaration.

The scenes of employees walking out of the buildings in New York and London with a box under the arm became a symbol for the financial crisis 2008. Lehman Brothers had 25,000 staff around the world. The world was looking at the symbolic end of the life on Wall Street as it was known(Steins 2014).

Lehman Brothers had survived repeated financial crises around the turn of the 19th century and succeeded even in the Great Depression. The bank had over $600bn of assets and huge, intangible trading relations. All other companies in the financial sector maintained trade relations to the bank. Almost everyone agreed that Lehman Brothers was "too big to fail"(Goldstein & Véron 2011).

"It's unconscionable what they did – or more accurately what they didn't do", says Joseph Stiglitz(Stieglitz 2012), Nobel prize-winning economist. "They didn't do their homework. People started talking about the failure of Lehman Brothers from the

moment of the failure of Bear Stearns in March, or before, and they didn't do a thing. If they knew there was systemic risk, why didn't they do anything about it?"(Foley 2009).

Lehman's fate was sealed in the Wall Street branch of the US Federal Reserve. Almost exactly 10 years before, Dick Fuld, CEO of Lehman Brothers, had sat in the Fed's conference room and decided with other CEO's to rescue Long-Term Capital Management (LTCM). When one of the largest hedge funds waggled and threatened to collapse, they launched a rescue mission(Swagel 2013).

Like all other Wall Street investment banks, Lehman Brothers had been overwhelmed by the profits from bundling packages of America's mortgages into securities for worldwide trading. Lehman established this business quite fast, and ignored the warnings that the housing market in America became an enormous bubble and that mortgage brokers gave out loans to people who weren't creditworthy at all and couldn't repay the loans(Sprave 2009).

Lehman had taken more risks than most of the other financial institutions: to achieve high profits and gain market share from their competitors, the Bank had to make large debts. There was less than a dollar in savings for every $30 of debts(Bloss et al. 2009). Since there were enough assets to balance that circumstance, it would have been acceptable. Most investors started to doubt the value of the assets Lehman affirmed to have.

In March 2008, The Treasury had managed the sale of Bear Stearns to JPMorgan, financed with money from the Fed. The week before Lehman's bankruptcy, The US Treasury had ordered the compulsory acquisition of Fannie Mae and Freddie Mac which were two of the largest mortgage finance institutions in the US(The Economist 2014).

Banks that consciously do high-risk trades should take responsibility for their actions. If the government would guarantee a bailout for everyone, then what's to stop the risky game and the exorbitant high bonuses when succeeding (and partly loosing) in gambling? There is no bailout for Lehman Brothers. This should be the time to restore moral hazard(Hett & Schmidt 2012).

Lehman was considerably more complex than LTCM many years before. It was clear that the follow-up of not achieving a deal could be disastrous.

There was an important pattern in the loan crisis. Market panic, investors and clients withdrew money from the dangerous banks in order to keep their money from further losses. No one could predict the dimension of a potential chain reaction. Other banks tried to prevent themselves from the same fate like Lehman. Merrill Lynch wanted to save itself and was willing to sell the company. Shortly, Merrill was taken over.

The analysis of the survey questionnaire will provide the information about what were the causes of the breakdown of the financial system and Lehman Brothers.

4.2 What do you think are the reasons for the breakdown of the financial crisis?

4.2.1. Interdependences on the financial market

Interdependences on the financial market

12% Strongly agree 16% agree 20% 20% Slightly agree Slightly disagree 24% disagree 8% Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 1 2 1 4 5 8 2.38

The majority thought that interdependences on the financial market were not the reason for the breakout of the crisis (value=2,38disagree). About 60% slightly disagree, disagree or strongly disagree and 40% thought that if there were no interdependences, there wouldn't be a chain reaction like the financial sector faced since 2007.

4.2.2. Not meeting the requirements of Digitalization

Not meeting the requirements of Digitalization 5% 10% Strongly agree 9% 14% agree 19% Slightly agree Slightly disagree 43% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 3 4 9 2 2 1 4.05

Many of the traditional banks missed the trend to more digitalization of the business model. The competition intensity increased because internet banks entered the market having a very low cost structure and reaching a large target group. That was the reason why the respondents slightly agree to the hypothesis that ongoing digitalization was one aspect causing the crisis because the banks customer reduction. 76% thought that this could be a reason for the breakout. 4.05  slightly agree.

4.2.3. More intensive competition

More intensive competition 5% 5% 0% Strongly agree agree 19% 38% Slightly agree Slightly disagree 33% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 8 7 4 1 1 0 4.95

The answers of the last hypothesis reflected the answer of this question. More intensive competition was a reason for the crisis because of shrinking profits were due to fewer customers. 90% thought that more competition caused the crisis. 4.95  agree.

4.2.4. No contemporary business models in banking sector

No contemporary business models in banking sector 5% 9% Strongly agree 5% agree 48% 14% Slightly agree Slightly disagree 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 10 4 3 1 2 1 4.76

If banks did not have a contemporary business model, it meant that the authorities believed that the direction they moved to decades ago could still be taken because nothing changed. But that was wrong. Banking business is different nowadays. Worldwide interdependences, growing online market, more regulation, liberalization etc. created a new environment. That's why the respondents agreed with the hypothesis (81%=4.76  agree).

