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  • III. EXAMINER’S!CONCLUSIONS!
  • 1. Business!and!Risk!Management!
  • (a) Lehman’s!Changed!Business!Strategy!
  • (c) Application!of!Risk!Controls!to!Changed!Business! Strategy!
  • (i) Stress!Testing!Exclusions!
  • (ii) Risk!Appetite!Limit!Increase!For!Fiscal!2007!
  • (iii) Decision!Not!To!Enforce!Single!Transaction!Limit!
  • (d) The!Board’s!Approval!of!Lehman’s!Growth!Strategy!
  • (a) Lehman’s!Residential!Mortgage!Business!
  • (ii) The!March!20,!2007!Board!Meeting!
  • (b) The!Explosion!in!Lehman’s!Leveraged!Loan!Business!
  • (c) Internal!Opposition!to!Growth!of!Leveraged!Loans! Business!
  • (e) Nagioff’s!Replacement!of!Gelband!as!Head!of!FID!
  • (a) Nagioff!and!Kirk!Try!to!Limit!Lehman’s!High!Yield! Business!
  • (c) Lehman!Delays!the!Archstone!Closing!
  • (i) Risk!Appetite!Disclosures!
  • (ii) Leveraged!Loan!Disclosures!!
  • (iii) Leverage!Ratios!and!Balance!Sheet!Disclosures!
  • (iv) Liquidity!and!Capital!Disclosures!
  • (a) Fiscal!2008!Risk!Appetite!Limit!Increase!
  • (b) January!2008!Meeting!of!Board!of!Directors!!
  • (c) Executive!Turnover!
  • (d) Commercial!Real!Estate!Sell"Off:!!Too!Little,!Too!Late!
  • (e) Lehman’s!Compensation!Practices!
  • (iii) Concentrated!Investments!in!Leveraged!Loans!
  • (iv) Firm"Wide!Risk!Appetite!Excesses!
  • (v) Firm"Wide!Balance!Sheet!Limits!
  • (vii) Summary:!!Officers’!Duty!of!Care!
  • (b) Lehman’s!Directors!Did!Not!Violate!Their!Duty!of!Loyalty!!
  • (c) Lehman’s!Directors!Did!Not!Violate!Their!Duty!to!Monitor!

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2-Jan-08 17-Mar-08 10-Jun-08 1-Jul-08 9-Sep-08 10-Sep-08 12-Sep-08
Landmark Dates
Lehman Stock Price


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P*$7&($ $3K*#L $7/ $*2/ 5&% S%*0*;/L/ %/0*/PI 9(Cc/)$ $& );3PC3)K 3L%//2/#$9+
17&%$;4 35$/% 7*9 3SS&*#$2/#$I $7/ -.32*#/% 2/$ P*$7 3#' /9$3C;*97/' 3 %/L(;3%
;*#/ &5 )&#$3)$ P*$7 $7/ 1"E= 6%(9$// $& 973%/ '&)(2/#$9I *#$/%0*/P 9(223%*/9 3#'
&$7/% *#5&%23$*&# $& 30&*' '(S;*)3$*&# &5 /55&%$+ 67/ -.32*#/% 2/$ P*$7 $7/ 1-: 3#'
$7%// l#*$/' 1$3$/9 =$$&%#/4 V55*)/9 YM/P W/%9/4I -39$/%# ?*9$%*)$ &5 M/P j&%KI
1&($7/%# ?*9$%*)$ &5 M/P j&%K\ $& /9$3C;*97 S%&$&)&;9 5&% );/3%*#L S%&S&9/' *#$/%0*/P9

QN

9& 39 #&$ $& *#$/%5/%/ P*$7 3#4 &#L&*#L *#0/9$*L3$*&#9+ =#' $7/ -.32*#/% 2/$ P*$7
*#$/%/9$/' S3%$*/9 $& &C$3*# $7/*% L(*'3#)/ 3#' $7&(L7$9+
67%&(L7&($ $7/ )&(%9/ &5 $7/ *#0/9$*L3$*&#I $7/ -.32*#/% )&#'()$/' %/L(;3%I
P//K;4 )3;;9 P*$7 $7/ 1-: 3#' l+1+ =$$&%#/49 $& (S'3$/ $7/2 &# '/0/;&S2/#$9 3#' $&
'/9)%*C/ 9*L#*5*)3#$ '&)(2/#$9 3#' $7/ %/9(;$9 &5 *#$/%0*/P9+ 67/ -.32*#/% 739 ;*K/P*9/
23'/ '&)(2/#$9 3#' $7/ %/9(;$9 &5 *#$/%0*/P9 303*;3C;/ $& $7/ 1"E= 6%(9$//+

q q q q q q q q q q q
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Section III.A.1: Risk

39
!"#$% &' (&)!%)!*
III. Ixaminer's ConcIusions......................................................................................................43
A. Why Did Lehman IaiI` Are There CoIorabIe Causes of Aclion Thal
Arise Irom Ils IinanciaI Condilion and IaiIure`.....................................................43
1. ßusiness and Risk Managemenl..........................................................................43
a) Ixeculive Summary.......................................................................................43
(1) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Senior Officers ßreached Their Iiduciary Duly of
Care by IaiIing lo Observe Lehman's Risk Managemenl
IoIicies and Irocedures .........................................................................47
(2) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Senior Officers ßreached Their Iiduciary Duly lo
Inform lhe ßoard of Direclors Concerning lhe LeveI of Risk
Lehman Had Assumed ..........................................................................52
(3) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Direclors ßreached Their Iiduciary Duly by
IaiIing lo Monilor Lehman's Risk"Taking Aclivilies.........................54
b) Iacls..................................................................................................................58
(1) Irom Moving lo Slorage: Lehman Ix¡ands Ils Irinci¡aI
Inveslmenls..............................................................................................58
(a) Lehman's Changed ßusiness Slralegy......................................... 59
(b) The Increased Risk Irom Lehman's Changed ßusiness
Slralegy............................................................................................. 62
(c) A¡¡Iicalion of Risk ConlroIs lo Changed ßusiness
Slralegy............................................................................................. 65
(i) Slress Tesling IxcIusions ..................................................... 66
(ii) Risk A¡¡elile Limil Increase Ior IiscaI 2007 .................... 70
(iii) Decision Nol To Inforce SingIe Transaclion Limil .......... 73
(d) The ßoard's A¡¡rovaI of Lehman's Grovlh Slralegy............... 76
(2) Lehman DoubIes Dovn: Lehman Conlinues Ils Grovlh
Slralegy Des¡ile lhe Onsel of lhe Sub¡rime Crisis............................78
(a) Lehman's ResidenliaI Morlgage ßusiness................................... 82
(i) Lehman Decides lo CurlaiI Sub¡rime Originalions
bul Conlinue lo Iursue ´AIl"A¨ Originalions .................. 82
(ii) The March 20, 2007 ßoard Meeling .................................... 90

40
(b) The Ix¡Iosion in Lehman's Leveraged Loan ßusiness ............. 95
(i) ReIaxalion of Risk ConlroIs lo Accommodale
Grovlh of Lehman's Leveraged Loans ßusiness ............. 97
(c) InlernaI O¡¡osilion lo Grovlh of Leveraged Loans
ßusiness.......................................................................................... 100
(d) Grovlh of Lehman's CommerciaI ReaI Islale ßusiness al
The Slarl of lhe Sub¡rime Crisis................................................. 103
(i) ReIaxalion of Risk ConlroIs lo Accommodale
Grovlh of Lehman's CommerciaI ReaI Islale
ßusiness ................................................................................ 105
(ii) InlernaI O¡¡osilion lo Grovlh of CommerciaI ReaI
Islale ßusiness..................................................................... 107
(iii) Archslone ............................................................................. 108
a. Lehman's Commilmenl............................................... 108
b. Risk Managemenl of Lehman's Archslone
Commilmenl................................................................. 112
(e) Nagioff's Re¡Iacemenl of GeIband as Head of IID................. 114
(f) The ßoard of Direclors' Avareness of Lehman's
Increasing Risk IrofiIe ................................................................. 116
(3) IarIy Warnings: Risk Limil Overages, Iunding Concerns,
and lhe Dee¡ening Sub¡rime Crisis ..................................................117
(a) Nagioff and Kirk Try lo Limil Lehman's High YieId
ßusiness.......................................................................................... 119
(b) }uIy"Augusl 2007 Concerns Regarding Lehman's AbiIily
lo Iund Ils Commilmenls............................................................ 123
(c) Lehman DeIays lhe Archslone CIosing ..................................... 128
(d) Lehman Increases lhe Risk A¡¡elile Limil lo
Accommodale lhe AddilionaI Risk AllribulabIe lo lhe
Archslone Transaclion ................................................................. 131
(e) Cash Ca¡ilaI Concerns................................................................. 134
(f) Lehman's Terminalion of Ils ResidenliaI Morlgage
Originalions ................................................................................... 138
(g) Se¡lember, Oclober, and November 2007 Meelings of
ßoard of Direclors......................................................................... 139
(i) Risk A¡¡elile DiscIosures .................................................. 139
(ii) Leveraged Loan DiscIosures.............................................. 144

41
(iii) Leverage Ralios and ßaIance Sheel DiscIosures ............. 147
(iv) Liquidily and Ca¡ilaI DiscIosures .................................... 148
(4) Lale Reaclions: Lehman SIovIy Ixils Ils IIIiquid ReaI Islale
Inveslmenls............................................................................................150
(a) IiscaI 2008 Risk A¡¡elile Limil Increase................................... 152
(b) }anuary 2008 Meeling of ßoard of Direclors............................. 154
(c) Ixeculive Turnover ...................................................................... 156
(d) CommerciaI ReaI Islale SeII"Off: Too LillIe, Too Lale ........... 157
(e) Lehman's Com¡ensalion Iraclices ............................................ 161
c) AnaIysis .........................................................................................................163
(1) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Senior Officers ßreached Their Iiduciary Duly of
Care by IaiIing lo Observe Lehman's Risk Managemenl
IoIicies and Irocedures .......................................................................164
(a) LegaI Slandard .............................................................................. 164
(b) ßackground.................................................................................... 166
(i) CounlercycIicaI Grovlh Slralegy vilh Res¡ecl lo
ResidenliaI Morlgage Originalion.................................... 171
(ii) Lehman's Concenlralion of Risk in Ils CommerciaI
ReaI Islale ßusiness............................................................ 172
(iii) Concenlraled Inveslmenls in Leveraged Loans ............. 175
(iv) Iirm"Wide Risk A¡¡elile Ixcesses................................... 179
(v) Iirm"Wide ßaIance Sheel Limils....................................... 181
(vi) Slress Tesling ....................................................................... 181
(vii) Summary: Officers' Duly of Care .................................... 182
(2) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Senior Officers ßreached Their Iiduciary Duly lo
Inform lhe ßoard of Direclors Concerning lhe LeveI of Risk
Lehman Had Assumed ........................................................................183
(3) The Ixaminer Does Nol Iind CoIorabIe CIaims Thal
Lehman's Direclors ßreached Their Iiduciary Duly by
IaiIing lo Monilor Lehman's Risk"Taking Aclivilies.......................188
(a) Lehman's Direclors are Irolecled Irom Duly of Care
LiabiIily by lhe IxcuI¡alory CIause and lhe ßusiness
}udgmenl RuIe............................................................................... 188

42
(b) Lehman's Direclors Did Nol VioIale Their Duly of
LoyaIly............................................................................................ 190
(c) Lehman's Direclors Did Nol VioIale Their Duly lo
Monilor........................................................................................... 191
(i) A¡¡Iicalion of !"#$%"#& lo Risk Oversighl: '( #$
!)*)+#,-. '(/0......................................................................... 191
(ii) A¡¡Iicalion of !"#$%"#& and !)*)+#,-. lo Lehman's
Direclors ............................................................................... 193

43
+++, %-".+)%/0* (&)($1*+&)*
", 234 567 $839:; ':6<= ">8 !38>8 (?<?>:@<8 (:AB8B ?C "DE6?; !3:E ">6B8
'>?9 +EB '6;:;D6:< (?;76E6?; :;7 ':6<A>8=
F, #AB6;8BB :;7 /6BG .:;:H898;E
:I %J8DAE6K8 *A99:>4
In 2006, Lehman ado¡led a more aggressive business slralegy by ex¡anding ils
inveslmenls in ¡olenliaIIy highIy ¡rofilabIe Iines of business lhal aIso carried much
more risk lhan Lehman's lradilionaI inveslmenl banking aclivilies. Through lhe firsl
haIf of 2007, Lehman focused on making ´¡rinci¡aI¨ inveslmenls ÷ commilling ils ovn
ca¡ilaI in commerciaI reaI eslale (´CRI¨), Ieveraged Iending, and ¡rivale equily"Iike
inveslmenls. These inveslmenls vere considerabIy riskier for Lehman lhan ils olher
business Iines because Lehman vas acquiring ¡olenliaIIy iIIiquid assels lhal il mighl be
unabIe lo seII in a dovnlurn.
114

Lehman conlinued and even inlensified lhis high"risk slralegy afler lhe onsel of
lhe sub¡rime residenliaI morlgage crisis in Iale 2006. As some Lehman officers
described il, Lehman shifled from focusing aImosl excIusiveIy on lhe ´moving¨
business ÷ a business slralegy of originaling assels ¡rimariIy for securilizalion or
syndicalion and dislribulion lo olhers ÷ lo lhe ´slorage¨ business ÷ vhich enlaiIed
making Ionger"lerm inveslmenls using Lehman's ovn baIance sheel.
115
Lehman

114
1$$ Tobias Adrian, IederaI Reserve ßank of Nev York, and Hyun Song Shin, Irincelon Universily,
IinanciaI Inlermediaries, IinanciaI SlabiIily and Monelary IoIicy (Aug. 5, 2008), al ¡. 13.
115
See Seclion III.A.1.b of lhis Re¡orl.

44
conlinued lo ¡ursue commerciaI reaI eslale and Ieveraged Ioan lransaclions
aggressiveIy unliI }uIy 2007.
116

WhiIe lhe decision lo shifl inlo Iong"lerm inveslmenls vas voIunlary, markel
evenls ¡ushed Lehman ever furlher from moving lo slorage. Lehman's ¡rimary
morlgage originalion subsidiaries, ßNC Morlgage Inc. (´ßNC¨) and Aurora Loan
Services, LLC (´Aurora¨), conlinued lo originale sub¡rime and olher non"¡rime
morlgages lo a grealer exlenl lhan olher morlgage originalors, many of vhom had
recenlIy gone oul of business, or vouId soon do so.
117
ßNC's and Aurora's conlinued
morlgage originalions increased lhe voIume of iIIiquid assels on Lehman's baIance
sheel ÷ aIbeil uninlenlionaIIy ÷ because Lehman became unabIe lo securilize and
dislribule lhese morlgages lo lhird ¡arlies.
118

Lehman's conlinued ¡ursuil of lhis aggressive grovlh slralegy, even in lhe face
of lhe sub¡rime crisis, vas based on lvo im¡orlanl caIcuIalions by Lehman's
managemenl. Iirsl, Iike some olher markel ¡arlici¡anls, nol lo menlion governmenlaI
officiaIs, Lehman's managemenl beIieved lhal lhe sub¡rime crisis vouId nol s¡read lo

116
See Seclion III.A.1.b of lhis Re¡orl.
117
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness Iresenlalion lo
Lehman ßoard of Direclors (Mar. 20, 2007), al ¡. 5 |LßHI_SIC07940_025839j.
118
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡. 1
|LßIX"DOCID 839039j, Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness
Iresenlalion lo Lehman ßoard of Direclors |Draflj (Mar. 18, 2007), al ¡. 14 |LßIX"DOCID 610173j
(´Limiled abiIily lo seII beIov Inveslmenl Grade risk ¡rofilabIy in currenl environmenl¨), Ixaminer's
Inlerviev of Mallhev MiIIer, Se¡l. 24, 2009, al ¡. 2.

45
olher markels and lo lhe economy generaIIy.
119
Second, Lehman's managemenl
beIieved lhal vhiIe olher financiaI inslilulions vere relrenching and reducing lheir risk
¡rofiIe, Lehman had lhe o¡¡orlunily lo ¡ick u¡ ground and im¡rove ils com¡elilive
¡osilion. Lehman had benefiled from a simiIar ´counlercycIicaI grovlh slralegy¨
during ¡rior markel disIocalions, and ils managemenl beIieved il couId simiIarIy
benefil from lhe sub¡rime Iending crisis.
120
Lehman miscaIcuIaled. As Lehman's Chief
Ixeculive Officer (´CIO¨) Richard S. IuId, }r. Ialer admilled, Lehman undereslimaled
bolh lhe severily of lhe sub¡rime crisis and lhe exlenl of lhe conlagion lo Lehman's
olher business Iines.
121

The Ixaminer invesligaled Lehman's ado¡lion and im¡Iemenlalion of lhis
aggressive counlercycIicaI business slralegy for severaI reasons. Iirsl, lhe ¡olenliaIIy
iIIiquid assels Lehman acquired ¡Iayed a significanl roIe in Lehman's uIlimale financiaI
faiIure. Lehman's Iosses vere IargeIy concenlraled in ils commerciaI reaI eslale
¡orlfoIio and in cerlain Iess Iiquid as¡ecls of ils residenliaI morlgage originalion and
securilizalion business. SimiIarIy, Lehman's Iiquidily vas com¡romised by ils

119
20+0, Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 16, 24, Ixaminer's Inlerviev of
}ose¡h Gregory, Nov. 13, 2009, al ¡. 7, Ixaminer's Inlerviev of Treasury Secrelary Timolhy I. Geilhner,
Nov. 24, 2009, al ¡. 3.
120
1$$ Seclion III.A.1.b of lhis Re¡orl.
121
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 16, 24, Ixaminer's Inlerviev of
Richard McKinney, Aug. 27, 2009, al ¡¡. 2, 9, Richard S. IuId, }r., Lehman, Noles for Senior Managemenl
S¡eech (}une 16, 2008), al ¡¡. 5"6 |LßIX"DOCID 529241j, allached lo e"maiI from Taimur Hyal, Lehman,
lo Herberl H. (ßarl) McDade III, Lehman, $* "30 (}une 25, 2008) |LßIX"DOCID 556064j.

