A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS CULTURE, LEADERSHIP, ALIGNMENT, STRUCTURE, SYSTEMS, AND STRATEGY (CLASS-S): A SYSTEMS THEORY REVIEW OF THE FAILURE OF LEHMAN BROTHERS ___________________________________ By KRISTIN TRAHAN WINFORD ___________________________________ A DISSERTATION Submitted to the faculty of the Graduate School of the Creighton University in Partial Fulfillment of the Requirements for the degree of Doctor of Education in the Department of Interdisciplinary Leadership. ___________________________________ Omaha, NE (November 15, 2013) A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS Copyright 2013, Kristin Trahan Winford This document is copyrighted material. Under copyright law, no part of this document may be reproduced without the expressed permission of the author. A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS iii ABSTRACT On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the United States, filed for Chapter 11 Bankruptcy protection under the United States Bankruptcy Code. Reporting over 25,000 employees worldwide, assets of $639 billion, and liabilities of $613 billion at the time of filing, this failure disturbed global financial markets and served as a major contributor to tipping the world into a recession that was second only to the Great Depression. Although the macroeconomic conditions of global financial markets were tremulous at the time of the investment bank’s failure, the collapse occurred suddenly. In the first quarter of 2008, the storied investment bank reported profit while other financial institutions were reporting massive losses from write-downs resulting from plummeting commercial and residential real estate holdings. Unknown to many was the fact that Lehman had not yet begun to address its equally troubled real estate portfolio comprised of $25 billion in prime, subprime, and Alt-A mortgages, which had driven the firm’s debt to equity ratio from 26:1 in 2003 to 32:1 in 2008. As a result of this increase, Lehman carried an additional $382 billion in tangible assets on its balance sheet, the majority of which were dwindling rapidly in value. Adopting a qualitative case study methodology, the purpose of the study was to analyze the failure of Lehman Brothers through the lens of CLASS-S (Culture, Leadership, Alignment, Structure, Systems, and Strategy) model to evaluate corporate governance and management of strategic risk. The CLASS-S model considers an organization’s risk strategies and corporate governance holistically as the sum of many of an entity’s parts to arrive at the conclusion that Lehman Brothers failure was a result, in part, of the lack of alignment between the CLASS-S tenants and that alignment is key to organizational A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS iv success. This finding contributed to the development of the Organizational Alignment Review (OAR) model, replacing the CLASS-S model. A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS v DEDICATION In loving memory of my grandfather John Curtis Trahan, Sr. My first example of leadership A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS vi ACKNOWLEDGEMENTS This document has been a labor of love, both in the painful and pure sense of creating something new. This journey should not be embarked on alone, and it is with much gratitude and appreciation that I acknowledge those who aided me along the way. Dr. Isabelle Cherney, thank you for having the vision and passion to make our program a reality. Your guidance and spirit left an indelible mark on me. Dr. Gail Jensen, you delivered thoughtful and pointed feedback. Thank you for expecting the best from me. I hope I delivered. Dr. Donna Ehrlich, you cheered me on, supported me, and guided me throughout this labyrinth. Thank you for your belief in me. Jack Butler, without your wisdom and experience, I would not have learned nearly as much. Thank you for investing both time and talent in making this study and me better. To my professional colleagues, thank you for serving as sounding boards, lab rats, and skeptical critics, and for your indulgence in my oft-repeated phrase, “Well, in Lehman…” To Ralph and Larry, thank you for investing in me over the last fifteen years. So much of my education has come from you. To my Creighton colleagues, you have been an amazing, blessed part of my journey and I am honored to have made it with you. Matt and Karen, your presence has enriched my life and your friendship has made me a better person. Speaking of friends, I have been blessed with some of the best and am amazed at the rich tapestry of relationships we created over time, as you have become the family of my choosing. Naming each of you would show the true embarrassment of riches with which I have been blessed, but please know that your support, laughter, and gentle (or not) prodding shepherded me through this process. A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS vii To my mother, thank you for giving me the amazing gifts of independence and confidence, and teaching me that hard work and kindness results in great achievements. Special thanks to my grandmothers, Helen and Edna, who were and are my shining examples that a woman’s best asset is always her intelligence. To my uncle, I miss you every day but know you are beaming proudly. To my brother, Jack, remember, awesomeness is genetic. Craig, words cannot express what you mean to me or the strength and peace our relationship has provided me. You are my best friend and greatest supporter. Thank you for encouraging, challenging, loving, and taking care of me in all the big and little ways you do. I pray I have shown you the same care and devotion. To my mother-in-law, thank you for being you, for loving me as your own and giving me your son. To Jackson and Dylan, thank you for inspiring me to constantly ask “why” and “what would happen if…” I hope I have shown you the value of hard work, perseverance, and the importance of education. We have all sacrificed for me to pursue this degree, and I thank you for your grace in allowing me to be a student and your mom. You will forever remain the best parts of my life. I love you both so much, and being your mother will always be my greatest accomplishment. Finally, thank you, Lord, for blessing me in ways I could never have fathomed and for which I am so grateful. I remain ever humbled, and pray you continue to use me as an instrument for your service. A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS viii TABLE OF CONTENTS ABSTRACT ....................................................................................................................... iii DEDICATION ................................................................................................................... iv ACKNOWLEDGEMENTS .................................................................................................v TABLE OF CONTENTS ................................................................................................... vi LIST OF TABLES ............................................................................................................ vii LIST OF FIGURES ......................................................................................................... viii CHAPTER ONE: INTRODUCTION ..................................................................................1 Overview ..................................................................................................................1 Lehman Brothers History .........................................................................................2 1844 to 1969 ................................................................................................2 1970 to 1994 ................................................................................................3 1996 to 2008 ................................................................................................4 Theoretical Framework: The CLASS-S Model .......................................................6 The Importance of Strategy .........................................................................6 Purpose of the Study ................................................................................................8 Research Questions ..................................................................................................9 Defined Terms .......................................................................................................10 Delimitations ..........................................................................................................13 Limitations .............................................................................................................13 Assumptions ...........................................................................................................14 Significance of the Study .......................................................................................15 Organization of the Study ......................................................................................16 A SYSTEMS THEORY REVIEW OF LEHMAN BROTHERS ix CHAPTER TWO: LITERATURE REVIEW ....................................................................17 Introduction ............................................................................................................17 Systems Theory ......................................................................................................17 Classical Systems Theory ..........................................................................17 General Systems Theory