4.2.5. Mixing of commercial & investment banking

Mixing of commercial & investment banking

10% 5% Strongly agree agree 33% 14% Slightly agree Slightly disagree 19% 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 7 4 4 3 2 1 4.38

So, after the Glass-Steagall-Act was repealed by former US-President Clinton, banks were allowed to do commercial and investment banking in the same company. Before that, it had to be separated. Most of the respondents (72%=4.38  slightly agree) shared the opinion that this was one of the reasons why the crisis broke out. By the

separation of the segments, the risky business could be treated differently from the consumer segment.

4.2.6. Too big to fail - problem & too complex processes

Too big to fail - problem & too complex processes

5% Strongly agree 14% 14% agree Slightly agree 19% 29% Slightly disagree 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 3 6 4 4 3 1 3.95

Banks, becoming too big to fail, become systemic. This means, if this institution files for bankruptcy, it will have unpredictable negative consequences for the whole financial system (see Lehman Brothers). 62% (3.95  slightly agree) of the respondents agreed with that hypothesis. Still 42% thought this was wrong and believed that complex processes and too big banks did not lead to a crisis. During this survey, there were a few banks that might be too big to fail was asked, but they are probably not interested in giving an answer which would harm themselves.

4.2.7. Management failed in leading the financial institutions responsibly

Management failed in leading the financial institutions responsibly 14% Strongly agree 19% agree 19% 24% Slightly agree 14% Slightly disagree 10% disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 3 4 2 3 5 4 3.29

Indeed, most of the respondents (57%=3.29  slightly agree) did not agree to the hypothesis that management failed in leading their company. Still, 43% agreed and thought that management should have managed the firm more responsibly. Anyway, most of the respondents wouldn't admit that management failed.

4.2.8. Lack of public regulation and supervision

Lack of public regulation and supervision

5% 5% Strongly agree 9% 29% agree 14% Slightly agree Slightly disagree 38% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 6 8 3 2 1 1 4.62

More than 90% of the respondents agree (4.62  agree) with the hypothesis that inadequate regulation and supervision caused the breakout of the crisis. This might be one of the main problems in the evolution of the crisis. If there had been more public attention, the crisis could probably have been prevented.

4.2.9. Collapse of Lehman Brothers

Collapse of Lehman Brothers 10% Strongly agree 14% agree 19% 24% Slightly agree 14% Slightly disagree 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 3 5 4 3 4 2 3.71

The collapse of Lehman Brothers and the fact that the financial sector is a highly cross- linked system leads to the assumption that this event caused the chain reaction. Indeed, the respondents tended to agree (3.71  slightly agree) but they were still at strife.

Many acted to the assumption that the US authorities would probably have rescued the bank if they knew about the consequences.

4.2.10. Ignoring the systemic relevance of Lehman Brothers by US authorities

Ignoring the systemic relevance of Lehman Brothers by US authorities 10% 5% Strongly agree 9% 38% agree Slightly agree 14% Slightly disagree

24% disagree

Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 8 5 3 2 1 2 4.52

This hypothesis ties in with the last question if the collapse of LB was the reason for the financial crisis. Here the answers were quite clearer. Most agreed (81%=4.71  agree) with it and thought that if the authorities wouldn't have ignored the systemic relevance and had decided to rescue the bank, the system wouldn't have collapsed. From the statements of the US-authorities, it can be deducted that many people didn't even know about the systemic relevance of LB.

4.2.11. Collapse of the real estate market in the USA

Collapse of the real estate market in the USA 5% 0% 9% Strongly agree 43% agree 19% Slightly agree 24% Slightly disagree disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 9 5 4 2 1 0 4.90

The researcher wondered if the collapse of the real estate market was the reason for the breakout of the crisis. The results show that most respondents agreed. Of course, the circumstances are more complex than one could imagine from the question. But

generally it has to do with this issue. The housing bubble (and the securitization of housing loans) was the initial reason for crisis. 86% (4.90  agree) shared this opinion.

4.2.12. Poor risk management in financial institutions

Poor risk management in financial institutions

Strongly agree

24% 14% agree 19% Slightly agree Slightly disagree 10% 14% 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 3 4 4 3 2 5 3.43

Essential for a financial institute is the risk management. Bank soften trade highly risky products. This can generally lead to problems if there is no adequate division which is continuously controlling the business. The respondents slightly disagree (the average answer has the value of 3.43) with this hypothesis. Background is that most banks do have a risk division. The problem is if risky positions become apparent, in some cases management tries to hide them.

4.2.13. Low interest rates policy of the central banks

Low interest rates policy of the central banks

9% Strongly agree agree 29% 19% Slightly agree 24% Slightly disagree 9% disagree 10% Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 2 4 2 2 5 6 2.95

There is a question whether the low interest rate policy of the central banks would lead to a financial crisis. The purpose of this policy is to stimulate the real economy. If the rates are low, many people want to borrow and consume (e. g. buying houses in the

US). Banks therefore lent money from the central banks and more people were able to afford a loan because it was cheap. More consumers stanted to have higher demand as it was the goal of a low interest rate policy, leading to high prices. When banks lent money for real estate, they needed to collateralize it, at the higher value than the value of a house. When the lender could not later afford to pay back the loan, a shortfall occurred and the bank made a loss.