46
accumuIalion of assels lhal il couId nol seII, incIuding nol onIy lhe commerciaI and
residenliaI reaI eslale assels, bul aIso, lo a Iesser exlenl, lhe Ieveraged Ioan ¡osilions.
Second, e"maiIs vrillen by Lehman risk managemenl ¡ersonneI suggesl lhal
Lehman senior managemenl disregarded ils risk managers, ils risk ¡oIicies, and ils risk
Iimils.
122
Iress re¡orls ¡rior lo Lehman's bankru¡lcy slaled lhal in 2007 Lehman had
removed MadeIyn Anloncic, Lehman's Chief Risk Officer (´CRO¨), and MichaeI
GeIband, head of ils Iixed Income Division (´IID¨), because of lheir o¡¡osilion lo
managemenl's groving accumuIalion of risky and iIIiquid inveslmenls.
123
And exlernaI
monilors of Lehman's affairs, such as lhe Office of Thrifl Su¡ervision (´OTS¨) and
Moody's Inveslor Services (´Moody's¨), aIso raised serious queslions aboul Lehman's
risk managemenl, ¡arlicuIarIy vilh res¡ecl lo ils commerciaI reaI eslale inveslmenls.
124


122
1$$4 $0+0, e"maiI from Kenlaro Umezaki, Lehman, lo Herberl H. (ßarl) McDade III, Lehman, $* "30 (Se¡l.
10, 2008) |LßIX"DOCID 1718043j (noling ´hislory of `end arounds' on risk decisions,¨ risk managemenl's
Iack of aulhorily and Iack of aulhorily over baIance sheel and inabiIily lo enforce risk Iimils), e"maiI from
Vincenl DiMassimo, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Se¡l. 1, 2008) |LßIX"DOCID 203219j
(´vhalever risk governance ¡rocess ve had in ¡Iace vas uIlimaleIy nol effeclive in ¡rolecling lhe firm |.j
Risk A¡¡elile measures vere nol effeclive in eslabIishing cIear enough varning signaIs lhal lhe Iirm vas
laking on loo much risk reIalive lo ca¡ilaI. . . . The |Risk Managemenlj funclion Iacked sufficienl
aulhorily vilhin lhe Iirm. Decision"making vas dominaled by lhe business. . . .¨), e"maiI from Salu
Iarikh, Lehman, lo MichaeI GeIband, Lehman, Se¡l. 15, 2008 |LßIX"DOCID 882447j (´I am shocked al
lhe ¡oor risk mgml al lhe highesl IeveIs, and I don'l lhink il slarled vilh Archslone. Il is aII unbeIievabIe
and I lhink lhere needs lo be an invesligalion inlo lhe broader issue of maIfeasance. Mgml gambIed
reckIessIy vilh lhousands of |obs and sharehoIder veaIlh. . . .¨).
123
1$$4 $0+04 YaIman Onaran, 5$6%"( 7"-3*"7)(8)(+ 9,)(*: *, 5":* ;"( 7-38 ": 16"#$: 5"(+-):6,
ßIoomberg.com, }uIy 22, 2008.
124
1$$ Office of Thrifl Su¡ervision, Re¡orl of Ixaminalion, Lehman ßrolhers HoIdings Inc. (as of May 31,
2008), al ¡. 2 |LßIX"OTS 000392j (finding lhal Lehman did nol em¡Ioy sound risk managemenl ¡raclices
in ils commerciaI reaI eslale business), e"maiI from Sle¡hen Lax, Lehman, lo Irin M. CaIIan, Lehman, $*
"30 (}une 9, 2008) |LßIX"DOCID 017840j (forvarding lexl of Moody's reIease announcing dovngrade of
Lehman ralings oulIook: ´The raling aclion aIso refIecls Moody's concerns over risk managemenl

47
AccordingIy, lhe Ixaminer invesligaled (1) vhelher lhere are coIorabIe cIaims for
breach of lhe duly of care againsl Lehman's officers for lhe manner in vhich lhey
adminislered Lehman's risk managemenl syslem in conneclion vilh lhe acquisilion of
lhese iIIiquid assels, (2) vhelher lhere are coIorabIe cIaims for breach of lhe duly of
good failh and candor againsl Lehman's officers for faiIing fuIIy lo inform lhe ßoard of
Direclors (lhe ´ßoard¨)
125
of lhe exlenl of lhe risk and iIIiquidily lhal Lehman assumed
lhrough lhe nev slralegy, and (3) vhelher lhere are coIorabIe cIaims againsl Lehman's
direclors for breach of lheir duly lo monilor Lehman's risk managemenl.
The Ixaminer concIudes lhal lhe conducl of Lehman's officers, vhiIe sub|ecl lo
queslion in relros¡ecl, faIIs vilhin lhe business |udgmenl ruIe and does nol give rise lo
coIorabIe cIaims. The Ixaminer concIudes lhal Lehman's direclors did nol breach lheir
duly lo monilor Lehman's risks.
LFI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
*8;6?> &CC6D8>B #>8:D387 !386> '67AD6:>4 5AE4 ?C (:>8 @4
':6<6;H E? &@B8>K8 $839:;0B /6BG .:;:H898;E M?<6D68B :;7
M>?D87A>8B
DeIavare Iav, vhich governs a DeIavare cor¡oralion such as Lehman, sels a
high bar for eslabIishing a breach of lhe fiduciary duly of care.
126
Officers' and
direclors' business decisions are generaIIy ¡rolecled from ¡ersonaI IiabiIily by lhe

decisions lhal resuIled in eIevaled reaI eslale ex¡osures and lhe subsequenl ineffecliveness of hedges lo
miligale lhese ex¡osures¨).
125
References lo lhe ´ßoard¨ in lhis Seclion of lhe Re¡orl refer lo Lehman's oulside direclors, nol lo IuId,
vho vas CIO and Chairman of lhe ßoard.
126
Ior a delaiIed discussion of DeIavare cor¡orale fiduciary Iav, see A¡¡endix 1.

48
business |udgmenl ruIe, and even if lhe business |udgmenl ruIe does nol a¡¡Iy, lhere is
no IiabiIily unIess lhe officer or direclor vas grossIy negIigenl. ´In lhe duly of care
conlexl gross negIigence has been defined as 'reckIess indifference lo or a deIiberale
disregard of lhe vhoIe body of slockhoIders or aclions vhich are vilhoul lhe bounds of
reason.'¨
127

The ¡roof necessary lo defeal lhe business |udgmenl ruIe and eslabIish gross
negIigence is ¡arlicuIarIy high vilh res¡ecl lo risk managemenl and financiaI
lransaclions. ßanking is inherenlIy risky and ¡rone lo financiaI Iosses caused by
unforeseen changes in lhe markels.
128
IrofilabiIily de¡ends IargeIy on lhe firm's abiIily
lo evaIuale lhe risks of ¡olenliaI inveslmenls and baIance lhem againsl lheir ¡olenliaI
gains.
129
ConsequenlIy, lo eslabIish a coIorabIe cIaim lhal Lehman officers breached
lheir fiduciary duly by mismanaging business risk, lhe evidence musl shov lhal
Lehman's senior managemenl vas reckIess or irralionaI in managing lhe risks
associaled vilh lhe ¡rinci¡aI inveslmenl slralegy lhal Lehman ¡ursued during 2006
and 2007.
130

Lehman had so¡hislicaled ¡oIicies, ¡rocedures, and melrics in ¡Iace lo eslimale
lhe risk lhal lhe firm couId assume vilhoul |eo¡ardizing ils abiIily lo achieve a largel

127
;/9"88$( <0 1)86-, 964 A.2d 1262, 1274 (DeI. Ch. 2008) (quoling =$()6"(" ,> ?,&@,4 '(/0 <0 =$()6"("4 '(/0,
891 A.2d 150, 192 (DeI. Ch. 2005)).
128
1$$ '( #$ !)*)+#,-. '(/0 1A6,38$# B$#)<"*)<$ 5)*)+0, 964 A.2d 106, 126 (DeI. Ch. 2009).
129
1$$ )80
130
1$$ A¡¡endix 1, LegaI Issues.

49
rale of relurn, and lo a¡¡rise managemenl and lhe ßoard vhelher Lehman vas vilhin
various risk Iimils.
131
Lehman aIso used an array of slress lesls lo delermine lhe
¡olenliaI financiaI consequences of an economic shock lo ils ¡orlfoIio of assels and
inveslmenls.
132
Lehman had an exlensive slaff lhal vas devoled soIeIy lo risk
managemenl.
133

These risk Iimils and slress lesls, hovever, did nol im¡ose IegaI requiremenls on
managemenl or ¡revenl managemenl and lhe ßoard from exceeding lhose Iimils if lhey
chose lo do so.
134
The roIe of lhe risk Iimils and slress lesls vas lo cause managemenl lo
consider vhelher a ¡arlicuIar inveslmenl or a broad business slralegy vas vorlh lhe
risk il carried.
135
In addilion, Lehman used ils risk managemenl syslem lo ¡romole ils
ca¡abiIilies lo inveslors, raling agencies, and reguIalors.
136
Lehman's managemenl
aIvays relained lhe discrelion lo use ils |udgmenl lo decide vhelher lo ¡ursue
¡arlicuIar slralegies or lransaclions.
137

The Ixaminer did find lhal in ¡ursuing ils aggressive grovlh slralegy, Lehman's
managemenl chose lo disregard or overruIe lhe firm's risk conlroIs on a reguIar basis.
The queslion vhelher lhere is a coIorabIe cIaim lhal Lehman's senior officers breached

131
1$$ +$($#"33@ A¡¡endix 1, LegaI Issues.
132
A¡¡endix No. 8, Risk Managemenl Organizalion and ConlroIs.
133
'80
134
'80
135
1$$ )80
136
'80
137
1$$ )80

50
lheir fiduciary duly of care focuses on facls reIaling lo Lehman's acquisilion of
¡olenliaIIy iIIiquid inveslmenls in 2007 and lhe manner in vhich managemenl used
Lehman's risk managemenl syslem as ¡arl of ils ¡rocess of making inveslmenl
decisions:
# Lehman's managemenl decided lo exceed risk Iimils vilh res¡ecl lo
Lehman's ¡rinci¡aI inveslmenls, nameIy, lhe ´concenlralion Iimils¨ on
Lehman's Ieveraged Ioan and commerciaI reaI eslale businesses, incIuding
lhe ´singIe lransaclion Iimils¨ on lhe Ieveraged Ioans. These Iimils vere
designed lo ensure lhal Lehman's inveslmenls vere ¡ro¡erIy Iimiled and
diversified by business Iine and by counler¡arly. Lehman look highIy
concenlraled risks in lhese lvo business Iines, and, ¡arlIy as a resuIl of
markel condilions, uIlimaleIy exceeded ils risk Iimils by margins of 70% as lo
commerciaI reaI eslale and by 100% as lo Ieveraged Ioans.
138

# Lehman's managemenl excIuded cerlain risky ¡rinci¡aI inveslmenls from ils
slress lesls. AIlhough Lehman conducled slress lesls on a monlhIy basis and
re¡orled lhe resuIls of lhese slress lesls ¡eriodicaIIy lo reguIalors and lo ils
ßoard of Direclors, lhe slress lesls excIuded Lehman's commerciaI reaI eslale
inveslmenls, ils ¡rivale equily inveslmenls, and, for a lime, ils Ieveraged
Ioan commilmenls. Thus, Lehman's managemenl did nol have a reguIar and
syslemalic means of anaIyzing lhe amounl of calaslro¡hic Ioss lhal lhe firm
couId suffer from lhese increasingIy Iarge and iIIiquid inveslmenls.
139

# Lehman did nol slriclIy a¡¡Iy ils baIance sheel Iimils, vhich vere designed
lo conlain lhe overaII risk of lhe firm and mainlain lhe firm's Ieverage ralio
vilhin lhe range required by lhe credil raling agencies, bul inslead decided
lo exceed lhose Iimils. To miligale lhe a¡¡arenl effecl of lhese overages,
Lehman used Re¡o 105 lransaclions lo lake assels lem¡orariIy off lhe baIance
sheel before lhe ends of re¡orling ¡eriods. (The Re¡o 105 lransaclions are
discussed in Seclion III.A.4 of lhis Re¡orl.)
140

# Lehman's managemenl decided lo lreal ¡rimary firm"vide risk Iimil ÷ lhe
risk a¡¡elile Iimil ÷ as a ´sofl¨ guideIine, nolvilhslanding Lehman's

138
A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.
139
1$$ Seclion III.A.1.b of lhis Re¡orl.
140
S$$ )80

51
re¡resenlalions lo lhe Securilies Ixchange Commission (´SIC¨) and lhe
ßoard lhal lhe risk a¡¡elile Iimil vas a meaningfuI conslrainl on Lehman's
risk"laking.
141
Lehman managemenl's decision nol lo enforce lhe risk
a¡¡elile Iimil vas a¡¡arenl in severaI vays:
! ßelveen December 2006 and December 2007, Lehman raised ils firm"
vide risk a¡¡elile Iimil lhree limes, going from $2.3 lo $4.0 biIIion.
142

! ßelveen May and Augusl 2007, Lehman omilled some of ils Iargesl risks
from ils risk usage caIcuIalion. The ¡rimary omilled risk vas a $2.3
biIIion bridge equily ¡osilion in lhe Archslone"Smilh ReaI Islale
Inveslmenl Trusl (´Archslone¨ or ´Archslone RIIT¨) reaI eslale
lransaclion, an exlraordinariIy Iarge and risky commilmenl. Had
Lehman's managemenl ¡rom¡lIy incIuded lhal risk in ils usage
caIcuIalion, il vouId have been immedialeIy a¡¡arenl lhal Lehman vas
over ils risk Iimils.
143

! Afler Lehman did incIude lhe Archslone risk in lhe firm's risk a¡¡elile
usage, Lehman conlinued lo exceed lhe Iimil for severaI more monlhs.
Ralher lhan aggressiveIy reduce Lehman's baIance sheel in res¡onse lo
lhese indicalors of excessive risk"laking, Lehman raised ils firm"vide
risk Iimil again.
144

AIlhough lhese decisions by Lehman's managemenl uIlimaleIy ¡roved lo be
unvise, lhe Ixaminer finds insufficienl evidence lo su¡¡orl a delerminalion lhal
Lehman's senior officers' conducl vilh res¡ecl lo risk managemenl vas oulside lhe
business |udgmenl ruIe or reckIess or irralionaI.
145


141
20+0, SIC, Lehman MonlhIy Risk Reviev Meeling Noles (}uIy 19, 2007), al ¡. 5 |LßIX"SIC 007363j
(´}eff |Goodmanj loId us lhal . . . VaR is |usl one measure lhal Lehman uses, and is more of a s¡eed
bum¡/varning sign lhal a lrue, hard Iimil "" lhal roIe faIIs lo RA |(i.e. risk a¡¡elile)j. |..j He said lhal
MadeIyn |Anloncicj, Dave |GoIdfarbj, and lhe execulive commillee lend lo Iook more al RA. As an aside,
MadeIyn came in afler }eff's ex¡Ianalion and gave virluaIIy lhe same s¡eech¨), :$$ "3:, Seclion III.A.1.b of
lhis Re¡orl.
142
1$$ Seclion III.A.1.b of lhis Re¡orl.
143
1$$ )80
144
1$$ )80
145
1$$ Seclion III.A.1.c of lhis Re¡orl.

52
ßased u¡on lheir considerabIe business ex¡erience and successfuI lrack record,
Lehman's senior managers decided lo ¡Iace a higher ¡riorily on increasing ¡rofils lhan
on kee¡ing lhe firm's risk IeveI vilhin lhe Iimils arising from ils risk managemenl
¡oIicies and melrics. Lehman's senior managers vere confidenl making business
|udgmenls based on lheir underslanding of lhe markels, and did nol feeI conslrained by
lhe quanlilalive melrics generaled by Lehman's risk managemenl syslem. These
decisions raise queslions aboul lhe roIe of risk managemenl in a com¡Iex financiaI
inslilulion, bul lhey do nol give rise lo a coIorabIe cIaim of lhe breach of lhe fiduciary
duly of care given lhe high bar lo IiabiIily eslabIished by DeIavare Iav.
LNI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
*8;6?> &CC6D8>B #>8:D387 !386> '67AD6:>4 5AE4 E? +;C?>9 E38
#?:>7 ?C 56>8DE?>B (?;D8>;6;H E38 $8K8< ?C /6BG $839:; O:7
"BBA987
The Ixaminer finds insufficienl evidence lo su¡¡orl a delerminalion lhal
Lehman's senior managers breached lheir fiduciary duly of candor, vhich required
lhem lo ¡rovide lhe ßoard vilh maleriaI re¡orls concerning Lehman's risk and
Iiquidily.
146

The facluaI issues reIevanl lo lhe duly of candor are lhe same risk managemenl
issues reIevanl lo lhe duly of care. Lehman's officers did nol discIose cerlain

146
A¡¡endix No. 1, LegaI Issues, '( #$ C%$#0 '(*A3 D#,-.4 '(/0, 965 A.2d 763, 806"07 (DeI. Ch. 2009) (´In
coIIoquiaI lerms, a fraud on lhe board has Iong been a fiduciary vioIalion under our Iav and ly¡icaIIy
invoIves lhe faiIure of insiders lo come cIean lo lhe inde¡endenl direclors aboul . . . informalion lhal lhe
insiders fear viII be used by lhe inde¡endenl direclors lo lake aclions conlrary lo lhe insiders$ vishes¨).

53
informalion concerning lhe amounl or duralion of lhe firm"vide risk Iimil overages,
lheir decisions lo exceed cerlain concenlralion Iimils, or lhe Iimilalions in lhe firm's
slress lesling. Nor did Lehman's officers discIose lhal Lehman's originalions of AIl"A
morlgages ÷ morlgages lhal vere considered riskier lhan ly¡icaI ¡rime morlgages bul
nol so risky as lo be calegorized as ´sub¡rime¨ ÷ vere ex¡osing lhe firm lo sub¡rime
morlgage risk, even as Lehman vas curlaiIing originalions of Ioans acluaIIy
denominaled as ´sub¡rime.¨ Lehman's direclors generaIIy said lhal if such risk
managemenl issues vere significanl and Iong"Iasling, lhey vouId have Iiked lo have
received more informalion aboul lhem, bul vouId nol necessariIy have laken aclion as a
resuIl.
147

Hovever, lhe Ixaminer found lhal Lehman's managemenl did inform lhe ßoard,
cIearIy and on more lhan one occasion, lhal il vas laking increased business risk in
order lo grov lhe firm aggressiveIy, lhal lhe increased business risk resuIled in higher
risk usage melrics and uIlimaleIy firm"vide risk Iimil overages, and lhal markel
condilions afler }uIy 2007 vere ham¡ering lhe firm's Iiquidily.
148
Lehman's
managemenl aIso informed lhe ßoard, accuraleIy, lhal lhe sub¡rime morlgage crisis

147
Ixaminer's Inlerviev of Roger S. ßerIind, May 8, 2009, al ¡. 4, Ixaminer's Inlerviev of Marsha }ohnson
Ivans, May 22, 2009, al ¡. 6, Ixaminer's Inlerviev of RoIand A. Hernandez, Ocl. 2, 2009, al ¡. 10,
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 17, Ixaminer's Inlerviev of Henry
Kaufman, May 19, 2009, al ¡. 17, Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡¡. 14"16,
Ixaminer's Inlerviev of MichaeI AinsIie, Se¡l. 22, 2009, al ¡¡. 3"4. Ior informalion concerning lhe ßoard
meelings vhere lhese generaI lo¡ics vere discussed, lhe direclors' slalemenls lo lhe Ixaminer aboul
lhose meelings, and lhe direclors' slalemenls aboul lhe maleriaIily of lhese facls, see Seclion III.A.1.b of
lhis Re¡orl.
148
Seclions III.A.1.b of lhis Re¡orl.

54
vas conslricling ¡rofilabiIily and lhal managemenl vas lighlening originalion
slandards and laking olher sle¡s lo address lhal crisis.
149

These discIosures vere nol so incom¡Iele as lo Iead lo lhe concIusion lhal
Lehman's managemenl misIed lhe ßoard of Direclors. Nor did Lehman's officers have
a IegaI duly lo discIose addilionaI delaiIs lo lhe ßoard. Lehman's risk Iimils and
conlroIs vere designed ¡rimariIy for managemenl's inlernaI use in making business
decisions concerning lhe core issue faced by any financiaI inslilulion: vhal business
risks lo lake and vhal business risks lo decIine.
150
WhiIe lhe overaII risk managemenl of
lhe firm is an a¡¡ro¡riale lo¡ic for board consideralion, lhe day"lo"day decisions are
¡rimariIy lhe res¡onsibiIily of officers, nol direclors.
151

LPI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
56>8DE?>B #>8:D387 !386> '67AD6:>4 5AE4 @4 ':6<6;H E? .?;6E?>
$839:;0B /6BG"!:G6;H "DE6K6E68B
Lehman's cor¡orale charler and reIaled as¡ecls of DeIavare Iav ¡rolecl ils
direclors from ¡ersonaI IiabiIily based u¡on lheir business decisions. As a resuIl, lhe
direclors cannol be heId IiabIe for a breach of lhe duly of care, ralher lhe direclors can
be IiabIe for inadequaleIy moniloring Lehman's affairs onIy if lheir faiIure lo monilor
vas so egregious as lo rise lo lhe IeveI of a breach of lhe duly of IoyaIly or lhe duly of

149
Seclion III.A.1.b of lhis Re¡orl.
150
1$$ A¡¡endix No. 8, Risk Managemenl Organizalion and ConlroIs.
151
1$$ 17 C.I.R. ÇÇ 240.15c3"1e & 15c3"4 (2007) (requiring Lehman lo submil a com¡rehensive descri¡lion
of ils inlernaI risk managemenl conlroI syslem lo lhe SIC), NYSI, Inc., Lisled Com¡any ManuaI
Ç303A(7)(c)(iii)(D) & cml. (2010) (requiring audil commillee of board lo ´discuss ¡oIicies vilh res¡ecl lo
risk assessmenl and risk managemenl¨ vhiIe noling lhal ´il is lhe |ob of lhe CIO and senior managemenl
lo assess and manage lhe com¡any's ex¡osure lo risk¨).

55
good failh. The DeIavare courls have caIIed lhis ly¡e of cIaim ÷ referred lo as a
!"#$%"#& cIaim ÷ ´¡ossibIy lhe mosl difficuIl lheory in cor¡oralion Iav u¡on vhich a
¡Iainliff mighl ho¡e lo vin a |udgmenl.¨
152

The conducl ly¡icaIIy evaIualed in !"#$%"#& cIaims has been lhe faiIure lo
monilor managers' unIavfuI conducl. In conlrasl here, a cIaim lhal lhe direclors faiIed
lo salisfy lheir duly lo monilor lhe exlenl of risk assumed by managemenl and ils
com¡Iiance vilh cor¡orale risk ¡oIicies vouId require ¡roof lhal lhe direclors faiIed lo
monilor managers' |udgmenl as lo inlernaI ¡rocedures lhal vere nol IegaIIy binding.

The business |udgmenl ruIe a¡¡Iies vilh ¡arlicuIar force lo such a cIaim because lhe
queslion of hov much risk an inveslmenl bank can reasonabIy assume goes lo lhe core
of ils business.
153

The Ixaminer finds insufficienl evidence of a breach of fiduciary duly by any
Lehman direclor. The direclors received re¡orls concerning Lehman's business and lhe
IeveI and nalure of ils risk"laking al every ßoard meeling. AIlhough lhese re¡orls noled
lhe eIevaled IeveIs of risk lo Lehman's business beginning in Iale 2006, managemenl
informed lhe direclors lhal lhe increased risk"laking vas ¡arl of a deIiberale slralegy lo
grov lhe firm. The direclors conlinued lo receive such re¡orls lhroughoul 2007, and
vere re¡ealedIy informed aboul deveIo¡menls in lhe sub¡rime markels and lhe credil
markels generaIIy. Managemenl assured lhe direclors lhal il vas laking ¡rudenl sle¡s

152
'( #$ !"#$%"#& '(*A3 '(/0 B$#)<"*)<$ 5)*)+0, 698 A.2d 959, 967 (DeI. Ch. 1996).
153
'( #$ !)*)+#,-. '(/0 1A6,38$# 5)*)+., 964 A.2d 106, 126 (DeI. Ch. 2009).

56
lo address lhese risks bul lhal managemenl sav lhe unfoIding crisis as an o¡¡orlunily
lo ¡ursue a counlercycIicaI grovlh slralegy. Managemenl's re¡orls lo lhe direclors did
nol conlain ´red fIags¨ im¡osing on lhe direclors a duly lo inquire furlher.
154

DeIavare Iav ¡ermils direclors lo reIy on managemenl's re¡orls and immunizes
lhe direclors from ¡ersonaI IiabiIily vhen lhey do so.
155
ConsequenlIy, lhere is
insufficienl evidence lo eslabIish a coIorabIe cIaim lhal Lehman's direclors breached
lheir duly lo monilor Lehman's managemenl of ils risks.
® ® ® ® ®
AIlhough lhe Ixaminer does nol find coIorabIe cIaims againsl Lehman's senior
officers or direclors concerning Lehman's risk managemenl, a com¡Iele discussion of
lhe facls discovered by lhe Ixaminer's invesligalion of risk managemenl is im¡orlanl in
lvo fundamenlaI res¡ecls. Iirsl, lhe Ixaminer sels oul lhe facls in delaiI so lhal lhe
Courl and lhe ¡arlies have lhe basis for lhe Ixaminer's concIusion lhal Lehman
managemenl's decisions vilh res¡ecl lo risk and ils counlercycIicaI grovlh slralegy do
nol give rise lo coIorabIe cIaims.

154
1$$4 $0+0, Lehman ßrolhers HoIdings Inc., Minules of Meeling of lhe ßoard of Direclors (}une 19, 2007)
|LßHI_SIC07940_026267j, Lehman, Lehman ßoard of Direclors MaleriaIs for }une 19, 2007 ßoard Meeling
(}une 19, 2007) |LßHI_SIC07940_026214j, Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard
of Direclors (Se¡l. 11, 2007) |LßHI_SIC07940_026364j, Lehman, Lehman ßoard of Direclors MaleriaIs for
Se¡l. 11, 2007 ßoard Meeling (Se¡l. 7, 2007) |LßHI_SIC07940_026282j, Lehman ßrolhers HoIdings Inc.,
Minules of Meeling of ßoard of Direclors (Ocl. 15, 2007), al ¡. 6 |LßHI_SIC07940_026407j, Lehman,
Lehman ßoard of Direclors MaleriaIs for Ocl. 15, 2007 ßoard Meeling (Ocl. 11, 2007)
|LßHI_SIC07940_026371j.
155
1$$ DIL. CODI ANN. lil. 8, Ç 141(e) (2009).

57
Second, lhese facls shov hov Lehman's a¡¡roach lo risk uIlimaleIy crealed lhe
condilions lhal Ied Lehman's lo¡ managers lo use Re¡o 105 lransaclions as discussed in
Seclion III.A.4 of lhis Re¡orl. Lehman's aggressive grovlh slralegy aIso ¡rovides
conlexl for severaI olher issues discussed in lhis Re¡orl, incIuding issues concerning
Lehman's Iiquidily ¡ooI and assel vaIualions. Lehman's grovlh slralegy resuIled in a
dramalic grovlh of Lehman's baIance sheel:
"<< C6HA>8B 6; LQ #6<<6?;BI RS TU RF TV RN TV RP TV RS TV RF TW RN TW
Re¡orled Nel Assels
FXU
268.936 300.797 337.667 357.102 372.959 396.673 327.774

Lehman's nel assels increased by aImosl $128 biIIion or 48% in a IillIe over a year ÷ from
lhe fourlh quarler of 2006 lhrough lhe firsl quarler of 2008.
This increase in Lehman's nel assels vas ¡rimariIy allribulabIe lo lhe
accumuIalion of ¡olenliaIIy iIIiquid assels lhal couId nol easiIy be soId in a dovnlurn.
ßy one measure, Lehman's hoIdings of ´Iess Iiquid assels¨ more lhan doubIed during
lhe same lime ¡eriod ÷ increasing from $86.9 biIIion al lhe end of lhe fourlh quarler of
2006 lo $174.6 biIIion al lhe end of lhe firsl quarler of 2008.
157


156
Lehman defined nel assels as lolaI assels excIuding: (1) cash and securilies segregaled and on de¡osil
for reguIalory and olher ¡ur¡oses, (2) securilies received as coIIaleraI, (3) securilies ¡urchases under
agreemenls lo reseII, (4) securilies borroved, and (5) idenlifiabIe inlangibIe assels and goodviII. Lehman
ßrolhers HoIdings Inc., AnnuaI Re¡orl for 2007 10"K as of Nov. 30, 2007 (Iorm 10"K) (fiIed on }an. 29,
2008), al ¡. 63.
157
Lehman ßrolhers HoIdings Inc., Lehman ßrolhers Iacl ßook Q2 2008 (}une 13, 2009), al ¡. 16
|LßHI_SIC07940_593047j. Lehman's ¡ubIic fiIings incIude a differenl quanlificalion of Lehman's Iess
Iiquid assels. According lo lhese sources, Lehman's Iess Iiquid assel hoIdings aImosl quadru¡Ied from
lhe lhird quarler of 2006 unliI lhe firsl quarler of 2008, vilh a ¡arlicuIarIy sudden s¡ike in lhe fourlh
quarler of 2007. Lehman ßrolhers HoIdings Inc., QuarlerIy Re¡orl as of Aug. 31, 2006 (Iorm 10"Q) (fiIed
on Ocl. 10, 2006), al ¡¡. 16, 71"72 (´LßHI 10"Q (fiIed Ocl 10, 2006)¨), Lehman ßrolhers HoIdings Inc.,

58
To ex¡Iain lhe business and risk decisions lhal Ied Lehman managemenl dovn
lhis ¡alh, lhe foIIoving ¡orlions of lhis Seclion of lhe Re¡orl describe:
1. Lehman's decision in 2006 lo lake more ¡rinci¡aI risk,
2. The dramalic grovlh in Lehman's ¡rinci¡aI inveslmenls and in ils baIance
sheel during lhe firsl haIf of Lehman's fiscaI 2007, cuIminaling in lhe
acquisilion of Archslone, lo vhich Lehman commilled in May 2007,
3. Il became a¡¡arenl during 2007 lhal Lehman's baIance sheel had grovn loo
Iarge, and lhal Lehman had laken on loo much risk,
4. Hov, even afler il became a¡¡arenl lhal Lehman's grovlh slralegy had
ex¡osed lhe firm lo financiaI ¡eriI, Lehman sliII acled vilhoul sufficienl
urgency lo deIeverage.
@I ':DEB
LFI '>?9 .?K6;H E? *E?>:H8Y $839:; %JZ:;7B +EB M>6;D6Z:<
+;K8BE98;EB
During lhe course of 2006, Lehman's managemenl and ßoard made lhe
deIiberale business decision lo increase lhe firm's risk ¡rofiIe generaIIy, and lo lake
more risk s¡ecificaIIy vilh res¡ecl lo ¡rinci¡aI inveslmenls vilh lhe firm's ca¡ilaI. This
nev slralegy vas direcled by Lehman's highesl officers ÷ ¡rimariIy IuId, }ose¡h

AnnuaI Re¡orl for 2006 as of Nov. 30, 2006 (Iorm 10"K) (fiIed on Ieb. 13, 2007), al ¡¡. 66"67 (´LßHI 2006
10"K¨), Lehman ßrolhers HoIdings Inc., QuarlerIy Re¡orl as of Ieb. 28, 2007 (Iorm 10"Q) (fiIed on A¡r. 9,
2007), al ¡¡. 15, 19, 60 (´LßHI 10"Q (fiIed A¡r. 9, 2007)¨), Lehman ßrolhers HoIdings Inc., QuarlerIy
Re¡orl as of May 31, 2007 (Iorm 10"Q) (fiIed on }uIy 10, 2007) , al ¡¡. 17, 22, 64 (´LßHI 10"Q (fiIed }uIy 10,
2007)¨), Lehman ßrolhers HoIdings Inc., QuarlerIy Re¡orl as of Aug. 31, 2007 (Iorm 10"Q) (fiIed on Ocl.
10, 2007), al ¡¡. 18, 23, 67 (´LßHI 10"Q (fiIed Ocl. 10, 2007)¨), Lehman ßrolhers HoIdings Inc., AnnuaI
Re¡orl for 2007 as of Nov. 30, 2007 (Iorm 10"K) (fiIed on }an. 29, 2008), al ¡¡. 61"62, 104 (´LßHI 2007 10"
K¨), Lehman ßrolhers HoIdings Inc., QuarlerIy Re¡orl as of Ieb. 29, 2008 (Iorm 10"Q) (fiIed on A¡r. 9,
2008), al ¡¡. 21, 27, 55, 71 (´LßHI 10"Q (fiIed A¡r. 9, 2008)¨), Lehman ßrolhers HoIdings Inc., QuarlerIy
Re¡orl as of May 31, 2008 (Iorm 10"Q) (fiIed on }uIy 10, 2008), al ¡¡. 26, 29 (´LßHI 10"Q (fiIed }uIy 10,
2008)¨), see aIso Seclion III.A.1.b.4 of lhis Re¡orl.

59
Gregory (Lehman's Iresidenl and Chief O¡eraling Officer), and Hugh I. (Ski¡) McGee
III (GIobaI Head of Inveslmenl ßanking) ÷ afler significanl inlernaI debale.
This Seclion of lhe Re¡orl describes lhe ¡rinci¡aI inveslmenl slralegy ado¡led by
Lehman in 2006, ex¡Iains lhe risks lhal lhis slralegy ¡osed lo lhe firm, describes hov
Lehman's risk conlroIs vere a¡¡Iied (or nol) lo lhe nev slralegy, and ex¡Iains lhe
ßoard's underslanding of, and agreemenl vilh, lhe nev slralegy.
L:I $839:;0B (3:;H87 #AB6;8BB *E>:E8H4
In 2006, Lehman made a significanl change in ils business slralegy from a Iover
risk brokerage modeI lo a higher risk, ca¡ilaI"inlensive banking modeI. HisloricaIIy,
Lehman described ilseIf as being ¡rimariIy in lhe moving business, nol lhe slorage
business.
158
Lehman, for lhe mosl ¡arl, did nol use ils baIance sheel lo acquire assels for
ils ovn inveslmenl, ralher, Lehman acquired assels ÷ such as commerciaI and
residenliaI reaI eslale morlgages ÷ ¡rimariIy lo move lhem by securilizalion or
syndicalion and dislribulion lo lhird ¡arlies.
During 2006, Lehman's managemenl decided lo em¡hasize lhe slorage business
÷ using Lehman's baIance sheel lo acquire assels for Ionger"lerm inveslmenl.
159
IuId
beIieved lhal olher banks vere using lheir baIance sheels lo make more ¡ro¡rielary
inveslmenls, lhal lhese inveslmenls vere highIy ¡rofilabIe reIalive lo lheir risk in lhe

158
Ixaminer's Inlerviev of IauI Shollon, }une 5, 2009, al ¡. 12.
159
'80 al ¡. 2.

60
lhen"buoyanl economic environmenl, and lhal Lehman vas missing oul on significanl
o¡¡orlunilies lo do lhe same.
160

Lehman's managemenl ¡rimariIy focused on ex¡anding lhree s¡ecific areas of
¡rinci¡aI inveslmenl: commerciaI reaI eslale, Ieveraged Ioans, and ¡rivale equily.
CommerciaI reaI eslale inveslmenls vere considered a slrong candidale for
ex¡ansion because lhose inveslmenls had hisloricaIIy been a slrenglh of lhe firm.
161

Mark A. WaIsh, Lehman's head of lhe GIobaI ReaI Islale Grou¡ (´GRIG¨), vas one of
lhe mosl successfuI and lrusled o¡eralors al lhe firm, managemenl beIieved lhal WaIsh
couId invesl Lehman's ca¡ilaI viseIy and couId dislribule any excess risk lo olher
inveslors.
162
The firm vas even viIIing lo make commerciaI reaI eslale bridge equily
inveslmenls ÷ laking ¡olenliaIIy riskier equily ¡ieces of reaI eslale inveslmenls ÷ on lhe
lheory lhal lhe bridge equily, lhough riskier lhan lhe debl, couId quickIy be resoId lo
lhird ¡arlies al a ¡rofil.
163
Lehman vas veII ¡aid for bridge equily in lhe commerciaI

160
Ixaminer's Inlerviev of Richard S. IuId }r., Se¡l. 25, 2009, al ¡¡. 10"12 (IuId said lhal Lehman
ex¡anded inlo lhe Ieveraged Iending, bridge equily and ¡rinci¡aI invesling lo gain ´vaIIel share.¨ IuId
vanled lo use lhe ´80"20 ruIe¨ lo gel lhe vaIIel share of Lehman's lo¡ cIienls. The 80"20 ruIe says lhal lhe
lo¡ 20% of lhe firm's cIienls viII ¡rovide 80% of lhe firm's earnings.), Ixaminer's Inlerviev of }eremy M.
Isaacs, Ocl. 1, 2009, al ¡. 6.
161
Ixaminer's Inlerviev of IauI A. Hughson, Ocl. 28, 2009, al ¡. 3.
162
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 14, Ixaminer's Inlerviev of Mark WaIsh,
Ocl. 21, 2009, al ¡¡. 4"5, e"maiI from }effrey Goodman, Lehman, lo Mark A. WaIsh, Lehman (Se¡l. 19,
2006) |LßIX"DOCID 1368068j.
163
Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 21, 2009, al ¡. 6.

61
reaI eslale business, and managemenl beIieved lhal WaIsh's dislribulion nelvork
minimized lhe risk lhal lhe firm vouId be unabIe lo seII il.
164

The business slralegy lo ex¡and lhe Ieveraged Ioan business vas somevhal
differenl. Lehman's managemenl recognized lhal Ieveraged Ioans in lheir ovn righl,
incIuding lhe bridge equily com¡onenls of lhose lransaclions, vere risky reIalive lo
lheir ¡rofilabiIily.
165
ßul IuId, Gregory, and McGee in ¡arlicuIar beIieved lhal if
Lehman made Ioans lo ¡rivale equily s¡onsors as ¡arl of ma|or M&A lransaclions,
Lehman vouId buiId Iong"lerm cIienl reIalionshi¡s vilh lhe s¡onsors and ¡erha¡s vilh
olher inslilulions invoIved in lhe lransaclion.
166
IuId, Gregory, and McGee beIieved
lhal every doIIar lhal Lehman made from a Ieveraged Ioan vouId Iead lo five doIIars of
foIIov"on ¡rofils in lhe fulure.
167

The firm's aggressive grovlh slralegy vas a¡¡arenl in various firm"vide
¡resenlalions given by senior managemenl and in cerlain high"IeveI business and risk"
laking decisions made during 2006 and al lhe oulsel of lhe 2007 fiscaI year. As David
GoIdfarb (lhen Lehman's GIobaI Head of Slralegic Iarlnershi¡s, Irinci¡aI Invesling,

164
Lehman, IID Offsile Iresenlalion and Noles (Se¡l. 28, 2006), al ¡. 10 |LßIX"DOCID 2042292, 2068495j,
allached lo e"maiI from MichaeI GeIband, Lehman, lo Richard S. IuId, }r., Lehman, $* "30 (Se¡l. 26, 2006)
|LßIX"DOCID 2384245j.
165
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡¡. 10, 13, Ixaminer's Inlerviev of
MichaeI GeIband, Aug. 12, 2009, al ¡. 6, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡. 6.
166
Ixaminer's Inlerviev of Hugh I (Ski¡) McGee III, Aug. 12, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of
}ose¡h Gregory, Nov. 13, 2009, al ¡. 3, "//,#8 Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009,
al ¡. 12.
167
Ixaminer's Inlerviev of }ose¡h Gregory, Nov. 13, 2009, al ¡. 3, Ixaminer's Inlerviev of AIex Kirk, }an.
12, 2010, al ¡. 7.

62
and Risk) ¡ul il, Lehman vas ¡ursuing ´13% annuaI grovlh¨ in revenues, and ´lo
su¡¡orl lhis revenue grovlh |Lehman vasj largeling an even fasler increase in lhe
firm's baIance sheel, lolaI ca¡ilaI base and risk a¡¡elile ÷ each of vhich |vasj ¡ro|ecled
lo increase by 15% ¡er year.¨
168
GoIdfarb noled lhal Lehman had been ´¡edaI lo lhe
melaI in grovlh mode¨ for lhe ¡revious lvo years, bul ¡Ianned lo conlinue lhal going
forvard.
169
Thal year, IuId and GeIband (lhen head of IID) aIso gave ¡resenlalions in
vhich lhey discussed Lehman's aggressive grovlh slralegy.
170

L@I !38 +;D>8:B87 /6BG '>?9 $839:;0B (3:;H87 #AB6;8BB
*E>:E8H4
The business slralegy lhal Lehman ¡ursued beginning in 2006 vas risky in Iighl
of lhe firm's high Ieverage and smaII equily base. CommerciaI reaI eslale inveslmenls,
Ieveraged Ioans and olher ¡rinci¡aI inveslmenls consumed more ca¡ilaI, enlaiIed more
risk, and vere Iess Iiquid lhan Lehman's lradilionaI Iines of business.
171

The Iack of Iiquidily increased lhe risk lo lhe firm in severaI vays. Having a
Iarge voIume of iIIiquid assels made il much more difficuIl for lhe firm lo accom¡Iish

168
David GoIdfarb, Lehman, GIobaI Slralegy Offsile Iresenlalion (Mar. 2006), al ¡¡. 30"31 |LßIX"DOCID
1342496j, allached lo e"maiI from Chrislo¡her M. O'Meara, Lehman, lo }acqueIine RoncagIioIo, Lehman
(A¡r. 3, 2006) |LßIX"DOCID 1357100j.
169
'80 al ¡. 10.
170
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 11, Lehman, IID Offsile Iresenlalion
and Noles (Se¡l. 28, 2006) |LßIX"DOCID 2042292, 2068495j, allached lo e"maiI from MichaeI GeIband,
Lehman, lo Richard S. IuId, }r., Lehman, $* "30 (Se¡l. 26, 2006) |LßIX"DOCID 2384245j.
171
Less Iiquid inveslmenls vere ´LeveI 3.¨ LeveI 1 assels have readiIy avaiIabIe markels lo ¡rovide
¡rices and Iiquidily, such as exchange"lraded equilies. LeveI 2 assels have observabIe evenls lo ¡rovide
¡ricing, such as com¡arabIe saIes. LeveI 3 assels have no readiIy avaiIabIe ¡ricing mechanism and
lherefore are Iess Iiquid lhan LeveI 1 and 2 assels.