Indeed, the low rate policy promotes crises, but most respondents disagreed with this hypothesis (63%; average 2.95 - slightly disagree). It is not the fact that rates were low that led to a crisis, but the fact that a business policy was established in response to a low interest rate policy.

4.2.14. Excessive management salaries & bonuses & moral hazard (incentive) problem

Excessive management salaries & bonuses & moral hazard (incentive) problem Strongly agree 5% 9% 14% agree 19% Slightly agree 24% Slightly disagree 29% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 2 4 6 5 3 1 3.71

The problem is that the respondents were directly affected and would not like the reduction in their salary and bonus. But, the answers were quite surprising. The average answer was 3.71 (slightly agree) which means that the excessive compensation was seen as a problem. In the investment division of a bank, profit was needed to generate a bonus. If the bonus was endangered, the moral behavior of a banker would be shrinking to a minimum level and he would sell even the most dubious product.

4.2.15. Shortsighted focus on profits

Shortsighted focus on profits

14% Strongly agree agree 29% 14% Slightly agree 24% Slightly disagree 9% disagree 10% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 3 3 2 2 5 6 3.00

This question ties in with the previous question. The last question focused on the individual banker and the salaries and bonuses. This question has an overall view on the whole bank. A healthy bank has to be presented to the shareholder, otherwise they might lose their liquidity when they start to pull out their money. In many banks, due to the profit expectations of the shareholder, there is a lack in sustainable banking. This is the theory so far. In practice, the researcher asked banks and 21 answers were given. The average of all answer (3.00 - slightly disagree) show that they did not agree with this hypothesis.

4.2.16. Lack in transparency of business models of financial institutions

Lack in transparency of business models of financial institutions

14% Strongly agree agree 24% 19% Slightly agree 29% Slightly disagree disagree 9% Strongly disagree 5%

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 5 6 1 2 4 3 3.86

Banks these days are quite complex. The more complex, the more they becomes intrans parent, not only for external but also for internal actors. If a system is not transparent and hard to understand people need to make decisions under absolute uncertainty. The

consequences can be that the banks act under wrong parameters which are taken as a basis.

Within the respondents, there were managers or employees who perfectly understood their business, and because of this they did not agree with this hypothesis. The average of the respondents slightly agreed (58%; average value 3.86).

4.2.17. Moral hazard --> getting big enough to become too big to fail

Too-Big-to-fail - Moral hazard Strongly agree 14% agree 14% 29% Slightly agree Slightly disagree 29% 9% disagree 5% Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 6 6 1 2 3 3 4.05

There is a big moral hazard problem. Banks which are too big to fail, which means they are too important for the economic stability to fail, need to be rescued. Not only the public authorities, but also the private financial sector knows that, if the company becomes too big and systemic, the government will not let it file for bankruptcy. The financial institutions therefor feel safe when they reach a critical size, which can be achieved by taking more and more risks and debts. When a bank is too big to fail, it can put pressure on the government to rescue it. If the US-authorities had known (or thought) about the drastic consequences before, Lehman Brother would probably had been rescued. 63% tended to agree to this hypothesis (value 4.05 - slightly agree).

4.2.18. Poor evaluation of products & company by rating agencies

Poor evaluation of products & company by rating agencies

5% 5% Strongly agree 9% agree 33% Slightly agree 19% Slightly disagree 29% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 7 6 4 2 1 1 4.62

With this question, the researcher brought in a new actor of the crisis. The rating agencies were criticized a lot by giving good ratings to products of Lehman Brothers, and in some cases, downgrading countries creditworthiness in critical situations that led to the consequence that the country had to pay very high interest rates for the issue of its bonds. That led to the next level of the crisis. The economic crisis became a liquidity crisis that almost forced countries like Greece to file for bankruptcy. Before the crisis, rating agencies gave excellent ratings for products of Lehman Brothers or others which allowed other institutions officially to trade these products 81% tended to agree with this hypothesis (4.62 - agree).

4.2.19. Overvaluation of loan securities

Overvaluation of loan securities 5% 0% Strongly agree 14% agree 48% 9% Slightly agree Slightly disagree 24% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 10 5 2 3 1 0 4.95

As mentioned in the question before, the rating agencies evaluated many products better than they actually were. It is even regulated by the public authorities that a product is only allowed to be traded when "the Big Three" rating agencies have approved the fungibility. Obviously, many well rated products figured out to be highly over evaluated and 81% of the respondents agree with that (value 4.95 - agree).

4.2.20. Shrinking profits of banks

Shrinking profits of banks

10% Strongly agree

29% agree 19% Slightly agree 9% 19% Slightly disagree 14% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 6 4 3 2 4 2 4.00

Indeed, the profits of banks were and still are shrinking. There were different reasons for that: low interest rates (low margin), more competition (cheaper online competitors), and higher costs. Still banks generated profits. Another problem is that the equity capital was too low to compensate for the losses of the collapsing institutions. The lower the profit, the lower the equity capital that can be accumulated. Most respondents tended to agree (62%; value 4.00 - slightly agree).

4.2.21. Instable banking sector

Instable banking sector 0% Strongly agree 9% 29% agree 19% Slightly agree Slightly disagree 19% 24% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 6 5 4 4 2 0 4.43

The banking sector is very instable. One significant event (collapse of LB) caused a dramatic chain reaction, which led to a worldwide financial and economic crisis. The banking sector was already overheating for a while, not least because they are under

pressure due to the reasons mentioned in the question before. 72% tended to agree to this hypothesis (value 4.43 - slightly agree).

4.2.22. Inadequate instruments for banks to rescue each other

No adequate instruments for banks to rescue each other 0% Strongly agree 19% 19% agree Slightly agree 24% 19% Slightly disagree 19% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 0 4 4 4 5 4 2.95

This question is targeting the issue of "banking union". This is being discussed in the EU very intensively, especially during the crisis when the tax payer had to rescue collapsing banks. There is for example a system within the national savings banks in countries like Germany. About 425 savings banks are part of a liability system which saves a member from the collapse. First the regional association has to jump in; the next instance is the German federal association of the savings banks. This makes the customer feel save and it does not force the government to support for the banks. 62% tended to disagree to the hypothesis that there is no adequate instrument. Maybe the question was misunderstanding because in Germany there are several systems in the financial sector for banks to save each other. Indeed, in the German banking sector, it is a dubious plan to implement a European Banking Union. Only 38% tended to agree (value 2.95 - slightly disagree).

4.2.23. The crisis would have been avoided if Lehman Brothers had been rescued

The crisis would have been avoided if Lehman Brothers had been rescued

Strongly agree

24% 24% agree Slightly agree 19% Slightly disagree 10% 14% 9% disagree Strongly disagree

Strongly agree Slightly Slightly disagree Strongly agree agree disagree disagree 5 4 2 3 2 5 3.62

As mentioned in some questions above, the hypothesis is that the crisis became that disastrous when Lehman Brother filed for bankruptcy. Although, this was not the sole reason for all the problems that occurred after that but ,because of this event, the chain reaction started. The market was shocked and immediately many other financial institutions started to struggle. Not only banks from all over the world invested in products of Lehman Brothers and thereby into the US real estate market, but also countries and private investors. LB was one of the largest investment banks in the world and, so it was not only systemic for the US financial sector, but for the global financial market. Thus, the question is, if the authorities would have decided to save the bank, whether the world would be able to uncovered the deficiencies and fix the problems without sliding into the most dramatic crisis since the Great Depression. 52% of the respondents tended to agree. The value is 3.62, which means that the weighting shows that they basically slightly agreed.

4.3. The reasons for the bankruptcy of Lehman Brothers

4.3.1.No adequate regulation & supervision

No adequate regulation & supervision Strongly agree 24% 29% agree Slightly agree 9% Slightly disagree 14% 19% disagree 5% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 4 3 1 2 5 3.81

There is a call for more regulation and supervision to minimize the risks. The business model should be transparent and the trade in financial products must be regulated. In the newspapers during the last few years, it is often written about the failure of the federal authorities. The mandate for supervision especially had to be fulfilled by the central bank and the federal financial supervisory agency. There was a lack in regulation and supervision which led to the failure of LB 62% tended to agree, the weighted value is 3.18 (slightly agree)

4.3.2. Low equity capital

Low equity capital

14% 0% Strongly agree 5% agree 10% 52% Slightly agree 19% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 11 4 2 1 3 0 4.90

It was definitely clear, that Lehman Brothers did not have enough equity capital to bear the huge debt burden. The losses during the burst of the housing bubble could not be compensated. 81% tended to agree to this hypothesis (value 4.90 - agree).

4.3.3. Accounting fraud

Accounting fraud

Strongly agree 19% 19% agree 19% Slightly agree 29% Slightly disagree 9% disagree Strongly disagree 5%

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 4 6 2 1 4 4 3.67

Almost until the last day of the collapse, the CEO and CFO claimed that Lehman Brothers was in a good condition. Nobody could in fact saw that the bank could not really bear the debt burden and not able to survive. They issued even more asset backed securities hoping that this might finally save the business. Then there was an affiliate company in which the toxic papers were transferred to make cash for the company. Loses were then eliminated through legal and also illegal creative accounting. 57% tended to agree. The value is 3.67 (slightly agree).

4.3.4. Bad management decisions

Bad management decisions 5% 0% 14% Strongly agree agree 48% 14% Slightly agree 19% Slightly disagree disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 10 4 3 3 1 0 4.90

The management made bad decision when deciding to hide the disastrous condition of Lehman Brothers (see last question). The risk policy of the bank was bad as well. The regulations within the bank and the terms and conditions of the loan process were excessively lax. 91% thought that the management was a main factor for the collapse of the bank (value 4.90 - agree).

4.3.5. Management preserved a bright pretense to hide the actual condition

Management preserved a bright pretence to hide the actual condition 5%0% 0% 5% Strongly agree

agree 33% Slightly agree 57% Slightly disagree

disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 12 7 1 1 0 0 5.43

As mentioned before, the management tried to hide the actual condition vehemently. They preserved a bright pretense, so that the business partners still trusted the bank and continued trading. Almost all respondents agreed to that (95% agree; value 5.43 - agree).