63
lhree im¡orlanl goaIs in a difficuIl financiaI environmenl: lo raise cash, lo hedge risks,
or lo seII assels lo reduce lhe Ieverage in ils baIance sheel.
When a financiaI inslilulion suffers Iosses, il oflen needs lo raise cash lo fund
ilseIf.
172
ßul iIIiquid inveslmenls are difficuIl lo use for lhal ¡ur¡ose because lhey
cannol be soId quickIy.
173
When iIIiquid inveslmenls are soId in a difficuIl markel, lhe
seIIer oflen lakes a much Iarger Ioss on lhe saIe lhan on a Iiquid assel.
174
SimiIarIy,
iIIiquid assels are more difficuIl lo use as coIIaleraI for borroving.
175
They oflen cannol
be used in lhe re¡o markel, vhich vas a cruciaI source of funding for inveslmenl banks
such as Lehman.
176
If a borrover ¡Iedges iIIiquid assels as coIIaleraI, lhere viII be a
Iarger ´haircul,¨ lhal is, a discounl from lhe markel vaIue of lhe ¡Iedged coIIaleraI, lhan
for Iiquid assels.
177


172
1$$ Lehman, Ca¡ilaI Adequacy Reviev (Se¡l. 11, 2008), al ¡. 1 |LßIX"DOCID 012124j.
173
1$$ Tobias Adrian, IederaI Reserve ßank of Nev York, and Hyun Song Shin, Irincelon Universily,
7)("(/)"3 '(*$#%$8)"#)$:4 7)("(/)"3 1*"E)3)*@ "(8 ;,($*"#@ 9,3)/@ (Aug. 5, 2008), al ¡. 13.
174
Marlin Oehmke, 9-**)(+ *6$ =#"&$: ,( !,33"*$#"3 5)F-)8"*),(:, CoIumbia ßusiness SchooI Ideas al Work,
}uIy 28, 2009,
hll¡://vvv4.gsb.coIumbia.edu/ideasalvork/fealure/731624/Iulling+lhe+ßrakes+on+CoIIaleraI+Liquidali
ons (Iasl visiled on Ieb. 1, 2010).
175
'80, :$$ "3:, Moody's Inveslor Services, Iress ReIease: Moody's Texl: Changes Lehman OulIook Irom
SlabIe To Negalive (}une 9, 2008).
176
Ixaminer's Inlerviev of Anura| ßismaI, Se¡l. 16, 2009, al ¡. 10, Lehman, Accounling IoIicy ManuaI
(Se¡l. 9, 2006) |LßIX"DOCID 3213287j, allached lo e"maiI from Marie Slevarl, Lehman, lo Marlin KeIIy,
Lehman, $* "30 (Dec. 5, 2007) |LßIX"DOCID 3223385j.
177
1$$ Lehman, U¡dale on Risk, Liquidily and Ca¡ilaI Adequacy Iresenlalion (Aug. 17, 2007), al ¡. 48
|LßIX"DOCID 2031705j (Lehman's funding framevork look accounl of lhe inabiIily lo fund iIIiquid
assels lhrough lhe re¡o markel, lherefore lhe firm aIvays funded iIIiquid hoIdings vilh Iong"lerm assels
and IiabiIilies).

64
IinanciaI inslilulions generaIIy engage in lransaclions designed lo hedge lheir
risks.
178
ßul iIIiquid inveslmenls are ly¡icaIIy more difficuIl lo hedge.
179
In facl, Lehman
decided nol lo lry lo hedge ils ¡rinci¡aI inveslmenl risks lo lhe same exlenl as ils olher
ex¡osures for ¡reciseIy lhis reason ÷ ils senior officers beIieved lhal hedges on lhese
inveslmenls vouId nol vork and couId even backfire, aggravaling inslead of miligaling
Lehman's Iosses in a dovnlurn.
180
As a resuIl, Lehman acquired a Iarge voIume of un"
hedged assels lhal uIlimaleIy caused Lehman significanl Iosses.
181

In a difficuIl financiaI environmenl, il aIso is im¡orlanl for financiaI inslilulions
lo be abIe lo reduce lheir Ieverage and risk ¡rofiIe.
182
The more highIy Ieveraged lhe
inslilulion is, lhe more im¡orlanl il is for lhe inslilulion lo begin reducing Ieverage as
soon as markel condilions lurn againsl il. ßul if lhe need lo reduce Ieverage forces lhe
saIe of iIIiquid assels al a Ioss, il has a doubIe im¡acl, in addilion lo lhe Ioss, lhe

178
!>0 Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡. 9, Ixaminer's Inlerviev of Roger Nagioff,
Se¡l. 30, 2009, al ¡¡. 3, 13.
179
!>0 Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 3, 13.
180
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 3, 13, Ixaminer's Inlerviev of Roger
ßerIind, May 8, 2009, al ¡. 7, Ixaminer's Inlerviev of Ired S. OrIan, Se¡l. 21, 2009, al ¡. 6, Ixaminer's
Inlerviev of IauI Shollon, }une 5, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25,
2009, al ¡. 17, Lehman, 2nd Quarler 2007 Reviev: Credil IaciIilalion Grou¡ (}une 2007), al ¡¡. 1"2 |LßIX"
DOCID 514908j, Lehman, Leveraged Iinance Risk Iresenlalion (}une 2007), al ¡. 12 |LßIX"DOCID
3283752j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo Ian T. Lovill, Lehman (Se¡l. 27, 2007) |LßIX"
DOCID 193218j, e"maiI from }effrey Goodman, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Ocl. 1,
2007) |LßIX"DOCID 201866j, e"maiI from }effrey Goodman, Lehman, lo IauI Shollon, Lehman, $* "30
(Mar. 19, 2008) |LßIX"DOCID 335666j, Andrev }. Morlon, Lehman, Hedging Iixed Income's IorlfoIio
Iresenlalion (Aug. 8, 2008), al ¡¡. 2, 3, 8, 11 |LßIX"DOCID 011869j, allached lo e"maiI from Thomas
OdenlhaI, Lehman, lo Andrev }. Morlon, Lehman, $* "30 (Aug. 6, 2008) |LßIX"DOCID 069824j.
181
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 3, 13, Ixaminer's Inlerviev of IauI
Shollon, }une 5, 2009, al ¡¡. 7"8.
182
!>0 Ixaminer's Inlerviev of Treasury Secrelary Timolhy I. Geilhner, Nov. 24, 2009, al ¡¡. 7"8.

65
¡erce¡lion can be lhal lhere is ´air¨ in lhe vaIualion of lhe olher iIIiquid assels lhal
remain on lhe baIance sheel, exacerbaling lhe risk of a Ioss of confidence in lhe firm's
fulure.
183

During lhe decIining markel of 2007"08, Lehman suffered from aII lhese
¡robIems. Lehman had difficuIly seIIing ´slicky¨ assels and vas unabIe lo reduce ils
baIance sheel quickIy lhrough ly¡icaI means. Inslead, Lehman ex¡anded lhe voIume of
Re¡o 105 lransaclions lhal misIeadingIy and lem¡orariIy reduced ils baIance sheel
soIeIy for lhe ¡ur¡ose of lhe firm's ¡ubIic financiaI re¡orls.
184

LDI "ZZ<6D:E6?; ?C /6BG (?;E>?<B E? (3:;H87 #AB6;8BB
*E>:E8H4
Lehman's ¡rinci¡aI inveslmenls in iIIiquid assels ¡resenled nev and increased
forms of risk lo lhe firm, bul Lehman's managemenl did nol recaIibrale lhe firm's ¡re"
exisling risk conlroIs lo ensure lhal ils nev inveslmenls vere ¡ro¡erIy evaIualed,
monilored and Iimiled. If anylhing, lo faciIilale lhe nev inveslmenl slralegy, Lehman's
managemenl reIaxed ils conlroIs in severaI uIlimaleIy falefuI vays, discussed beIov.
Lehman's senior officers look lhis lack nolvilhslanding lheir ¡eriodic slalemenls lo

183
'80, :$$ Moody's Inveslor Services, Iress ReIease: Moody's Texl: Changes Lehman OulIook Irom SlabIe
To Negalive (}une 9, 2008).
184
See Seclion III.A.4 of lhis Re¡orl.

66
Lehman's ßoard, lhe raling agencies, and lhe SIC lhal ils risk managemenl syslem vas
a rigorous inde¡endenl check on lhe risks underlaken by ils business Iines.
185

L6I *E>8BB !8BE6;H %JD<AB6?;B
One of Lehman's ma|or risk conlroIs vas slress lesling. HisloricaIIy, Lehman's
slress lesling had nol been designed lo encom¡ass lhe risks ¡osed lo lhe firm by
¡rinci¡aI inveslmenls in reaI eslale and ¡rivale equily, because lhose ¡osilions
¡reviousIy made u¡ a smaII ¡orlion of Lehman's ¡orlfoIio.
186
Lehman did nol revise ils
slress lesling lo address ils evoIving business slralegy.
Lehman vas required by lhe SIC
187
lo conducl some form of reguIar slress
lesling on ils ¡orlfoIio lo quanlify lhe calaslro¡hic Ioss il couId suffer over a defined
¡eriod of lime.
188
Lehman ran a series of slress lesls based on 13 or 14 differenl
scenarios.
189
Some of lhe scenarios vere hisloricaI evenls, such as lhe 1987 slock markel

185
MadeIyn Anloncic, Risk Managemenl Iresenlalion lo Slandard & Ioor's |Draflj (Aug. 17, 2007), al ¡. 5
|LßIX"DOCID 342851j (´GIobaI Risk Managemenl Division is inde¡endenl of lhe lrading areas¨),
allached lo e"maiI from Lisa Ralhgeber, Lehman, lo }effrey Goodman, Lehman, $* "3. (Aug. 15, 2007)
|LßIX"DOCID 305205j, SIC Division of Markel ReguIalion, Lehman ßrolhers " ConsoIidaled Su¡ervised
Inlily Markel and Credil Risk Reviev (}une 2005), al ¡¡. 3"4 |LßIX"DOCID 2125011j (saying Risk
Managemenl vas ´inde¡endenl of Lehman's business unils¨), allached lo e"maiI from MicheIIe Danis,
SIC, lo David Oman, Lehman, $* "30 (A¡r. 21, 2006) |LßIX"DOCID 2068428j, Lehman, Risk U¡dale
Iresenlalion lo Lehman ßoard of Direclors (}uIy 18, 2006), al ¡¡. 5, 8 |LßIX"DOCID 2125293j (saying
Lehman$s risk a¡¡roach ´a¡¡Iie|dj anaIylicaI rigor overIaid vilh sound ¡raclicaI |udgmenl¨, Lehman,
Risk Managemenl U¡dale Iresenlalion lo Lehman ßoard of Direclors (A¡r. 15, 2008), al ¡¡. 1"2
|LßHI_SIC07940_027909"29j (saying Lehman ´¡rovided an inde¡endenl viev of risk¨).
186
Ixaminer's Inlerviev of IauI Shollon, Ocl. 16, 2009, al ¡. 2.
187
1$$ )(>#", Seclion III.A.6.
188
Ixaminer's Inlerviev of lhe Securilies and Ixchange Commission, Aug. 24, 2009, al ¡. 13.
189
1$$4 $0+0, Lehman, Slress Tesl Re¡orl for March 31, 2006 |LßIX"DOCID 2078161j, allached lo e"maiI
from Sandee¡ Garg, Lehman, lo Ialrick WhaIen, Lehman, $* "30 (A¡r. 24, 2006) |LßIX"DOCID 2118206j,
Lehman, Slress Tesl Re¡orl for Iebruary 28, 2007 |LßIX"DOCID 632363j, allached lo e"maiI from MeIda

67
crash or lhe 1998 Russian financiaI crisis, vhiIe olher scenarios vere hy¡olhesized by
Lehman's risk managers.
190
Lehman's managemenl re¡resenled lo ils exlernaI
consliluenls lhal reguIar and com¡rehensive slress lesls ´vere ¡erformed lo evaIuale
lhe ¡olenliaI I&L im¡acl on lhe Iirm's ¡orlfoIio of abnormaI yel ¡IausibIe markel
condilions.¨
191
Slress lesling vas designed lo measure ´laiI risk¨ ÷ a one in len year
ly¡e evenl.
When Lehman firsl ado¡led slress lesling in aboul 2005, il a¡¡Iied lhe lesling
onIy lo ils lradabIe inslrumenls such as slocks, bonds, and olher securilies, il did nol
incIude ils un"lraded assels such as ils commerciaI reaI eslale or ¡rivale equily
inveslmenls.
192
ßecause lhese assels did nol lrade freeIy, lhey vere nol considered
susce¡libIe lo slress lesling over a shorl"lerm scenario.
193
And since Lehman did nol
lhen have significanl inveslmenls in lhese areas, excIuding lhem from lhe slress lesling

IIagoz, Lehman, lo IauI Shollon, Lehman, $* "30 (Mar. 9, 2007) |LßIX"DOCID 630356j, Slress Tesl Re¡orl
for Oclober 31, 2007 |LßIX"DOCID 632432j, allached lo e"maiI from }effrey Goodman, Lehman, lo Cherie
GooIey, Lehman (Dec. 19, 2007) |LßIX"DOCID 665513j, Slress Tesl Re¡orl for A¡r. 30, 2008 |LßIX"
DOCID 3296803j, allached lo e"maiI from Mark Weber, Lehman, lo Cherie GooIey, Lehman, $* "30 (May
28, 2008) |LßIX"DOCID 3302270j.
190
Lehman, Risk Managemenl Iresenlalion lo Iilch (A¡r. 7, 2006), al ¡. 47 |LßIX"DOCID 691768j,
Lehman, Risk, Liquidily, Ca¡ilaI, and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk Commillee
of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 28 |LßIX"AM 067167j.
191
20+0, MadeIyn Anloncic, Lehman, Risk Managemenl Iresenlalion lo Slandard & Ioor's |Draflj (Aug.
17, 2007), al ¡¡. 38"39 |LßIX"DOCID 342851j, allached lo e"maiI from Lisa Ralhgeber, Lehman, lo }effrey
Goodman, Lehman, $* "3. (Aug. 15, 2007) |LßIX"DOCID 305205j.
192
Ixaminer's Inlerviev of IauI Shollon, Ocl. 16, 2009, al ¡¡. 5"6[ Ixaminer's Inlerviev of }effrey
Goodman, Aug. 28, 2009.
193
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009.

68
did nol undermine lhe usefuIness of lhe resuIls.
194
The SIC vas avare of lhis
excIusion.
195

Al various ¡oinls in 2006 and 2007, Lehman's risk managers considered vhelher
lo incIude ¡rinci¡aI inveslmenls in Lehman's slress lesling.
196
An inlernaI audil advised
lhal Lehman ´address lhe main risks in lhe Iirm's ¡orlfoIio,¨ incIuding ´iIIiquidily¨
and ´concenlralion risk.¨
197
ßul Lehman did nol lake significanl sle¡s lo incIude lhese
¡rivale equily ¡osilions in lhe slress lesling unliI 2008, even lhough lhese inveslmenls
became an increasingIy Iarge ¡orlion of Lehman's risk ¡rofiIe.
198

UnliI Iale 2007, Lehman's slress lesling aIso excIuded ils Ieveraged Ioan
commilmenls ÷ )0$., lhe Ieveraged Ioans lhal Lehman had commilled lo fund in lhe
fulure, bul had nol yel cIosed.
199
This excIusion a¡¡ears lo have been inadverlenl.
200


194
Ixaminer's Inlerviev of IauI Shollon, Ocl. 16, 2009, al ¡¡. 5"6.
195
Ixaminer's Inlerviev of Mallhev Iichner, Nov. 23, 2009, al ¡. 12, Ixaminer's Inlerviev of IauI
Shollon, Ocl. 16, 2009, al ¡. 6.
196
I"maiI from Marc Henn, Lehman, lo Maria Turner, Lehman, (Mar. 2, 2007) |LßIX"DOCID 264992j, e"
maiI from MeIda IIagoz, Lehman, lo }effrey Goodman, Lehman, $* "3. (}une 11, 2007) |LßIX"DOCID
384503j, Lehman, 2006 Com¡elilor AnaIysis " Key Consideralions (Dec. 1, 2006) |LßIX"DOCID 2110930j,
allached lo e"maiI from Mirey NadIer, Lehman, lo Ired Sleinberg, Lehman (Dec. 1, 2006) |LßIX"DOCID
2042308j, e"maiI from Gerard ReiIIy, Lehman, lo Chrislo¡her M. O'Meara, Lehman (May 17, 2006) |LßIX"
DOCID 1342418j, e"maiI from }ames ßaIIenline, Lehman, lo MichaeI GeIband, Lehman, $* "3. (}an. 4, 2007)
|LßIX"DOCID 384818j.
197
Lehman, InlernaI VaR Audil Re¡orl |Draflj (Ieb. 26, 2007), al ¡. 3 |LßIX"DOCID 232917j, allached lo
e"maiI from Lisa Ralhgeber, Lehman, lo IauI Shollon, Lehman (Ieb. 26, 2007) |LßIX"DOCID 232916j.
198
Ixaminer's Inlerviev of Chrislo¡her M. O'Meara, Aug. 14, 2009, al ¡. 25.
199
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 10"11, Ixaminer's Inlerviev of IauI
Shollon, Ocl. 16, 2009, al ¡. 4, e"maiI from MeIda IIagoz, Lehman, lo }effery Goodman, Lehman (}uIy 16,
2007) |LßIX"DOCID 385103j, e"maiI from }effery Goodman, Lehman, lo Sle¡hen Lax, Lehman, $* "30 (Nov.
14, 2007) |LßIX"DOCID 297400j.
200
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 10"11, Ixaminer's Inlerviev of IauI
Shollon, Ocl. 16, 2009, al ¡. 4.

69
ßecause Lehman's slress lesling did nol incIude ils reaI eslale inveslmenls, ils
¡rivale equily inveslmenls or, during a cruciaI lime ¡eriod, ils Ieveraged Ioan
commilmenls, Lehman's managemenl ¡ursued ils lransilion from lhe moving business
lo lhe slorage business vilhoul lhe benefil of reguIar slress lesling on lhe ¡rimary
business Iines lhal vere lhe sub|ecl of lhis slralegic change. Ior exam¡Ie, as described
beIov, Lehman enlered inlo a series of Iarge and risky commerciaI reaI eslale
lransaclions in lhe firsl haIf of 2007 vilhoul slress lesling lhe ¡arlicuIar lransaclions and
vilhoul conducling reguIar slress lesling on Lehman's aggregale commerciaI reaI eslale
book.
201

This excIusion vas significanl. Ix¡erimenlaI slress lesls conducled in 2008
shoved lhal a Iarge ¡ro¡orlion of Lehman's laiI risk ÷ ¡erha¡s even a Iarge ma|orily of
ils overaII laiI risk ÷ Iay vilh lhe businesses lhal vere ¡reviousIy excIuded from lhe
slress lesling. One slress lesl ¡osiled maximum ¡olenliaI Iosses of $9.4 biIIion,
incIuding $7.4 biIIion in Iosses on lhe ¡reviousIy excIuded reaI eslale and ¡rivale equily
¡osilions, and onIy $2 biIIion on lhe ¡reviousIy incIuded lrading ¡osilions.
202
Anolher
slress lesl shoved lolaI Iosses of $13.4 biIIion, of vhich $2.5 biIIion vas allribulabIe lo

201
1$$ Seclion III.A.1.b of lhis Re¡orl.
202
Lehman, Slress Tesl Re¡orl (}une 30, 2008), al ¡. 3 |LßIX"DOCID 3326829j, allached lo e"maiI from
Nancy MaIik, Lehman, lo IauI Shollon, Lehman, $* "3. (}une 30, 2008) |LßIX"DOCID 3301915j, Lehman,
Irivale Iquily and ReaI Islale Slresses, GIobaI Markel Risk Managemenl ¡resenlalion (}une 30, 2008), al
¡¡. 3"4 |LßIX"DOCID 3301916j allached lo e"maiI from Nancy MaIik, Lehman, lo IauI Shollon, Lehman,
$* "3. (}une 30, 2008) |LßIX"DOCID 3301915j.

70
lhe firm's incIuded ¡osilions, and $10.9 biIIion vas allribulabIe lo lhe excIuded
¡osilions.
203

ßul lhese slress lesls vere conducled Iong afler lhese assels had been acquired,
and lhey vere never shared vilh Lehman's senior managemenl.
204
Ior a more delaiIed
discussion of Lehman's slress lesling, see A¡¡endix 8, Risk Managemenl Organizalion
and ConlroIs.
L66I /6BG "ZZ8E6E8 $696E +;D>8:B8 '?> '6BD:< NTTV
Lehman had a series of ´risk a¡¡elile Iimils¨ lhal il considered lhe ´cenler of ils
a¡¡roach lo risk.¨
205
Risk a¡¡elile vas a measure lhal aggregaled lhe markel risk,
credil risk, and evenl risk faced by Lehman.
206
Lehman had an eIaborale sel of
¡rocedures designed lo caIcuIale lhe ´risk a¡¡elile usage¨ in each of ils business Iines,
each of ils divisions, and for lhe firm as a vhoIe.
207
These risk a¡¡elile usage figures
vere caIcuIaled every day.
208


203
Lehman, Slress Tesl Re¡orl (}une 30, 2008), al ¡. 1 |LßIX"DOCID 384227j allached lo e"maiI from
Nancy MaIik, Lehman, lo IauI Shollon, Lehman, $* "3. (Se¡l. 2, 2008) |LßIX"DOCID 385413j.
204
Ixaminer's Inlerviev of Mark Weber, Aug. 11, 2009, al ¡. 14, Ixaminer's Inlerviev of Chrislo¡her M.
O'Meara, Se¡l. 23, 2009, al ¡. 19.
205
1$$, $0+0, }ared Iedovilz, ßMRM"Markel Risk Managemenl WaIklhrough Tem¡Iale (Nov. 30, 2007), al
¡. 9 |IY"LI"LßHI"KIYIIRS 1015089j, MadeIyn Anloncic, Lehman, Risk Managemenl Iresenlalion lo
Slandard & Ioor's |Draflj (Aug. 17, 2007), al ¡. 23 |LßIX"DOCID 342851j, allached lo e"maiI from Lisa
Ralhgeber, Lehman, lo }effrey Goodman, Lehman, $* "30 (Aug. 15, 2007) |LßIX"DOCID 305205j.
206
MadeIyn Anloncic, Lehman, Risk Managemenl Iresenlalion lo Slandard & Ioor's |Draflj (Aug. 17,
2007), al ¡. 21 |LßIX"DOCID 342851j, allached lo e"maiI from Lisa Ralhgeber, Lehman, lo }effrey
Goodman, Lehman, $* "3. (Aug. 15, 2007) |LßIX"DOCID 305205j.
207
SIC Division of Markel ReguIalion, Lehman ßrolhers " ConsoIidaled Su¡ervised Inlily Markel and
Credil Risk Reviev (2005), al ¡¡. 4"5 |LßIX"DOCID 2125011j.
208
1$$, $0+0, e"maiI from }enny Ieng, Lehman, lo David GoIdfarb, Lehman, $* "3. (Ocl. 12, 2007) |LßIX"
DOCID 152049j (conlaining summary ´DaiIy Risk A¡¡elile and VaR Re¡orl¨ for Ocl. 10, 2007), and

71
Al lhe beginning of each year, Lehman sel numericaI Iimils on lhe risk a¡¡elile
usage il vas viIIing lo lake for each such business unil and for lhe firm as a vhoIe.
209

Managemenl ¡resenled lhe firm"vide Iimil lo lhe ßoard.
210

Under Lehman's Iimil ¡oIicy, Iover"IeveI Iimils a¡¡IicabIe lo a singIe business
Iine or geogra¡hic area vere reIaliveIy ´sofl¨ and couId be exceeded based on
a¡¡ro¡riale aulhorily.
211
Lehman's higher"IeveI Iimils vere ´harder¨ and required
grealer aulhorizalion if lhey vere exceeded.
212
The firm"vide risk a¡¡elile Iimil vas lhe
´hardesl¨ of aII, and if il vas exceeded, lhe ´Risk Commillee¨ of lhe firm vas required
lo consider lhe ¡ro¡er course of aclion lo lake.
213
The Risk Commillee vas com¡osed of
lhe Ixeculive Commillee of lhe firm, lhe Chief Risk Officer (´CRO¨), and lhe Chief
IinanciaI Officer (´CIO¨). WhiIe one vilness said lhal lhe onIy ¡ermissibIe reaclion lo

allached s¡readsheel (Ocl. 12, 2007) |LßIX"DOCID 150128j (conlaining daiIy risk a¡¡elile re¡orl, gIobaI
risk a¡¡elile re¡orl organized by risk ly¡e, and daiIy VaR re¡orl).
209
SIC Division of Markel ReguIalion, Lehman ßrolhers " ConsoIidaled Su¡ervised Inlily Markel and
Credil Risk Reviev (2005), al ¡¡. 4"5 |LßIX"DOCID 2125011j. 1$$ A¡¡endix 8, Risk Managemenl
Organizalion and ConlroIs (discussing risk a¡¡elile Iimils). Risk a¡¡elile measured lhe amounl Lehman
couId Iose in a give year and sliII achieve an acce¡labIe IeveI of nel ¡rofil.
210
Il is nol cIear vhelher lhe ¡resenlalion vas for ralificalion and a¡¡rovaI or sim¡Iy for informalion. 1$$
$0+04 Lehman, 2008 IinanciaI IIan Summary Iresenlalion lo Lehman ßoard of Direclors (}une 29, 2008), al
¡. 11 |LßHI_SIC07940_027374j.
211
Lehman, Markel Risk Managemenl Limil IoIicy ManuaI (Ocl. 2006), al ¡. 2 |LßHI_SIC07940_767665),
allached lo e"maiI from Chrislo¡her M. O'Meara lo Krisli MicheIIe ReynoIds (A¡r. 7, 2008)
|LßHI_SIC07940_767661j.
212
Lehman ßrolhers GIobaI Risk Managemenl, Second Quarler 2008 Re¡orl (}uIy 21, 2008), al ¡. 29
|LßIX"DOCID 738522j, allached lo e"maiI from IIizabelh Agoslo, Lehman, lo }effrey Goodman, Lehman,
$* "30 (}uIy 21, 2008) |LßIX"DOCID 670132j.
213
20+0, SIC, Lehman MonlhIy Risk Reviev Meeling Noles (}uIy 19, 2007), al ¡. 5 |LßIX"SIC 007363j, SIC
Division of Markel ReguIalion, Lehman ßrolhers " ConsoIidaled Su¡ervised Inlily Markel and Credil
Risk Reviev (2005), al ¡. 6 |LßIX"DOCID 2125011j.

72
exceeding lhe firm"vide Iimil vas immedialeIy reducing lhe risk faced by lhe firm,
214

mosl Lehman ¡ersonneI said lhal senior managemenl couId cure a Iimil excess by
granling a lem¡orary re¡rieve from lhe Iimil or by increasing lhe Iimil.
215
As vilh lhe
slress lesls, managemenl described lhe risk a¡¡elile Iimils lo reguIalors, raling agencies
and lhe ßoard as a meaningfuI conlroI lhal Lehman used lo manage ils risk"laking.
216

Al lhe end of 2006, Lehman dramalicaIIy increased ils risk a¡¡elile Iimils
a¡¡IicabIe lo fiscaI 2007. The firm"vide Iimil increased from $2.3 biIIion lo $3.3 biIIion,
and subsidiary Iimils aIso increased significanlIy, ¡arlicuIarIy insofar as lhe ¡rinci¡aI
invesling businesses vere concerned.
217

These increases in lhe risk a¡¡elile Iimils vere somevhal conlroversiaI. The
CRO al lhe lime, MadeIyn Anloncic, argued for a significanlIy Iover increase lo $2.6 or
$2.7 biIIion, and lhe much higher $3.3 biIIion figure vas a¡¡arenlIy lhe resuIl of a

214
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 5.
215
20+04 Ixaminer's Inlerviev of MadeIyn Anloncic, Ocl. 6, 2009, al ¡. 7, Ixaminer's Inlerviev vilh David
GoIdfarb, Se¡l. 21, 2009, al ¡. 5, Ixaminer's Inlerviev of IauI Shollon, }une 5, 2009, al ¡¡. 10"11 (saying
lhal lhe firm"vide risk a¡¡elile Iimil vas a ´hard¨ Iimil, lhe breach of vhich had lo be cured by eilher
reducing lhe firm's overaII risk or raising lhe Iimil).
216
MadeIyn Anloncic, Risk Managemenl Iresenlalion lo Slandard & Ioor's |Draflj (Aug. 17, 2007), al ¡.
23 |LßIX"DOCID 342851j, allached lo e"maiI from Lisa Ralhgeber, Lehman, lo }effrey Goodman,
Lehman, $* "3. (Aug. 15, 2007) |LßIX"DOCID 305205j, SIC Division of Markel ReguIalion, Lehman
ßrolhers " ConsoIidaled Su¡ervised Inlily Markel and Credil Risk Reviev (}une 2005), al ¡¡. 4"5 |LßIX"
DOCID 2125011j, allached lo e"maiI from MicheIIe Danis, SIC, lo David Oman, Lehman, $* "30 (A¡r. 21,
2006) |LßIX"DOCID 2068428j, Lehman, Risk U¡dale Iresenlalion lo Lehman ßoard of Direclors (}uIy 18,
2007), al ¡¡. 11"12 |LßIX"DOCID 2125293j.
217
Lehman ßrolhers, 2007 Risk A¡¡elile Limil (}an. 7, 2007), al ¡. 1 |LßIX"DOCID 158938j, allachmenl lo
e"maiI from Roberl Azerad, Lehman, lo MadeIyn Anloncic, Lehman (}an. 11, 2007) |LßIX"DOCID
158331j.

73
com¡romise vilh olher senior managers.
218
Moreover, lo |uslify lhe increased Iimil
amounl, Lehman changed lhe vay lhal il caIcuIaled lhe Iimil, had Lehman used lhe
same melhod lo caIcuIale lhe 2007 Iimil lhal il had used lo caIcuIale lhe 2006 Iimil, lhe
2007 Iimil vouId have been severaI hundred miIIion doIIars Iover.
219

Increasing lhe firm"vide Iimil lo $3.3 biIIion faciIilaled a ra¡id ex¡ansion of lhe
firm's risk ¡rofiIe belveen 2006 and 2007. As described beIov, vilhin lhe firsl fev
monlhs of fiscaI 2007, Lehman quickIy used lhe fuII amounl of lhe nev $3.3 biIIion risk
a¡¡elile Iimil ÷ and lhen some. In Iale 2007 and earIy 2008, Lehman reIaxed ils risk
a¡¡elile Iimils in severaI olher vays, vhich are described beIov. Ior a more delaiIed
discussion of Lehman's risk a¡¡elile Iimils, :$$ A¡¡endix 8, Risk Managemenl
Organizalion and ConlroIs.
L666I 58D6B6?; )?E !? %;C?>D8 *6;H<8 !>:;B:DE6?; $696E
In 2006, lo faciIilale lhe ¡Ianned ex¡ansion of lhe Ieveraged Ioan business,
Lehman's Ixeculive Commillee decided lo be more fIexibIe vilh res¡ecl lo lhe firm's
singIe lransaclion Iimil.
220
The singIe lransaclion Iimil vas acluaIIy lvo Iimils ÷ one
Iimil a¡¡IicabIe lo lhe nolionaI amounl of lhe ex¡ecled Ieveraged Ioan and a second

218
Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡. 13, e"maiI from David GoIdfarb,
Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (Nov. 2, 2006) |LßIX"DOCID 2125677j, e"maiI from
MadeIyn Anloncic, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Nov. 2, 2006) |LßIX"DOCID 2125679j,
e"maiI from Chrislo¡her M. O'Meara, Lehman, lo MadeIyn Anloncic, Lehman (Nov. 2, 2006) |LßIX"
DOCID 2125680j.
219
Lehman, 2007 IinanciaI IIan Iresenlalion lo Iinance and Risk Commillee of lhe ßoard of Direclors
(}an. 30, 2007), al ¡¡. 21"22 |LßIX"AM 067099j.
220
Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 7"8.

74
Iimil a¡¡IicabIe lo a caIcuIaled amounl lhal Lehman vas al risk of Iosing on lhe
Ieveraged Ioan. The Iimils vere ¡arlIy a funclion of Lehman's equily. Lehman had
¡reviousIy agreed vilh lhe raling agencies lhal il vouId ado¡l a singIe lransaclion Iimil
akin lo Iimils ¡reviousIy ado¡led by commerciaI banks.
221

AIlhough Lehman's Ixeculive Commillee aIvays relained lhe freedom lo vaive
lhe singIe lransaclion Iimil as lo any individuaI lransaclion, Lehman informed ils
exlernaI consliluenls lhal lhis ¡rerogalive vouId be exercised onIy in ´rare
circumslances.¨
222

In Iale 2006, Lehman's managemenl decided nol lo enforce lhe singIe lransaclion
Iimil because il had cosl Lehman significanl o¡¡orlunilies.
223
ßecause Lehman had a
dramalicaIIy smaIIer equily base lhan ils commerciaI banking com¡elilors, and a
somevhal smaIIer equily base even lhan ils inveslmenl banking com¡elilors, Lehman
had a Iover singIe lransaclion Iimil lhan ils com¡elilors, vhich forced il lo forgo or
Iimil ils ¡arlici¡alion in a number of big deaIs.
224
Lehman's managemenl decided lhal

221
A¡¡endix 8, Risk Managemenl Organizalion and ConlroIs.
222
MadeIyn Anloncic, Lehman, ´Slandard¨ Risk Managemenl Iresenlalion (Undaled), al ¡. 21 |LßIX"
DOCID 194031j, allached lo e"maiI from IauI Shollon, Lehman, lo Chrislo¡her M. O'Meara, Lehman
(Ieb. 20, 2008) |LßIX"DOCID 214223j, MadeIyn Anloncic, Lehman, ´Slandard¨ Risk Managemenl
Iresenlalion, al ¡. 21 |LßIX"DOCID 194031j.
223
Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 7"8, Lehman, A¡¡endix lo IinanciaI S¡onsors
Slralegies (IncIuding Lending Ca¡acily SoIulions) Iresenlalion lo lhe Ixeculive Commillee (Aug. 3,
2006), al ¡. 6 |LßIX"DOCID 1343776j, allached lo e"maiI from ßIair Sieff, Lehman, lo MadeIyn Anloncic,
Lehman, $* "30 (Aug. 2, 2006) |LßIX"DOCID 1360977j.
224
Lehman, A¡¡endix lo IinanciaI S¡onsors Slralegies (incIuding Lending Ca¡acily SoIulions)
Iresenlalion lo lhe Ixeculive Commillee (Aug. 3, 2006), al ¡¡. 3, 6 |LßIX"DOCID 1343776j, allached lo e"
maiI from ßIair Sieff, Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (Aug. 2, 2006) |LßIX"DOCID

75
in lhe fulure, il vouId ¡arlici¡ale in such deaIs vilhoul regard lo lhe singIe lransaclion
Iimil.
225
Moreover, Lehman did nol a¡¡Iy lhe singIe lransaclion Iimil lo ils commerciaI
reaI eslale deaIs, even lhough some of ils risk managers advocaled for lhis broader
a¡¡Iicalion of lhe Iimil.
226

Like lhe decision lo increase lhe firm"vide risk a¡¡elile Iimil, lhe decision nol lo
enforce lhe singIe lransaclion Iimil vas conlroversiaI vilhin Lehman's managemenl.
AIex Kirk, lhen head of Lehman's Credil ßusiness, had ¡rimary res¡onsibiIily for lhe
Ieveraged Ioan business, lhoughl lhal lhe singIe lransaclion Iimil vas an im¡orlanl
melhod of Iimiling lhe firm's risk on ils Ieveraged Ioans.
227
Anloncic aIso lhoughl lhal
lhe firm shouId conlinue lo abide by lhe singIe lransaclion Iimil in ¡arl because lhe
subslanlive lerms of lhe Ieveraged Ioans vere increasingIy Io¡sided in favor of lhe
¡rivale equily s¡onsors and unfavorabIe for lhe Iending banks.
228
AIlhough Anloncic

1360977j, Lehman, IinanciaI S¡onsors Slralegies (incIuding Lending Ca¡acily SoIulions) Iresenlalion lo
lhe Ixeculive Commillee (Aug. 3, 2006), al ¡¡. 10"11 (LßIX"DOCID 1343775j, allached lo e"maiI from
ßIair Sieff, Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (Aug. 2, 2006) (|LßIX"DOICD 1360977j.
225
I"maiI from }oe Li, Lehman, lo IauI Milrokoslas, Lehman (Aug. 30, 2007) |LßIX"DOCID 2547330j, }oe
Li, Lehman, STL ßacklesling IxceI S¡readsheel (}uIy 25, 2007) |LßIX"DOCID 2506462j, allached lo e"maiI
from }oe Li, Lehman, lo Ired S. OrIan, Lehman, $* "30 (}uIy 25, 2007) |LßIX"DOCID 2563167j, "//,#8
Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 7"8.
226
!>0 Ixaminer's Inlerviev of MadeIyn Anloncic, Ocl. 6, 2009, al ¡. 12, e"maiI from }effrey Goodman,
Lehman, lo Zev KIasevilz, Lehman (}an. 17, 2007) |LßIX"DOCID 794864j, e"maiI from }effrey Goodman,
Lehman, lo Zev KIasevilz, Lehman (Ieb. 12, 2007) |LßIX"DOCID 794879j.
227
Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 7"8.
228
Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡. 9.

76
lhoughl lhe firm shouId abide by lhe singIe lransaclion Iimil,
229
Kirk and Anloncic vere
overruIed by IuId, Gregory, and McGee.
230

L7I !38 #?:>70B "ZZ>?K:< ?C $839:;0B \>?]E3 *E>:E8H4
Lehman's ßoard fuIIy embraced Lehman's grovlh slralegy. In a }anuary 2007
ßoard meeling, lhe direclors vere informed of lhe Iarge increase in lhe risk a¡¡elile
Iimil for fiscaI 2007, and of lhe firm's inlenlion lo ex¡and ils fool¡rinl in ¡rinci¡aI
inveslmenls, and lhey agreed vilh Lehman's senior officers lhal Lehman needed lo lake
more risk in order lo com¡ele.
231
AII of lhe direclors loId lhe Ixaminer lhal lhey agreed
vilh Lehman's grovlh slralegy al lhe lime il vas underlaken.
232.