4.3.6. Poor risk management of the bank

Poor risk management of the bank 10% 0% 10% Strongly agree 33% agree 9% Slightly agree

Slightly disagree 38% disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 7 8 2 2 2 0 4.76

In a retrospective view, the risk management of the bank miserably failed. Risks were taken without even analyzing any possible consequences. There were risks in the US real estate sector which became apparent already long time before the subprime crisis. Loans were given out to people who could not even afford to pay the redemption. Even, knowing about the bad loans, Lehman Brothers still continued selling them in CDO’s.

Most of the respondents agreed to the hypothesis (80%; Value 4.76 - agree - Most of the banks asked by the researcher in some ways had a business relationship with LB).

4.3.7. Ethically and morally reprehensible salary and bonus policy

Ethically and morally reprehensible salary and bonus policy

Strongly agree 14% 29% agree 9% 10% Slightly agree 19% Slightly disagree 19% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 3 2 2 4 4 6 2.95

When trading successfully with business partners, the banker achieves a bonus. The management earned a very high salary plus a huge bonus and various other benefits. This policy of "higher and more" led to the fact, that the bankers were interested only in making a deal in a business transaction. If the trade was risky, it was presented as a high profit product and the risks were minimized. But even if they didn't assess the risks, the rating agencies certified the products at the best grade. The morally and ethically excessive compensation policy resulted in a lower moral and ethical behavior in a bank. More deals led to more money rewards. The majority did not agree to this hypothesis, as the respondents benefited from their own salary compensation. The average value answer is 2.95 (slightly disagree).

4.3.8. Lack in transparency of the bank business model

0% Lack in transparency of the bank business model

Strongly agree 19% 29% agree 9% Slightly agree 24% 19% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 4 5 2 4 0 4.29

The problem came from the fact that the banks became too big and too complex. Another problem that comes along with it is the lack in transparency. The more complex the process, business model and structures, the harder it is to have an overview and to coordinate every process and every employee. Indeed, the different segments start to act independent from each other. This unclear structure results into an uncoordinatable business model what causes an in transparent profit/earnings situation. 72% agreed to this hypothesis. The others might probably have a very big bank and can successfully lead it and that's why they disagreed. The average weighted value still is 4.29 (slightly agree).

4.3.9. Participation in commercial banking as an investment bank

Participation in commercial banking as an investment bank

Strongly agree 19% 24% agree 19% Slightly agree 19% Slightly disagree 14% disagree Strongly disagree 5%

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 5 4 1 3 4 4 3.57

Lehman Brothers used to be a pure investment bank for decades. Soon the bank management realized that the profits in commercial banking were quite high. They therefore started to diversify. LB became one of the biggest players in real estate sector. But still LB was basically specialized in investment banking. Profit driven, the banker gave out loans to almost everyone who applied for a credit to buy a house. The bank had a lack in competency and the wrong incentives were given. The risks were therefore completely suppressed. The value approach for evaluating the houses was absolutely disproportionate and a check for credit-worthiness almost did not exist. The respondents on average slightly agreed (3.57). 48% tended to agree.

4.3.10. Debt burden became too big (exorbitant high leverage ratio)

0% Debt burden became too big (exorbitant high leverage ratio) 0% 0% Strongly agree 19% agree

Slightly agree 24% 57% Slightly disagree

disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 12 5 4 0 0 0 5.38

The fact that Lehman Brothers was hopelessly overleveraged was for sure. At the end, the debt burden caused the failure. If the equity capital level was high enough and the leverage ratio at a healthy level, the bank probably could have survived. 100% of the respondents tended to agree (value 5.38).

4.3.11. Rating agencies made "wrong" ratings --> sugarcoating securitized mortgages so the bank could continue trading high risk CDO's

Rating agencies made "wrong" ratings --> sugarcoating securitized 9% mortgages so the bank could continue trading high risk CDO's Strongly agree 29% agree 24% Slightly agree 19% Slightly disagree 14% disagree 5% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 4 3 1 5 2 3.95

Within the financial system, there are institutions and the rating agencies, that have been established to assess certain products or companies, to evaluate the risks. In the history of the financial system, there are three main agencies which could assert themselves in the world. The "Big Three" (Moody's, Standard &Poor’s and Fitch) have an enormous influence on the market. When the rating was Triple A, the product or company was declared highly reliable and profitable. In the case of LB they obviously gave the wrong ratings. Until the downfall of LB, the ratings were good, so the client companies continued to do business with LB. Indeed, the rating agency market was an oligopoly so

the rating of the “Big Three” was very powerful. 62% agreed with the hypothesis (the value is 3.95 - slightly agree).

4.3.12. Too complex and abstruse products

Too complex and abstruse products

Strongly agree

29% 24% agree Slightly agree 14% 19% Slightly disagree 9% disagree

5% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 5 3 2 1 4 6 3.33

In many cases the products, which were traded by Lehman Brothers, were extremely complex and abstract. Many brokers even did not understand what exactly they were selling or buying. There were bundles of papers (in the case of LB - housing loans) securitized and sold. The rating agencies sealed these "CDO's" with an "AAA" and the banks started to trade. 53% disagreed with the hypothesis that the products were too complex. The average answer is 3.33 - slightly disagree. Probably most of the respondents knew the products which were claimed to be a reasons for the collapse.