AIlhough lhe ¡eriodic maleriaIs lhal lhe Iinance and Risk Commillee
233
received
aboul lhe firm's slress lesling discIosed lhal lesls vere conducled on lhe firm's ´lrading
¡orlfoIio¨ and ´We sub|ecl bolh our lrading and our counler¡arly ¡orlfoIio lo slress

229
'80, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 6"8.
230
Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 7"8, Ixaminer's Inlerviev of MadeIyn Anloncic,
Mar. 27, 2009, al ¡. 9.
231
Ixaminer's Inlerviev of Sir. Chrislo¡her Genl, Ocl. 21, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of
Thomas Cruikshank, Ocl. 8, 2009, al ¡¡. 2"3, Ixaminer's Inlerviev of RoIand A. Hernandez, Ocl. 2, 2009,
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 28, 2009, al ¡. 12, Ixaminer's Inlerviev of MichaeI L.
AinsIie, Se¡l. 22, 2009, al ¡. 8, Ixaminer's Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡. 12,
Ixaminer's Inlerviev of Dr. Henry Kaufman, May 19, 2009, al ¡¡. 7"8, 14, Ixaminer's Inlerviev of Roger
ßerIind, May 8, 2009, al ¡¡. 6"7, Ixaminer's Inlerviev of }ohn I. Akers, A¡r. 22, 2009, al ¡. 9.
232
'80
233
The ßoard had a Iinance and Risk Commillee lhal generaIIy mel lvice a year and received more
delaiIed informalion lhan lhe fuII ßoard on lhese lo¡ics. Dr. Henry Kaufman, former managing direclor
of SaImon ßrolhers, vas lhe head of lhe Iinance and Risk Commillee.

77
lesls,¨
234
managemenl did nol inform lhe Iinance and Risk Commillee lhal many of lhe
firm's commerciaI reaI eslale and ¡rivale equily inveslmenls vere excIuded from lhe
firm's slress lesls.
235

The omission vas noled on }anuary 29, 2008, vhen lhe Iinance and Risk
Commillee received maleriaIs slaling lhal ´reaI eslale ovned and ¡rivale equily¨ vere
excIuded from lhe slress lesling.
236
No member of lhe ßoard vho vas asked by lhe
Ixaminer aboul lhe issue recaIIed nolicing lhis revised discIosure, and no member
recaIIed Lehman's officers ex¡Iaining il or olhervise bringing il lo lhe allenlion of lhe
ßoard.
237
Some direclors vere nol concerned aboul lhe excIusion of lhese inveslmenls
from lhe slress lesling, saying lhal lhe excIusions a¡¡eared reasonabIe al lhe lime.
238


234
Lehman ßrolhers HoIdings Inc., Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo
Iinance and Risk Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 28 |LßIX"AM 067167"
233j.
235
Ixaminer's Inlerviev of IauI Shollon, Ocl. 16, 2009, al ¡. 5, :$$ aIso Lehman ßrolhers HoIdings Inc.,
Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk Commillee of
Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 29 |LßIX"AM 067167"233j.
236
Lehman, 2008 IinanciaI IIan Iresenlalion lo Lehman Iinance and Risk Commillee of lhe ßoard of
Direclors (}an. 29, 2008), al ¡. 19 |LßHI_SIC 07940_068559j.
237
!>0 Ixaminer's Inlerviev of }erry A. Grundhofer, Se¡l. 16, 2009, al ¡. 7, Ixaminer's Inlerviev of RoIand
A. Hernandez, Ocl. 2, 2009, Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 4, Ixaminer's
Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡. 11, /,(*#" Ixaminer's Inlerviev of Chrislo¡her M.
O'Meara, Se¡l. 23, 2009, al ¡. 18.
238
Ixaminer's Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡¡. 2"3, 10"11 (´Des¡ile |lhesej
excIusions, |Kaufmanj vas nol concerned vilh lhe resuIl lo lhe slress lesls.¨), Ixaminer's Inlerviev of
}erry A. Grundhofer, Se¡l. 16, 2009, al ¡. 7 (saying lhe excIusion ´Iooked reasonabIe and lhal il vouId be
hard for |Grundhoferj lo beIieve Lehman vas nol foIIoving lhe slandard for conducling slress lesls.¨), :$$
Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡¡. 13"14 (saying he did nol find slress
lesls heI¡fuI and lhoughl some assels mighl be excIuded).

78
Hovever, one direclor said lhal if lhe excIusion vas maleriaI, he vouId have vanled lo
knov aboul il.
239

The ßoard aIso vas nol loId lhal Lehman's managemenl had decided nol lo
a¡¡Iy lhe singIe lransaclion Iimils lo ils Ieveraged Ioans. AIlhough lhe Ixaminer has
found no evidence lhal before 2008, Lehman's managemenl had re¡resenled lo lhe
ßoard lhal any singIe lransaclion Iimil had been ado¡led,
240
some direclors said lhal
concenlralion Iimils vere im¡orlanl ¡roleclions for lhe firm, and lhey vouId have
vanled lo knov aboul significanl excesses above concenlralion Iimils.
241

In sum, during lhe second haIf of 2006, Lehman began lo ¡ursue a more
aggressive ¡rinci¡aI inveslmenl slralegy, and il reIaxed severaI risk Iimils lo faciIilale
lhal slralegy.
LNI $839:; 5?A@<8B 5?];Y $839:; (?;E6;A8B +EB \>?]E3
*E>:E8H4 58BZ6E8 E38 &;B8E ?C E38 *A@Z>698 (>6B6B
Lale in lhe second haIf of 2006, lhe firsl signs of veakness in lhe sub¡rime
residenliaI morlgage markel vere a¡¡arenl.
242
Ior exam¡Ie, deIinquency rales on
sub¡rime Ioans, vhich had hovered near 10% in 2004 and 2005, reached 13% by lhe end

239
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 11.
240
1$$4 $0+0, Lehman, Risk U¡dale Iresenlalion lo Lehman ßoard of Direclors (}uIy 18, 2006) |LßIX"WGM
986315j (nol menlioning singIe lransaclion Iimil), E-* :$$ Lehman, Risk Managemenl U¡dale Iresenlalion
lo Lehman ßoard of Direclors (A¡r. 15, 2008), al ¡. 1 |LßHI_SIC07940_027909j (´We have an overaII Risk
A¡¡elile Iimil vhich is su¡¡Iemenled by . . . singIe lransaclion, counlry and olher concenlralion Iimils.¨).
241
Ixaminer's Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡. 6, Ixaminer's Inlerviev of }ohn
Macomber, Se¡l. 25, 2009, al ¡¡. 6, 17.
242
ßank for InlernalionaI SellIemenls, 77lh AnnuaI Re¡orl (}une 24, 2007), al ¡. 109.

79
of 2006.
243
In addilion, afler ¡eaking in mid"2006, housing ¡rices began lo decIine
slee¡Iy.
244
This decIine in ¡rices lhrealened lhe sub¡rime morlgage markel because lhe
markel's heaIlh de¡ended on conlinued ¡rice a¡¡recialion in housing.
245
As a resuIl,
beginning in November 2006, significanl videning of s¡reads on non"inveslmenl grade
lranches of home equily Ioans vas evidenl.
246
ßy lhe s¡ring of 2007, lhe crisis had
advanced lo lhe ¡oinl lhal severaI ma|or sub¡rime Ienders had gone bankru¡l or been
acquired by slronger ¡arlners.
247

Lehman's managemenl sav lhe sub¡rime crisis as an o¡¡orlunily lo ¡ick u¡
ground on ils com¡elilors.
248
Lehman's managemenl ado¡led a ´counlercycIicaI grovlh

243
'80
244
Slandard & Ioor's, Iress ReIease: Home Irice DecIines Worsen As We Inler lhe Iourlh Quarler of
2008 According lo lhe S&I/Case"ShiIIer Home Irice Indices (Dec. 30, 2008), al ¡. 1 ("<")3"E3$ "*
hll¡://vvv2.slandardand¡oors.com/s¡f/¡df/index/CSHomeIrice_ReIease_123062.¡df), :$$ "3:, Vikas
ßa|a|, G,%$ 9#)/$: 7"33 )( ;,#$ ?6"( G"3> ,> H"*),(A: =)++$:* ;"#&$*:, N.Y. Times, Ieb. 16, 2007, al ¡. C1.
245
Gary Gorlon, '(>,#%"*),(4 5)F-)8)*@ "(8 *6$ IJ(+,)(+K 9"()/ ,> LMMN 2 (NIßR Working Ia¡er No. v14649,
2009), :$$ "3:, Gary Gorlon & Andrev Melrick, 1$/-#)*)O$8 ="(&)(+ "(8 *6$ P-( ,( P$., 5 (YaIe Inl'I Cenler
for Iinance, Working Ia¡er No. 09"14, 2009).
246
ßank for InlernalionaI SellIemenls, 77lh AnnuaI Re¡orl (}une 24, 2007), al ¡. 109.
247
'80 al ¡¡. 109"10.
248
Lehman, 2008 IinanciaI IIan Summary Iresenlalion lo Lehman ßoard of Direclors (}an. 24, 2008), al ¡.
5 |LßHI_SIC07940_027374j (´Currenl environmenl ¡resenls a unique Iong"lerm grovlh o¡¡orlunily for
lhe Iirm. . . . The Iirm's com¡elilors, vilh lhe nolabIe exce¡lions of GoIdman Sachs and }I Morgan
Chase, have suslained Iarge Iosses, veakening lheir com¡elilive ¡osilions. . . . This ¡resenls an
o¡¡orlunily for lhe Iirm lo ¡ursue a counlercycIicaI grovlh slralegy, simiIar lo vhal il did during lhe
2001"2002 dovnlurn, lo im¡rove ils com¡elilive ¡osilion and, over lime, generale su¡erior relurns for our
sharehoIders.¨), :$$ "3:, Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness
Iresenlalion lo Lehman ßoard of Direclors (Mar. 20, 2007), al ¡. 10 |LßHI_SIC07940_025834j (´Mosl of
Iarge sub¡rime inde¡endenls have gone oul of business, have been soId or are seIIing. . . . Currenl
dislressed environmenl ¡rovides subslanliaI o¡¡orlunilies, as in Iale 1990's¨), Lehman, Noles for
Iresenlalion for lhe Iixed Income Division Offsile Meeling (Se¡l. 26, 2006), al ¡¡. 10"12 |LßIX"DOCID
1715601j (slaling lhal Lehman vieved lhe 2006 grovlh slralegy as a counlercycIicaI o¡¡orlunily lo grov
business), allached lo e"maiI from LesIey Oramas"ScaIa, Lehman, lo MichaeI GeIband, Lehman (Se¡l. 26,
2006) |LßIX"DOCID 1945744j.

80
slralegy.¨
249
Lehman's managemenl beIieved lhal lhe sub¡rime crisis vouId nol s¡read
lo lhe economy generaIIy, or even lo lhe commerciaI reaI eslale markel, vhere Lehman
vas a ma|or ¡Iayer.
250
In ¡asl recessions and financiaI crises, Lehman had successfuIIy
laken on more risk vhiIe ils com¡elilors relrenched.
251

During lhe firsl haIf of 2007, Lehman conlinued ils grovlh slralegy. AIlhough
Lehman's managemenl decided lo curlaiI ils residenliaI morlgage originalion business,
il did so Iess dramalicaIIy lhan many of ils com¡elilors in lhal business, severaI of
vhich venl oul of business.
252

Lehman, aIong vilh olher markel ¡arlici¡anls and governmenl reguIalors,
undereslimaled lhe severily of lhe sub¡rime morlgage crisis,
253
lhe sub¡rime crisis
im¡aired Lehman's abiIily lo securilize and seII residenliaI morlgages and forced lhe
firm lo relain an increasingIy Iarge voIume of residenliaI morlgage"reIaled risk on ils

249
'80
250
'80
251
'80
252
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness Iresenlalion lo
Lehman ßoard of Direclors (Mar. 20, 2007), al ¡¡. 5, 10 |LßHI_SIC07940_025834j, e"maiI from Dimilrios
Krilikos, Lehman, lo }effrey Goodman, Lehman (Ieb. 2, 2007) |LßIX"DOCID 566140j (´WhiIe lhe resl of
lhe induslry is lighlening credil and increasing ¡rices in lhese areas, ve are moving in lhe o¡¡osile
direclion.¨).
253
Ixaminer's Inlerviev of Treasury Secrelary Timolhy I. Geilhner, Nov. 24, 2009, al ¡. 3, Ixaminer's
Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 16, 24, Ixaminer's Inlerviev of Richard McKinney,
Aug. 27, 2009, al ¡¡. 2, 9, Richard S. IuId, }r., Lehman, Noles for Senior Managemenl S¡eech (}une 16,
2008), al ¡¡. 5"6 |LßIX"DOCID 529241j, allached lo e"maiI from Taimur Hyal, Lehman, lo Herberl H.
McDade III, Lehman, $* "30 (}une 25, 2008) |LßIX"DOCID 556064j.

81
ovn baIance sheel.
254
Al lhe same lime, during lhe firsl lvo quarlers of 2007, Lehman
conlinued lo grov ils Ieveraged Ioan, commerciaI reaI eslale, energy, and ¡rinci¡aI
inveslmenls businesses.
255
Lehman's grovlh slralegy cuIminaled in lhe acquisilion of
lhe Archslone RIIT in Iale May 2007.
256
Togelher, lhese lransaclions conlinued lhe
ongoing increase in lhe size of Lehman's baIance sheel, vilh a ¡arlicuIarIy slrong
concenlralion in assels lhal couId nol easiIy be soId in a crisis. ßeginning in lhe fourlh
quarler of 2006, IID's businesses consislenlIy exceeded lheir Iimils even lhough relurns
on assels and earnings vere decreasing.
257
ßy Iebruary 2007, IID had a ´serious
baIance sheel issue.¨
258

This Seclion of lhe Ixaminer's Re¡orl discusses Lehman's aclions vilh res¡ecl lo
each of lhese business Iines se¡araleIy beIov. This Seclion aIso discusses lhe ma|or
¡ersonneI move during lhe firsl haIf of 2007 ÷ lhe re¡Iacemenl of MichaeI GeIband vilh
Roger Nagioff as lhe head of IID. IinaIIy, lhis seclion discusses lhe exlenl lo vhich

254
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡¡. 1,
3 |LßIX"DOCID 839039j, allached lo e"maiI from }ames Guarino, Lehman, lo Richard McKinney,
Lehman, $* "30 (}an. 16, 2007) |LßIX"DOCID 865925j.
255
1$$ Seclion III.A.1.b.1 of lhis Re¡orl.
256
1$$ Seclion III.A.1.b.2.d of lhis Re¡orl.
257
Lehman, Iixed Income Division ßaIance Sheel Managemenl (A¡r. 2007), al ¡. 2 |LßIX"DOCID 787297j,
allached lo e"maiI from Kieron Kealing, Lehman, lo David N. Sherr, Lehman, $* "30 (}une 6, 2007) |LßIX"
DOCID 808850j, Lehman ßaIance Sheel and DiscIosure Scorecard Ior Trade Dale A¡r. 21, 2008 (A¡r. 22,
2008), al ¡. 3 |LßIX"DOCID 3187588j, allached lo e"maiI from TaI Lilvin, Lehman, lo Herberl H. McDade
III, Lehman, $* "30 (A¡r. 22, 2008) |LßIX"DOCID 3187333j.
258
I"maiI from }ose¡h GenliIe, Lehman, lo MichaeI GeIband, Lehman, $* "30 (Ieb. 21, 2007) |LßIX"DOCID
810934j.

82
Lehman's officers informed lhe ßoard of Direclors of lhe conlinuing ex¡ansion of
Lehman's baIance sheel and risk"laking.
L:I $839:;0B /8B678;E6:< .?>EH:H8 #AB6;8BB
L6I $839:; 58D678B E? (A>E:6< *A@Z>698 &>6H6;:E6?;B @AE
(?;E6;A8 E? MA>BA8 ^"<E""_ &>6H6;:E6?;B
In lhe second haIf of 2006, Lehman began lo see lhe firsl cracks in lhe sub¡rime
morlgage markel.
259
Lehman reacled lo lhese signs by lighlening ils originalion
slandards, ¡arlicuIarIy vilh res¡ecl lo sub¡rime morlgages,
260
bul Lehman conlinued lo
¡ursue grovlh in ils morlgage originalion business generaIIy, ¡arlicuIarIy lhrough ils
AIl"A originalor, Aurora.
261
AIl"A Ioans are a ´somevhal IooseIy defined calegory
belveen ¡rime and sub¡rime¨ lhal are ´designed for borrovers vilh good credil
records vho do nol meel slandard guideIines for documenlalion requiremenls.¨
262


259
Ixaminer's Inlerviev of Thomas L. Wind, A¡r. 21, 2009, al ¡. 8, Ixaminer's Inlerviev of Susan
Harrison, A¡r. 28, 2009, al ¡¡. 2, 5, Ixaminer$s Inlerviev of Marie }ean ßurrueI, A¡r. 28, 2009, al ¡. 5,
Dimilrios Krilikos, Lehman, ßNC Risk Reviev December 2006 (}an. 20, 2007), al ¡. 50 |LßIX"DOCID
251077j, Dimilrios Krilikos, Lehman, Risk Reviev: Aurora and ßNC Iebruary 2007 (Mar. 19, 2007), al ¡.
10 |LßIX"DOCID 188325j.
260
Dimilrios Krilikos, Lehman, ßNC Risk Reviev December 2006 (}an. 20, 2007), al ¡. 6 |LßIX"DOCID
251077j, Lehman, MaleriaIs Ire¡ared for Office of Thrifl Su¡ervision Safely and Soundness/Com¡Iiance
Ixaminalion 2007 (Aug. 13, 2007), al ¡¡. 13"15 |LßIX"DOCID 538654j, Lehman, Iresenlalion lo Moody's
|Draflj (Ocl. 16, 2007), al ¡¡. 12"15 |LIH"IINRA"I"MAIL00088455j, Lehman, Iresenlalion lo Radian:
Morlgage O¡eralions Reviev (}uIy 24, 2007), al ¡¡. 15"17 |LßIX"DOCID 839141j, Ixaminer's Inlerviev of
Marie }ean ßurrueI, A¡r. 28, 2009, al ¡¡. 8"10, Ixaminer's Inlerviev of Dimilrios Krilikos, A¡r. 16, 2009, al
¡. 8.
261
Dimilrios Krilikos, Lehman, Aurora Loan Services Risk Reviev }anuary 2008 (Ieb. 7, 2008), al ¡¡. 10,
12 |LßIX"DOCID 394711j.
262
Saundra I. ßraunslein, Direclor of Division of Consumer and Communily Affairs, ßoard of Governors
of lhe IederaI Reserve, Teslimony ßefore U.S. House of Re¡resenlalives Commillee on IinanciaI Services,
Subcommillee on IinanciaI Inslilulions and Consumer Credil (Mar. 27, 2007), :$$ "3:, Lehman, Iroducl
Definilions of AIl"A, Morlgage Maker, and Sub¡rime (Ocl. 17, 2007), al ¡. 1 |LßIX"DOCID 537902j,

83
AIlhough Lehman's AIl"A morlgages vere never as risky as sub¡rime morlgages, ils
AIl"A morlgages became increasingIy risky lovards lhe end of 2006 and lhe beginning
of 2007.
263
This ¡orlion of lhe Re¡orl describes lhose evenls.
Lehman considered ils residenliaI morlgage securilizalion business lo be a
dislribulion business.
264
Lehman had a verlicaIIy inlegraled residenliaI morlgage
business in vhich ßNC originaled sub¡rime Ioans and Aurora originaled AIl"A Ioans,
and Lehman ilseIf securilized ¡ooIs of lhose morlgages inlo residenliaI morlgage"
backed securilies (´RMßS¨).
265
ßNC and Aurora vere ¡arl of Lehman's Morlgage
Ca¡ilaI Division, vhich originaled residenliaI morlgages, vhiIe IID vas res¡onsibIe for
securilizing lhe morlgages.
266
ßy seIIing lhe RMßS lo inveslors, Lehman shifled lhe
risks of lhe underIying morlgages lo lhe inveslors.
267
Lehman, hovever, bore lhe risk
lhal il vouId nol be abIe lo securilize lhe morlgages or seII lhe RMßS.
268
The morlgages

Cynlhia AngeII & CIare D. RovIey, IederaI De¡osil Insurance Cor¡., IDIC OulIook (Second Quarler
2006) (Iasl u¡daled Mar. 21, 2007)
(hll¡://vvv.fdic.gov/bank/anaIylicaI/regionaI/ro20062q/na/2006_summer04.hlmI)
263
I"maiI from Dimilrios Krilikos, Lehman, lo }effrey Goodman, Lehman (}an. 31, 2007) |LßIX"DOCID
380035j, Dimilrios Krilikos, Lehman, SeIecled lrends from Aurora Risk Reviev (Ieb. 2, 2007), al ¡. 2
|LßIX"DOCID 537846j, Ixaminer's Inlerviev of Dimilrios Krilikos, }uIy 29 & 30, 2009, al ¡¡. 12, 14"15.
264
MadeIyn Anloncic, Lehman, 2007 ßondhoIder Meeling Iresenlalion (Ocl. 18, 2007), al ¡. 6 |LßIX"
DOCID 244792j, Lehman, Iresenlalion lo Slandard and Ioor's, Lehman ßrolhers Securilized Iroducls
ßusiness (Ocl. 7, 2005), al ¡. 2 |LßIX"DOCID 095356j, Lehman, Slralegic and IinanciaI Reviev (}an. 18,
2008), al ¡. 9 |LßIX"DOCID 1412341j, Ixaminer's Inlerviev of Richard McKinney, Aug. 27, 2009, al ¡. 5.
265
Vikas ShiI¡iekanduIa, Lehman, An Overviev of lhe ResidenliaI Morlgage Markel (Ocl. 25, 2007), al ¡.
2 |LßIX"DOCID 894664j.
266
Ixaminer's Inlerviev of David N. Sherr, May 6, 2009, al ¡. 4.
267
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡. 1
|LßIX"DOCID 839039j.
268
'80Q Lehman, Iresenlalion lo Slandard and Ioor's, Lehman ßrolhers Securilized Iroducls ßusiness
(Ocl. 7, 2005), al ¡¡. 9, 10 |LßIX"DOCID 095356j.