4.3.13. Conflict of interest of rating agencies (consulting & rating at the same time)

Conflict of interest of rating agencies (consulting & rating at the same time) 5% Strongly agree 14% agree 24% Slightly agree 33% Slightly disagree 19% 5% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 3 7 4 1 5 1 3.95

Ernst & Young, a top accounting firm, was engaged as consultants and as an auditor at the same time for Lehman Brothers. The Chief Prosecutor of New York indicted E&Y for detaining facts about the actual situation of LB4. One reason for that misbehavior may be that LB was one of the biggest clients of E&Y. The rating agencies say that they trusted in the report of the auditor. But the problem with the rating agencies is that the rating is ordered and paid for by the company that has to be rated. This has a lot of potential for tortious interference. 66% believed in the possibility of an influenced rating (3.95 - slightly agree).

4.3.14. No reaction to the trend to more digitalization

0% No reaction to the trend to more digitalization Strongly agree 19% 24% agree 10% Slightly agree 14% Slightly disagree 33% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 0 4 2 3 7 5 2.67

It is advocated that the digital trend within the financial sector and the fact that banks did not react adequately to this was one reason for the collapse of Lehman Brothers. The rising online market in fact increased the competition but it did not lead to the breakdown. 71% of the respondents shared this opinion and tended to disagree (2.67 - slightly disagree).

4.3.15. Trade with "dubious" financial products

Trade with "dubious" financial products

Strongly agree 14% 29% agree 19% Slightly agree 19% Slightly disagree 14% disagree 5% Strongly disagree

4 http://www.focus.de/finanzen/news/banken-anklage-gegen-ernst-und-young-wegen-lehman- pleite_aid_584182.html

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 4 3 1 4 3 3.90

Trading in the complex and abstruse products is comparable to gambling and deemed morally and ethically reprehensible. Lehman Brothers securitized toxic papers and traded them, and they knew about it. Most of the respondents tended to agree (62%, 3.90 - slightly agree).

4.3.16. Repealing Glass-Steagall Act by Pres. Bill Clinton 1999

Repealing Glass-Steagall Act

Strongly agree 24% 33% agree 14% Slightly agree 10% 14% Slightly disagree disagree 5%

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 7 3 1 2 3 5 3.71

The Glass-Steagall Act was the law that separated commercial and investment banking since 1933. The repeal of the Act in 1999 made it possible for Lehman Brothers, basically an investment bank, to start participating in financing the private real estate market. It was a fast growing segment and LB soon became one of the biggest actors in real estate sector in the USA. At the end, this law was one main aspect in the history in the chain of causation for the LB-failure when the housing market collapsed. 52% of the respondents tended to agree and still 48% tended to disagree.

4.3.17. High risk - maximum profit strategy

High risk - maximum profit strategy

Strongly agree 19% 29% agree 10% Slightly agree 9% 19% 14% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 4 3 2 2 4 3.90

A traditional bank usually exists to generate profits. But, at Lehman Brothers, the running of business became quite excessive. The goal was growing more and more and making more and more profits. But for Lehman Brothers, growth and the profits were reached by borrowing money from the market. But when the market learnt of the problems of Lehman Brothers, it stoped lending money. And this business model of high risk for maximum profit collapsed at this point. 62% tended to agree that this strategy led to the breakdown while the others thought that this strategy was appropriate. The average of all answers is 3.90 - slightly agree.

4.3.18. Inflationary contracting of mortgage loans even to customers who couldn't afford to repay

Inflationary contracting of mortgage loans even to 0% customers who couldn't afford to repay 5% 0% Strongly agree agree 19% 43% Slightly agree Slightly disagree 33% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 9 7 4 1 0 0 5.14

As mentioned, after repealing the Glass-Steagall Act, Lehman Brothers entered the commercial market and became an important player in financing the real estate market. But this fast growing business was blown up with a huge debt mountain. The problem was the risk policy in this segment, as the credit check almost did not exist. That was why almost everyone got a housing loan, and the real estate market was overheated. The risk management completely failed. At the end, LB had its books full of bad loans which could not be paid back. 95% tended to agree, that Lehman Brothers' loan policy was one main factor for its bankruptcy (5.14 - agree).

4.3.19. Too high value approaches for houses

Too high value approaches for houses

5% 5% 0% Strongly agree agree 38% 19% Slightly agree

33% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 8 7 4 1 1 0 4.95

The first misbehavior mentioned in the question above was the inflationary contracting of housing loans. Another problem is the inappropriate high valuation (hypothecary value) for the houses. The higher the value, the higher is the loan the banker can grant to the customer. That should be regulated in the risk policy of a bank and should be controlled by the internal auditing department and by the public institutions for supervision and regulation. But obviously it did not happen. In case of a credit default, the loan was not secured sufficiently and the bank had to book a loss. 90% tended to agree which is an average of 4.95 (agree).

4.3.20. Housing bubble and ignorance to signs of an occurring bubble

Housing bubble and ignorance to signs for an occurring bubble

Strongly agree 10% 14% 29% agree

14% Slightly agree 14% Slightly disagree 19% disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 3 4 3 2 3 3.95

As mentioned, the real estate market was highly overheated. Not least because of the low interest and the lack of alternative possibilities of investment due to low capital investment interest rates. It therefore seemed to make sense for customers to buy a house. The prices of houses increased due to higher demand and that led to prices which were higher than the factual value. Due to high loans in the housing sector and the low

recoverability, the real estate market became a high risk sector and a housing bubble developed. At the end, the bubble burst and it came out that the money invested will not be paid back. Normally, if investors and private households put their money into the housing sector and the prices seem to be much higher than the real value, a bank should react by implementing a more restrictive loan policy. But instead, Lehman Brothers ignored the first signs (like many others as well) and continued with their strategy. 62% tended to agree to this hypothesis. This is an average of 3.95 (slightly agree).

4.3.21. Public authorities refusing to rescue Lehman Brothers to restore moral hazard

Public authorities refused to rescue Lehman Brothers 10% to restore moral hazard

Strongly agree 14% 38% agree Slightly agree 9% 10% 19% Slightly disagree disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 8 4 2 2 3 2 4.29

Critics of the case of Lehman Brothers blamed the government authorities for letting the bank go bankrupt. The reason for the authorities was that, to rescue LB, was to restore moral hazard and ignore the widespread consequences. On the other hand, the authorities could not even imagine that the collapse would be so dramatic. Indeed, 66% of the respondents thought this hypothesis was true and this act should only send out a message to the other financial institutions to know that they would not be saved in any case. This is an average of answers of 4.29 (slightly agree).

4.3.22. Lehman Brothers would have been rescued, if the authorities would have known about the disastrous consequences for the global financial sector & the would economy

Lehman Brothers would have been rescued, if the authorities would have known about the consequences 5% Strongly agree 14% 38% agree 10% Slightly agree 19% Slightly disagree 14% disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 8 3 4 2 3 1 4.38

This question is linked to the previous one, whether LB would have been rescued had the authorities foreseen the consequences for the world financial sector and the global economy.71% tended to agree to this hypothesis, this is 4.38 - slightly agree. The crisis which broke out with full force after the LB collapse cost billions of dollars. It might probably have been cheaper to rescue LB and start stabilizing the financial sector and the world economy. And that is why it can be assumed that, the bank would have been saved, if it was known of the consequence.

4.4. Possibility that the crisis could have been prevented

4.4.1. Not letting Lehman Brothers go bankrupt

Not letting Lehman Brothers go bankrupt

10% Strongly agree agree 14% 38% 5% Slightly agree 19% Slightly disagree 14% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 8 3 4 1 3 2 4.29

The picture of this question reflects the result of the previous question, whether the crisis could have been avoided if LB had been rescued. 71% tended to agree. 4.29 in average - slightly agree.

4.4.2. Limitation of the size of a bank to avoid systemic risks

Limitation of the size of a bank to avoid systemic risks

Strongly agree agree 14% 33% 14% Slightly agree Slightly disagree 24% 10% disagree 5% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 7 5 1 2 3 3 4.10

The keyword is "too big to fail". The question is whether the financial crisis could be avoided, when the size of a bank is limited, so that the institution does not have the size to become systemic. If a bank of a small size faces bankruptcy and not rescued, it will not have dramatic consequences like the case Lehman Brothers. 62% of the respondents shared this opinion. But, a limitation will have the consequence to the present banks. That is was why 38% still did not share this opinion. And some of the banks asked are already systemic. The average is 4.10 - slightly agree.

4.4.3. Need for higher equity capital quota + capital surplus

Need for higher equity capital quota + capital surplus

Strongly agree agree 19% 24% 10% Slightly agree Slightly disagree 5% 33% disagree 9% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 5 7 2 1 2 4 4.00

The biggest problem in the case of Lehman Brothers was that there was almost no capital equity which could have been adequate for the bank to pay at least a part of the debt burden. This debt overload and the fact that LB was not able to borrow any money at the market led to the collapse. 66% tended to agree (4.00 - slightly agree).

4.4.4. More transparency on assessment criteria of rating agencies

More transparency on assessment criteria of rating agencies

Strongly agree

14% 29% agree Slightly agree 29% 14% Slightly disagree 9% disagree Strongly disagree 5%

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 3 2 1 6 3 3.67

The rating agencies played a big role within the crisis. Critics blamed them for evaluating products and companies with best grades although they were highly risky and about to collapse. This is why temporarily many politics and critics claim for more transparency in the rating processes. 52% tended to agree. Still 48% tended to disagree. The problem with transparent criteria is that the main goal of an agency is to evaluate the companies and products without letting them know what exactly is relevant. If it would be transparent, the evaluated object (but only these objects) can be prepared to exactly fulfill the relevant goals. The average answer is 3.67 - slightly agree.

4.4.5. Supervision of rating agencies

Supervision of rating agencies

10% Strongly agree 14% agree 43% 5% Slightly agree 14% Slightly disagree 14% disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 9 3 3 1 3 2 4.38

An alternative to the demand for more transparency is to put the rating agency under supervision of an independent institution. The respondents answered more clearly with 4.38 - slightly agree. Having a given standard can make the ratings more reliable for the public.