84
lhal Lehman couId nol shifl lo lhird"¡arly inveslors lhrough securilizalion vere knovn
as ´relained inleresls.¨
269

ßy Iale 2006, Lehman's non"inveslmenl grade relained inleresls began lo increase
shar¡Iy, inveslors vere groving increasingIy caulious aboul ¡urchasing RMßS bonds
backed by sub¡rime morlgages, ´and as a resuIl lhe |Lehman residenliaI morlgage
lradingj desk |vasj slruggIing lo seII residuaIs and |non"inveslmenl gradej bonds.¨
270

Lehman's diminished abiIily lo shifl lhe morlgage"based risk lo inveslors meanl lhal
lhe formerIy ¡rofilabIe moving business couId become a money"Iosing slorage
business.
271

Al lhe same lime, Lehman's morlgage business ex¡erienced olher lroubIing
lrends, incIuding shar¡ increases in re¡urchase requesls, rises in deIinquency rales and
a s¡ike in firsl"¡aymenl defauIls.
272
ßy lhe fourlh quarler of 2006, Lehman's inlernaI
research re¡orls vere suggesling lhal inveslors in RMßS bonds, and ¡arlicuIarIy lhose
backed by sub¡rime morlgages, vouId become increasingIy risk"averse, and sub¡rime"
backed RMßS bonds vouId be al heighlened risk of a raling agency dovngrade.
273


269
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡. 25
|LßIX"DOCID 839039j, :$$ "3:, LßHI_SIC07940_581174 10"Q (fiIed A¡r. 9, 2008), al ¡¡. 20, 55.
270
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡. 13
|LßIX"DOCID 839039j.
271
'8. al ¡. 1.
272
Ixaminer's Inlerviev of Susan Harrison, A¡r. 28, 2009, al ¡¡. 2, 5, Dimilrios Krilikos, Lehman, ßNC
Risk Reviev December 2006 (}an. 20, 2007), al ¡. 50 |LßIX"DOCID 251077j, Dimilrios Krilikos, Lehman,
Risk Reviev: Aurora and ßNC Iebruary 2007 (Mar. 19, 2007), al ¡. 10 |LßIX"DOCID 188325j.
273
Srinivas Modukuri, Lehman, Securilized Iroducls OulIook for 2007: ßracing for a Credil Dovnlurn
(Dec. 2006), al ¡¡. 8, 19 |LßIX"DOCID 245013j.

85
ßecause of lhese lrends, Lehman lighlened ils sub¡rime Iending o¡eralions. In
aboul Augusl 2006, Lehman re¡Iaced ßNC's CIO and aIso crealed a nev execulive
¡osilion (fiIIed by Thomas L. Wind) lo oversee bolh ßNC and Aurora o¡eralions.
274

Wind and nev ßNC CIO Sleven SkoInik inilialed changes lo ßNC's undervriling
guideIines and ¡roducl mix.
275
These changes incIuded reduclion in lhe size of one of
ßNC's Ieading Iending ¡rograms, knovn as ´80/20,¨ in vhich ßNC exlended lvo
se¡arale Ioans lo bring lhe borrover's Ioan"lo"vaIue ralio lo 100% based onIy on income
dala as slaled by lhe borrover.
276
Iroduclion under lhe 80/20 ¡rogram dro¡¡ed by lvo
lhirds from 2005 lo 2006, and ßNC disconlinued lhe ¡rogram enlireIy in Iale March
2007.
277
Yel even in earIy 2007, ßNC vas originaling a subslanliaI quanlily of sub¡rime
morlgages (aboul $750 miIIion vorlh during lhe monlh of Iebruary 2007, for

274
Ixaminer's Inlerviev of Thomas L. Wind, A¡r. 21, 2009, al ¡¡. 3, 8, Ixaminer's Inlerviev of Dimilrios
Krilikos, }uIy 29"30, 2009, al ¡¡. 8"9, Ixaminer's Inlerviev of Richard McKinney, Aug. 27, 2009, al ¡¡. 5"6,
Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡. 6, Lehman, Iresenlalion lo lhe Office of
Thrifl Su¡ervision, Lehman ßrolhers ßank, ISß: Safely & Soundness/Com¡Iiance Ixaminalion 2007 (Aug.
7, 2007), al ¡. 5 |LßIX"DOCID 1693347j, Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage
Originalion ßusiness Iresenlalion lo Lehman ßoard of Direclors (Mar. 20, 2007), al ¡. 6
|LßHI_SIC07940_025834j.
275
Ixaminer's Inlerviev of Thomas L. Wind, A¡r. 21, 2009, al ¡¡. 6, 7"8.
276
Dimilrios Krilikos, Lehman, ßNC Risk Reviev December 2006 (}an. 20, 2007), al ¡. 6 |LßIX"DOCID
251077j, Ixaminer's Inlerviev of Marie }ean ßurrueI, A¡r. 28, 2009, al ¡¡. 8"10.
277
Lehman, MaleriaIs Ire¡ared for Office of Thrifl Su¡ervision Safely and Soundness/Com¡Iiance
Ixaminalion 2007 (Aug. 13, 2007), al ¡. 13 |LßIX"DOCID 538654j, Lehman, Iresenlalion lo Moody's
|Draflj (Ocl. 16, 2007), al ¡. 12 |LIH"IINRA"I"MAIL00088444j, Lehman, Iresenlalion lo Radian:
Morlgage O¡eralions Reviev (}uIy 24, 2007), al ¡. 14 |LßIX"DOCID 839141j, Ixaminer's Inlerviev of
Marie }ean ßurrueI, A¡r. 28, 2009, al ¡¡. 8"10, Ixaminer's Inlerviev of Dimilrios Krilikos, A¡r. 16, 2009, al
¡. 8.

86
exam¡Ie).
278
Lehman did nol disconlinue sub¡rime Iending (as Lehman defined il)
lhrough ßNC unliI ils cIosure of ßNC on Augusl 22, 2007.
279

Lehman execulives had differenl recoIIeclions concerning vhelher managers
vilhin IID had advocaled an earIier and more ra¡id reduclion in Lehman's sub¡rime
morlgage originalions.
280
Cerlain IID execulives noled lhal Lehman managers from lhe
Morlgage Ca¡ilaI Division vished lo conlinue aggressive originalion and lhal
Morlgage Ca¡ilaI's viev ¡revaiIed, vhiIe olhers in Morlgage Ca¡ilaI did nol recaII lhe
disagreemenl or mainlained lhal IID couId have reduced originalions ilseIf if il
vished.
281


278
Dimilrios Krilikos, Lehman, Risk Reviev: Aurora and ßNC Iebruary 2007 (Mar. 19, 2007), al ¡. 6
|LßIX"DOCID 188325j.
279
Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡. 12, Ixaminer's Inlerviev of Theodore
I. }anuIis, Se¡l. 25, 2009, al ¡. 3, Ixaminer's Inlerviev of Marie }ean ßurrueI, A¡r. 28, 2009, al ¡. 10,
Lehman ßrolhers HoIdings Inc., Iress ReIease: Lehman ßrolhers Announces CIosure of ßNC Morlgage
(Aug. 22, 2007) |LßIX"DOCID 880148j, Lehman, Sub¡rime(r) (Se¡l. 4, 2007), al ¡. 14 |LßIX"DOCID
894656j, e"maiI from Idvard Grieb, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Aug. 22, 2007) |LßIX"
DOCID 197143j, e"maiI from Tasha IeIio, Lehman, lo }as|il (}esse) ßhallaI, Lehman, $* "3. (Aug. 22, 2007)
|LßIX"DOCID 176893j.
280
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡¡. 2, 15, Ixaminer's Inlerviev of MichaeI
GeIband, Aug. 12, 2009, al ¡¡. 2, 10"12, Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡¡.
4, 6, Ixaminer's Inlerviev of Theodore I. }anuIis, Se¡l. 25, 2009, al ¡¡. 3, 5.
281
!,%."#$ Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡¡. 2, 15 (slaling lhal he, GeIband
and Sherr, vanled lo scaIe back originalions vhiIe }anuIis did nol), Ixaminer's Inlerviev of MichaeI
GeIband, Aug. 12, 2009, al ¡. 11, (recaIIing lhal as Iale as 2007, he recommended managing lhe residenliaI
reaI eslale business more conservaliveIy, and lhal in generaI, MCD had an incenlive lo conlinue lo ¡ush
for originalions because il vas revarded vhen ils originalion voIumes vere high and lhe risk vas shifled
lo lhe Securilized Iroducls Grou¡ afler lhe morlgages vere originaled.), R)*6 Ixaminer's Inlerviev of
David N. Sherr, Se¡l. 25, 2009, al ¡¡. 2"3, 4"5 (slaling lhal he did nol recaII a dis¡ule belveen MCD and
IID over any ¡ro¡osed scaIing back of originalions, bul lhal lhere vas lension belveen IID and MCD
over lhe conlroI of lhe residenliaI morlgage originalion business,), Ixaminer's Inlerviev of Theodore I.
}anuIis, Se¡l. 25, 2009, al ¡¡. 3, 5 (slaling lhal he did nol recaII a disagreemenl aboul vhelher originalions
shouId be sIoved and lhal IID couId have sIoved originalion voIumes if il vished lo do so), Ixaminer's
Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡. 6. (slaling lhal she did nol recaII inlernaI

87
Iven as Lehman vas lighlening slandards on ils sub¡rime originalions lhrough
ßNC, Lehman vas aIso using ils Aurora subsidiary lo ex¡and ils AIl"A Iending.
282

Moreover, Aurora's AIl"A Iending reached borrovers of Iesser credil quaIily lhan lhose
vho hisloricaIIy had been considered AIl"A borrovers.
283
The vehicIe for lhal as¡ecl of
lhe Aurora business ¡Ian vas lhe Morlgage Maker ¡roducl.
284
As Morlgage Maker
ex¡anded lo more lhan haIf of Aurora's AIl"A ¡roduclion by Iebruary 2007, many of
Aurora's Ioans denominaled as AIl"A came more and more lo resembIe lhe sub¡rime
Ioans lhal Lehman vas su¡¡osedIy exiling by lighlening originalion slandards al
ßNC.
285

ßy Iale }anuary 2007, Lehman's residenliaI morlgage anaIysl began lo nolice
dislurbing lrends vilh res¡ecl lo Aurora's Morlgage Maker ¡rogram:

¡resenlalions by GeIband queslioning lhe conlinued viabiIily of sub¡rime residenliaI Iending), :$$ "3:,
Ixaminer's Inlerviev of }ose¡h Gregory, Nov. 13, 2009, al ¡. 10 (suggesling lhal he agreed vilh MCD's
viev and a¡¡roved a slralegy of conlinuing lo originale residenliaI morlgages aggressiveIy).
282
Ixaminer's Inlerviev of CarI Ielerson, May 27, 2009, al ¡¡. 6"8.
283
'80 al ¡¡. 5"7.
284
'80 al ¡. 5, Ixaminer's Inlerviev of Diane May, A¡r. 16, 2009, al ¡. 5, Aurora Loan Services,
Iresenlalion lo Securilies and Ixchange Commission (Ieb. 6"7, 2007), al ¡. 2 |LßIX"DOCID 357348j.
285
Ixaminer's Inlerviev of David N. Sherr, May 6, 2009, al ¡. 8, Ixaminer's Inlerviev of }ohn Vedra, A¡r.
15, 2009, al ¡. 8, Ixaminer's Inlerviev of Diane May, A¡r. 16, 2009, al ¡. 5, Dimilrios Krilikos, Lehman,
Risk Reviev: Aurora and ßNC Iebruary 2007 (Mar. 19, 2007), al ¡. 4 |LßIX"DOCID 188325j, :$$ "3:, e"
maiI from Dimilrios Krilikos, Lehman, lo Ken Linlon, Lehman, $* "30 (Mar. 30, 2007) |LßIX"DOCID
286265j (noling lhal lhe riskier segmenls of Morlgage Maker ¡erformed lhree lo five limes vorse lhan lhe
resl of Aurora$s Ioans), RusseII V. ßrady, Aurora, Res¡onse lo LXS Ierformance Issues (}an. 24, 2007), al ¡.
1 |LßIX"DOCID 885450j (suggesling lhal Aurora needed lo ´|djelermine vhelher a segmenl of lhe
|Morlgagej Maker ¡o¡uIalion shouId be serviced simiIar lo sub¡rime¨), e"maiI from Richard McKinney,
Lehman, lo Thomas L. Wind, Aurora, $* "30 (Ieb. 12, 2007) |LßIX"DOCID 1369758j (noling lhal lhe
¡erformance of Lehman's LXS securilizalions lhal consisled moslIy of Morlgage Maker had vorsened
versus ils Iargesl com¡elilor for 2006 ¡roduclion, and slaling ´Ix¡ecled subordinalion IeveIs are 11.7% lo
AAA Ioss coverage. This com¡ares vilh 20"25% for a ly¡icaI sub¡rime deaI. Thal is, ve are crealing
vorse ¡erformance lhan sub¡rime, vhiIe lhe raling agencies assume our ¡erformance shouId be
subslanliaIIy beller¨).

88
Looking al lhe lrends on originalions and Iinking lhem lo firsl ¡aymenl
defauIls, lhe slory is ugIy: The Iasl four monlhs Aurora has originaled lhe
riskiesl Ioans ever, vilh every monlh being riskier lhan lhe one before "
lhe induslry meanvhiIe has ¡uIIed back during lhal lime.
286

Al lhe same lime, olher ¡arlici¡anls in lhe AIl"A induslry vere re¡orling defauIl rales
and Iale ¡aymenl dala lhal indicaled lhal ´|ljhe credil delerioralion |in AIl"Aj has been
aImosl ¡araIIeI lo lhe one of lhe sub¡rime markel.¨
287
Thus, vhiIe Aurora's morlgages
vere nol as risky as sub¡rime morlgages, Aurora's risk ¡rofiIe vas increasing in much
lhe same vay as lhe risk in sub¡rime morlgages.
As a resuIl of aII lhese faclors, Lehman's risk managers somelimes considered lhe
Morlgage Maker Ioans lo be dislincl from AIl"A morlgages, and described Morlgage
Maker as AIl"ß.
288
WhiIe lhe lerm AIl"ß vas nol an acce¡led lerm or calegorizalion in
lhe business, Lehman's managers occasionaIIy used il as a vay of differenlialing lhe
riskier morlgages in lhe Morlgage Maker ¡rogram from vhal had more lradilionaIIy
been considered AIl"A morlgages, lhough nol so risky as lo meril lhe IabeI sub¡rime.
289


286
I"maiI from Dimilrios Krilikos, Lehman, lo }effrey Goodman, Lehman (}an. 31, 2007) |LßIX"DOCID
380035j.
287
Dimilrios Krilikos, Lehman, Risk Reviev: Aurora and ßNC Iebruary 2007 |Draflj (Mar. 9, 2007), al ¡. 1
|LßIX"DOCID 538518j.
288
I"maiI from Dimilrios Krilikos, Lehman, lo }effery Goodman, Lehman (Mar. 12, 2007) |LßIX"DOCID
307101j (´Aurora's ¡roducl is far from AIl"A anymore. The lradilionaI AIl"A ¡rogram is onIy 40% of
Aurora's ¡roduclion´), e"maiI from Dimilrios Krilikos, Lehman, lo CharIie Lu, Lehman (A¡r. 12, 2007)
|LßIX"DOCID 566105j (´MorlgageMaker is NOT AIl"A¨), Dimilrios Krilikos, Lehman, SeIecled lrends
from Aurora Risk Reviev Iebruary 2007 (Ieb. 2, 2007), al ¡. 2 |LßIX"DOCID 537846j (´The ¡roducl mix
of Aurora ¡roduclion has shifled subslanliaIIy in lhe Iasl 6 monlhs from AIl"A lo MorlgageMaker (AIl"
ß)¨).
289
Dimilrios Krilikos, Lehman, SeIecled lrends from Aurora Risk Reviev Iebruary 2007 (Ieb. 2, 2007), al
¡. 2 |LßIX"DOCID 537846j, Ixaminer's Inlerviev of Dimilrios Krilikos, }uIy 29"30, 2009, al ¡¡. 3, 18
(slaling lhal Morlgage Maker Ioans vere neilher AIl"A nor sub¡rime).

89
To make mallers vorse, Lehman's risk managers sav indicalions lhal Lehman
vouId nol be abIe lo dislribule lhe risk on lhe morlgages il vas originaling. ßy }anuary
2007, il vas a¡¡arenl lhal Lehman's hoIding of non"inveslmenl grade relained inleresls
in securilizalions had been increasing.
290
And by March 2007, Lehman vas noling shar¡
decIines in securilizalion revenue,
291
causing lhe Securilized Iroducls Grou¡ vilhin IID
lo exceed ils risk a¡¡elile and VaR Iimils.
292

To res¡ond lo lhese risks in ils AIl"A ¡orlfoIio, in March 2007 Lehman underlook
a series of changes designed lo make Morlgage Maker Ioans Iess avaiIabIe lo borrovers
vilh Iover credil scores, or lo borrovers vho vished lo lake oul Ioans al 100% of a
home's vaIue.
293
AIlhough lhe voIume of Morlgage Maker Ioans originaled by Lehman

290
Lehman, Securilized Iroducls, MßS: Non Inveslmenl Grade Relained Inleresls (}an. 16, 2007), al ¡. 3
|LßIX"DOCID 839039j.
291
Lehman, Morlgage U¡dale 1Q 07, al ¡. 9 |LßHI_SIC07940_845984j.
292
1$$4 $0+04George Hansman, Lehman, Securilized Iroducls Risk A¡¡elile and VaR Iimil and overage
gra¡hs (May 17, 2007) |LßIX"DOCID 861260j, e"maiI from Lehman Risk, lo Lehman Risk Limil Ixcess e"
maiI grou¡ (Mar. 8, 2007) |LßIX"DOCID 229930j, e"maiI from Lehman Risk, lo Lehman Risk Limil Ixcess
e"maiI grou¡ (Mar. 19, 2007) |LßIX"DOCID 229944j, e"maiI from Lehman Risk, lo Lehman Risk Limil
Ixcess e"maiI grou¡ (Mar. 22, 2007) |LßIX"DOCID 229954j, e"maiI from Lehman Risk, lo Lehman Risk
Limil Ixcess e"maiI grou¡ (A¡r. 9, 2007) |LßIX"DOCID 790039j, e"maiI from Lehman Risk, lo Lehman
Risk Limil Ixcess e"maiI grou¡ (A¡r.16, 2007) |LßIX"DOCID 790029j, e"maiI from Lehman Risk, lo
Lehman Risk Limil Ixcess e"maiI grou¡ (May 29, 2007) |LßIX"DOCID 790059j, e"maiI from Lehman Risk,
lo Lehman Risk Limil Ixcess e"maiI grou¡ (May 30, 2007) |LßIX"DOCID 790060j, e"maiI from Lehman
Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Se¡l. 5, 2007) |LßIX"DOCID 230188j, e"maiI from
Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 12, 2007) |LßIX"DOCID 230789903j, e"maiI
from Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 17, 2007) |LßIX"DOCID 789908j, e"
maiI from Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 18, 2007) |LßIX"DOCID 789910j,
e"maiI from Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 19, 2007) |LßIX"DOCID
789909j, e"maiI from Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 22, 2007) |LßIX"
DOCID 790089j, e"maiI from Lehman Risk, lo Lehman Risk Limil Ixcess e"maiI grou¡ (Ocl. 30, 2007)
|LßIX"DOCID 789916j.
293
Dimilrios Krilikos, Lehman, Risk Reviev: Aurora and ßNC Iebruary 2007 (Mar. 19, 2007), al ¡. 3
|LßIX"DOCID 188325j (summarizing undervriling guideIine changes al ßNC and Aurora).