4.4.6. Creating a European rating agency to balance the power of the Big Three from the USA

Creating a European rating agency to balance the power of the Big Three from the USA

Strongly agree

agree 19% 38% 14% Slightly agree 14% Slightly disagree 5% disagree 10% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 8 3 2 1 3 4 4.00

Another idea is to create a new European rating agency to break the power of "The Big Three". The reason is that they seem to do one-sided ratings for the advantage of the US-economic area and against the European economy. While countries like Portugal, Ireland, Spain and especially Greece slid into an economic and financial crisis, the rating agencies harassed the markets by downgrading them. To the European politics and economists, it seemed suspicious that the ratings came up when the countries already struggled, resulting in higher interest rates for them to borrow money from the markets and made the situation more dramatic. 62% (4.00 - slightly agree) tended to agree to the hypothesis that a crisis could be avoided by having a new European rating agency to balance the power of the US agencies.

4.4.7. Implementation of a regulated and sustainable payment system

Implementation of a regulated and sustainable payment system 0% 5% 10% Strongly agree

agree 38% 14% Slightly agree

Slightly disagree 33% disagree

Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 0 1 2 3 7 8 2.10

For the question whether the implementation of a regulated and sustainable compensation system could avoid crises in the future, 85% tended to disagree (2.10 - disagree). The respondents thought it was not the compensation system itself that caused crises.

4.4.8. Creating a legal framework to allow an orderly restructuring of financial institutions

Creating a legal framework to allow a orderly restructuring of financial institutions

14% Strongly agree 10% 24% agree Slightly agree 14% 38% Slightly disagree disagree

0% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 5 8 0 3 2 3 4.10

This topic was discussed in the European politics intensively. Many claimed for a framework that allowed the orderly restructuring of financial institutions in case of systemic relevance. The problem was that there were many banks that were "too big to fail", and for this reason they were systemic. In case of bankruptcy, it would have not been foreseeable consequences for the economy of a country. 62% tended to agree that it might help to prevent economic crises that the world had faced since 2007. At least, this is necessary to have a framework which could act as a contingency plan. The average answer is 4.10 - slightly agree.

4.4.9. Implementation of a maximum leverage ratio

Implementation of a maximum leverage ratio 5% 9% Strongly agree 29% agree 19% Slightly agree

14% 24% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 5 3 4 2 1 4.29

Setting a maximum leverage ratio will help to minimize risks in financial institutions. The lower it is, the better a bank can react when sliding into a crisis. In the case of Lehman Brothers, there was no equity capital at all and the leverage ratio was too high to pay the debts. And by implementing a maximum leverage ratio the financial sector would be more stabilized. 67% of the respondents thought that a crisis could be avoided significantly when implementing a maximum leverage ratio (4.29 – slightly agree).

4.4.10. Limitation and regulation of trades with CDO's and other high risk products

Limitation and regulation of trades with CDO's and other high risk products

0% 9% Strongly agree 10% 24% agree 14% Slightly agree 43% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 0 2 2 3 9 5 2.38

Another idea is to limit and regulate the trade with high risk products like CDO’s. The problem of the present crisis is that securities were traded which were highly toxic, implying that they were bad loans. The securities traded by LB were bundled housing loans. The housing loans were highly risky, because on the US real estate market, a bubble arose which made many of the loans fail, making the CDO’s more or less worthless. In addition, LB had many houses in its books which did not have the value that was evaluated by the bankers. 81% tended to disagree to the plans to limit and regulate the trade with high risk products (2.38 – disagree).

4.4.11. Fair value evaluation / adequate assessment for loans

Fair value evaluation / adequate assessment for loans 10% Strongly agree agree 14% 29% Slightly agree 9% 14% 24% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 6 5 3 2 3 2 4.14

The experiences from the collapse of Lehman Brothers show that there is a need for a fair value evaluation. Indeed, the valuation approaches were not adequate, making the bank book having assets that were lower in actual value. To have a standardized assessment approach for real estate and other objects to finance may be the solution. The idea was shared by 67% which is an average value of the answers of 4.14 – slightly agree.

4.4.12. Reimplementation of the separated banking system model (Glass-Steagall Act)

(re-)implementation of the separated banking system model (Glass-Steagall Act)

Strongly agree agree 19% 24% Slightly agree 19% 14% Slightly disagree 14% disagree 10% Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 5 3 3 2 4 4 3.57

The question is whether the implementation of the Glass-Steagall Act could avoid the crisis. This act would separate the commercial from the investment banking segment and makes it possible to liquidate one segment without affecting the other. The respondents were quite indifferent about this idea, so 52% tended to agree which is a slim majority (average answer 3.57 – slightly agree).

4.4.13. Banking union to shift the responsibility and the risks to the banks and away from the public.

Banking union to shift the responsibility and the risks to the banks and away from the public.

5% 5% Strongly agree 9% agree 29% Slightly agree 19% 33% Slightly disagree disagree Strongly disagree

Strongly agree Slightly Slightly Disagree Strongly agree agree disagree disagree 1 1 2 4 7 6 2.43

This topic was discussed by the authorities of the European Union since the breakout of the crisis, to let the banks form a union and implement a fund to create a mechanism that will be activated when a European bank faces bankruptcy. By this act, the responsibility will be shifted from the governments to the origin. This idea does not really find supporters within the financial sector because of the fact that, for example, a bank in Germany cannot supervise a bank in France and vice versa. 81% tended to disagree (2.43 – disagree). Meanwhile, parts of this law have been passed.