90
decIined foIIoving im¡Iemenlalion of lhe March 2007 guideIine changes, Lehman
conlinued lo originale significanl voIumes of AIl"A morlgages unliI Augusl 2007.
294

L66I !38 .:>D3 NT` NTTV #?:>7 .88E6;H
On March 20, 2007, lhe Morlgage Ca¡ilaI and Iixed Income Divisions gave a
¡resenlalion lo Lehman's ßoard of Direclors aboul lhe slale of Lehman's residenliaI
morlgage originalion and securilizalion business in Iighl of lhe dee¡ening sub¡rime
crisis.
295
The ¡resenlalion vas given by David N. Sherr, lhe head of Lehman's
Securilized Iroducls Grou¡, Theodore I. }anuIis, lhe head of lhe Morlgage Ca¡ilaI
Division, and Lana Iranks Harber, Chief Adminislralive Officer (´CAO¨) of lhe
Morlgage Ca¡ilaI Division.
296

WhiIe ¡re¡aring lo give lhis ¡resenlalion, Harber e"maiIed one of her coIIeagues
lo inform him aboul a conversalion lhal she had vilh Lehman's Iresidenl, }ose¡h
Gregory, aboul lhe ¡resenlalion:
ßoard is nol so¡hislicaled around sub¡rime markel ÷ }oe doesn'l vanl loo
much delaiI. He vanls lo candidIy laIk aboul lhe risks lo Lehman bul be

294
Dimilrios Krilikos, Lehman, Aurora Loan Services Risk Reviev }anuary 2008 (Ieb. 7, 2008), al ¡. 12
|LßIX"DOCID 394711j.
295
Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (Mar. 20, 2007), al ¡¡. 6"7
|LßHI_SIC07940_025779j, Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion
ßusiness Iresenlalion lo Lehman ßoard of Direclors (Mar. 20, 2007) |LßHI_SIC07940_025834j.
296
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness Iresenlalion lo
Lehman ßoard of Direclors (Mar. 20, 2007) |LßHI_SIC07940_025834j, Ixaminer's Inlerviev of Lana
Iranks Harber, Se¡l. 23, 2009, al ¡. 2, Ixaminer's Inlerviev of Theodore I. }anuIis, Se¡l. 25, 2009, al ¡. 2,
Ixaminer's Inlerviev of David N. Sherr, Se¡l. 25, 2009, al ¡. 9.

91
o¡limislic and conslruclive ÷ laIk aboul lhe o¡¡orlunilies lhal lhis markel
creales and hov ve are uniqueIy ¡osilioned lo lake advanlage of lhem.
297

Consislenl vilh lhis direclion, lhe ßoard ¡resenlalion em¡hasized lhal Lehman's
managemenl considered lhe crisis an o¡¡orlunily lo ¡ursue a counlercycIicaI slralegy.
298

The March 2007 ßoard ¡resenlalion firsl noled lhe difficuIlies in lhe sub¡rime markel,
incIuding lhe facl lhal seven of lhe lo¡ lvenly sub¡rime originalors had aIready been
soId lo slronger ¡arlners or gone bankru¡l and lhal lhe business vas significanlIy Iess
¡rofilabIe lhan in ¡asl years because of Iover originalion voIumes, Iover saIe and
securilizalion margins, and increased Ioan Ioss reserves.
299
The ¡resenlalion furlher
noled lhal in res¡onse lo lhese markel evenls, Lehman had im¡roved ßNC's risk and
credil ¡rofiIe, lighlened ils Iending crileria, relained nev managemenl, and
significanlIy reduced headcounl.
300

The ¡resenlalion concIuded by highIighling managemenl's beIief lhal Lehman
had ´subslanliaI o¡¡orlunilies, as in Iale 1990's¨ lo im¡rove ils com¡elilive ¡osilion.
301

This counlercycIicaI slralegy vas based on severaI slaled ¡remises. Mosl im¡orlanl,
Lehman's managemenl beIieved lhal lhe sub¡rime crisis vouId ¡resenl onIy a ´Limiled
Conlagion To Olher Markels¨ ÷ in ¡arlicuIar, Lehman's managemenl did nol ex¡ecl lhe

297
I"maiI from Lana Iranks Harber, Lehman, lo Sleven SkoInik, ßNC Morlgage, $* "30 (Mar. 9, 2007)
|LßIX"DOCID 306198j, "//,#8 Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡¡. 9"10,
Ixaminer's Inlerviev of Theodore I. }anuIis, Se¡l. 25, 2009, al ¡. 6.
298
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness Iresenlalion lo
Lehman ßoard of Direclors (Mar. 20, 2007), al ¡¡. 1, 10 |LßHI_SIC07940_025834j.
299
'80 al ¡¡. 4"5.
300
'80 al ¡¡. 6"7.
301
'80 al ¡. 10.

92
sub¡rime crisis lo have a significanl im¡acl on lhe ´|bjroader credil markels.¨
302

Lehman's managemenl aIso beIieved lhal a ´subslanliaI ¡arl of |lhej sub¡rime markel
is here lo slay¨ and lhal ´|¡jrofilabiIily viII relurn vhen environmenl im¡roves.¨
303
In
sum, Lehman managemenl lhoughl lhal lhe markel vas nearing lhe bollom of lhe cycIe
in s¡ring and summer of 2007, and lhal Lehman vouId benefil from ¡reserving lhe
o¡lion lo ex¡and lhe business in lhe fulure.
304
Managemenl informed lhe ßoard lhal lhe
dovn cycIe in sub¡rime ¡resenled ´subslanliaI o¡¡orlunilies¨ for Lehman, and lhal
managemenl ex¡ecled Lehman lo be beller ¡osilioned for ¡rofilabIe grovlh once lhe
induslry cycIe lurned.
305

The ¡resenlalion did nol discuss Aurora's AIl"A morlgage originalions al aII,
nolvilhslanding lhe significanl concerns lhal Lehman's residenliaI morlgage anaIysl
had recenlIy raised aboul lhal grou¡ of morlgages.
306
Inslead, lhe ¡resenlalion grou¡ed
lhe AIl"A calegory of morlgages vilh ¡rime and described ´Irime/AIl"A Morlgages¨ as
foIIovs: ´credil ¡erformance nol ¡robIemalic " deIinquencies are vilhin ex¡ecled
range.¨
307
An earIier drafl of lhe sIideshov ¡resenled lo lhe ßoard had used lhe lerm
´AIl"A/AIl"ß Morlgages¨ above lhe vords ´credil ¡erformance nol ¡robIemalic ÷

302
'80 al ¡. 9.
303
'80 al ¡. 10.
304
Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡. 2, Ixaminer's Inlerviev of Theodore
I. }anuIis, Se¡l. 25, 2009, al ¡. 8, Ixaminer's Inlerviev of David N. Sherr, Se¡l. 25, 2009, al ¡. 6.
305
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Originalion ßusiness Iresenlalion lo Lehman ßoard
of Direclors (Mar. 20, 2007), al ¡¡. 1, 10 |LßHI_SIC07940_025834j.
306
'80 al ¡¡. 1"10.
307
'80 al ¡. 9.

93
deIinquencies are vilhin ex¡ecled range,¨
308
bul lhis reference lo AIl"ß vas deIeled from
lhe finaI version of lhe maleriaIs in favor of ´Irime/AIl"A Morlgages.¨
309

Sherr, }anuIis, and Harber loId lhe Ixaminer lhal lhey did nol incIude a s¡ecific
reference lo Morlgage Maker or AIl"ß in lheir ¡resenlalion because lhey beIieved lhal
lhe Ioans in lhe Morlgage Maker ¡rogram vere dislincl from sub¡rime morlgages,
vhich vere lhe sub|ecl of lhe ¡resenlalion.
310
The Lehman risk anaIysl vho had sludied
lhe ¡erformance issues in Morlgage Maker loId lhe Ixaminer lhal Ieaving Morlgage
Maker oul of a ¡resenlalion on sub¡rime vas ¡ro¡er given lhe differences belveen
vhal Lehman considered sub¡rime (IICO scores beIov 620) and Morlgage Maker
(average IICO score of 691).
311

Afler lhe ßoard ¡resenlalion, Lehman conlinued lo originale sub¡rime and
es¡eciaIIy AIl"A/AIl"ß morlgage Ioans, lhereby ¡ursuing ils counlercycIicaI slralegy,
and IikeIy exacerbaling Lehman's residenliaI morlgage Iosses. The Ixaminer's financiaI
advisors have eslimaled lhe Iosses from residenliaI morlgage ¡osilions from lhe firsl
quarler of 2007 lhrough lhe lhird quarler of 2008 al $7.4 biIIion.
312


308
Lehman, Slale of Lehman ßrolhers' Sub¡rime Morlgage Originalion ßusiness Iresenlalion lo Lehman
ßoard of Direclors |Draflj (Mar. 15, 2007), al ¡. 12 |LßIX"DOCID 2485576j.
309
Lehman, U¡dale on Lehman ßrolhers' Sub¡rime Originalion ßusiness Iresenlalion lo Lehman ßoard
of Direclors (Mar. 20, 2007), al ¡. 9 |LßHI_SIC07940_025834j.
310
Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡. 3, Ixaminer's Inlerviev of Theodore
I. }anuIis, Se¡l. 25, 2009, al ¡¡. 2, 7, Ixaminer's Inlerviev of David N. Sherr, Se¡l. 25, 2009, al ¡. 7.
311
Ixaminer's Inlerviev of Dimilrios Krilikos, }uIy 29"30, 2009, al ¡. 19.
312
Lehman, Morlgage U¡dale " 1Q 07 (A¡r. 9, 2007) |LßIX"DOCID 540069j, Lehman, Morlgage U¡dale "
2Q 07 (}une 8, 2007) |LßIX"DOCID 505835j, Lehman, Morlgage U¡dale " }une 07 (Aug. 9, 2007) |LßIX"
DOCID 611902j, Lehman, Morlgage U¡dale " Augusl 07 (Se¡l. 25, 2007) |LßIX"DOCID 505889j, Lehman,

94
These Iosses vere lem¡ered by effeclive hedging slralegies lhrough al Ieasl 2007
and inlo earIy 2008.
313
ßelveen lhe firsl quarler of 2007 and lhe lhird quarler of 2008,
Lehman had a gain of $2.96 biIIion on ils residenliaI morlgage credil hedges.
314
Of lhis
$2.96 biIIion gain, $2.623 biIIion vas gained belveen lhe firsl quarler of 2007 and lhe
end of lhe firsl quarler of 2008.
315
Ior lhe second and lhird quarlers of 2008, hovever,
Lehman had essenliaIIy no gains on ils hedges.
316
As a resuIl, during lhose quarlers,
Lehman suffered very subslanliaI Iosses on ils residenliaI morlgage business.
317


IIash " Morlgage U¡dale " November 07 (Dec. 21, 2007) |LßIX"DOCID 505890j, Lehman, IIash "
Morlgage U¡dale " }anuary 07 (Ieb. 15, 2008) |LßIX"DOCID 3237972j, Lehman, IIash " Morlgage U¡dale
" March 07 (A¡r. 23, 2008) |LßIX"DOCID 2432630j, Lehman, IIash " Morlgage U¡dale " A¡r. 07 (May
15, 2008) |LßIX"DOCID 1362958j, Lehman, IIash " Morlgage U¡dale " May 07 (}une 11, 2008) |LßIX"
DOCID 3238001j, Lehman, Securilized Iroducls I&L " }une 2008 (}uIy 11, 2008) |LßIX"DOCID 505776j,
Lehman, Securilized Iroducls I&L " }uIy 2008 (Aug. 14, 2008) |LßIX"DOCID 505778j.
313
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 17, Lehman, Minules of Meeling of lhe
ßoard of Direclors (Se¡l. 11. 2007), al ¡. 6 |LßHI_SIC07940_263264j.
314
Lehman, Morlgage U¡dale " 1Q 07 (A¡r. 9, 2007) |LßIX"DOCID 540069j, Lehman, Morlgage U¡dale "
2Q 07 (}une 8, 2007) |LßIX"DOCID 505835j, Lehman, Morlgage U¡dale " }une 07 (Aug. 9, 2007) |LßIX"
DOCID 611902j, Lehman, Morlgage U¡dale " Augusl 07 (Se¡l. 25, 2007) |LßIX"DOCID 505889j, Lehman,
IIash " Morlgage U¡dale " November 07 (Dec. 21, 2007) |LßIX"DOCID 505890j, Lehman, IIash "
Morlgage U¡dale " }anuary 07 (Ieb. 15, 2008) |LßIX"DOCID 3237972j, Lehman, IIash " Morlgage U¡dale
" March 07 (A¡r. 23, 2008) |LßIX"DOCID 2432630j, Lehman, IIash " Morlgage U¡dale " A¡r. 07 (May
15, 2008) |LßIX"DOCID 1362958j, Lehman, IIash " Morlgage U¡dale " May 07 (}une 11, 2008) |LßIX"
DOCID 3238001j, Lehman, Securilized Iroducls I&L " }une 2008 (}uIy 11, 2008) |LßIX"DOCID 505776j,
Lehman, Securilized Iroducls I&L " }uIy 2008 (Aug. 14, 2008) |LßIX"DOCID 505778j.
315
'8.
316
LßHI 10"Q (}uIy 10, 2008), al ¡. 67.
317
The Ixaminer's financiaI advisors eslimale lhal Lehman's secured Iosses from residenliaI morlgages
exceeded $1 biIIion in lhe second quarler and in excess of $3.5 biIIion in lhe lhird quarler of 2008.

95
L@I !38 %JZ<?B6?; 6; $839:;0B $8K8>:H87 $?:; #AB6;8BB
During lhe firsl haIf of fiscaI 2007, lhe high yieId markel vas aclive,
nolvilhslanding lhe onsel of lhe crisis in lhe sub¡rime residenliaI morlgage markel.
318

Like olher markel aclors during lhis ¡eriod, Lehman ¡arlici¡aled in more Ieveraged
finance deaIs lhan ever before and enlered inlo deaIs lhal vere generaIIy bigger lhan
lhe Ieveraged finance deaIs il had done in lhe ¡asl.
319
Com¡ared lo ils com¡elilors,
Lehman vas lhe mosl aggressive Iender ¡er doIIar of sharehoIder equily in lhe firsl haIf
of 2007.
320

Lehman conlinued dovn lhis ¡alh des¡ile lhe facl lhal lhe lerms of lhese deaIs
became Iess and Iess favorabIe over lime from an inveslmenl banking ¡ers¡eclive.
ßecause lhere vas so much com¡elilion lo finance lhese Ioans, s¡onsors vere abIe lo
negoliale lerms lhal significanlIy increased lhe risk lo lhe banks. Ior exam¡Ie,
according lo some eslimales, covenanl Iighl Ioans ÷ Ioans lhal did nol incIude
¡reviousIy slandard covenanls requiring lhe borrover lo mainlain cerlain IeveIs of
coIIaleraI, cash fIov, and ¡aymenl lerms ÷ increased from Iess lhan 1% of aII Ieveraged

318
I"maiI from Roo¡aIi HaII, Lehman (}an. 4, 2008) |LßHI_SIC07940_066187j, Lehman Loan Syndicale,
Year"Ind Reca¡ (}an. 7, 2008), al ¡. 1 |LßHI_SIC07940_066190j.
319
I"maiI from Ivelle SaIdana, Lehman, lo HYCC members, Lehman, $* "30 (}une 15, 2007) |LßIX"DOCID
494525j, Lehman Credil IaciIilalion Grou¡, 2nd Quarler 2007 Reviev (}une 2007), al ¡. 1 |LßIX"DOCID
514908j, allachmenl lo e"maiI from Ivelle SaIdana, Lehman, lo HYCC members, Lehman, $* "30 (}une 15,
2007) |LßIX"DOCID 494525j.
320
I"maiI from Ivelle SaIdana, Lehman, lo HYCC members, Lehman, $* "30 (}une 15, 2007) |LßIX"DOCID
494525j, Lehman Credil IaciIilalion Grou¡, 2nd Quarler 2007 Reviev (}une 2007), al ¡. 6 |LßIX"DOCID
514908j, allached lo e"maiI from Ivelle SaIdana, Lehman, lo HYCC members, Lehman, $* "30 (}une 15,
2007) |LßIX"DOCID 494525j.

96
Ioans in 2004 lo over 18% by 2007 induslry"vide.
321
Lenders such as Lehman aIso
abandoned cerlain conlracluaI ¡roleclions ($0+0, maleriaI adverse change ¡rovisions
(´MACs¨), u¡"fronl syndicalion, and |oinl IiabiIily) lhal vere ¡reviousIy slandard in lhe
Ieveraged Ioan induslry.
322
In some deaIs, Lehman vas lhe onIy ¡arly lo sign lhe IegaI
documenls, even lhough olher banks vere inlended lo commil lo lhe Ioans, lhus,
Lehman iniliaIIy bore aII lhe risk.
323
As of March 2007, lhe raling agencies ´¡erceived
Ioosening of |Lehman'sj risk slandards ÷ ¡arlicuIarIy in Ieveraged Iending. . . .¨
324
The
Ixaminer has nol invesligaled vhelher lhe conlracluaI lerms of Lehman's Ieveraged
Iending lransaclions vere more aggressive lhan lhose of ils com¡elilors.
ßelveen December 2006 and }une 2007, Lehman ¡arlici¡aled in more lhan 11
Ieveraged buyoul deaIs lhal each exceeded $5 biIIion.
325
ßy A¡riI 2007, Lehman had
a¡¡roximaleIy 70 high yieId conlingenl commilmenls in ils ¡i¡eIine ÷ a record number

321
Iric IeIder, Lehman, Credil OulIook Iresenlalion (A¡r. 16, 2008), al ¡. 48 |LßHI_SIC07940_393578j,
allached lo e"maiI from Chrislo¡her Wichenbaugn, Lehman, lo DCMNY, Lehman (A¡r. 16, 2008)
|LßHI_SIC07940_393578j, Slandard & Ioor's and LSTA, Leveraged Loan Index, Augusl 2008 Reviev
(Se¡l. 3, 2008), al ¡. 84 |LßIX"DOCID 4404712j, allached lo e"maiI from Krislen VigIella, Lehman (Se¡l. 3,
2008) |LßIX"DOCID 4326914j.
322
Ixaminer's Inlerviev of MadeIyn Anloncic, Ieb. 25, 2009, al ¡. 4.
323
'8.
324
Lehman, Credil Ralings Slralegy Iresenlalion (Mar. 1, 2007), al ¡. 13 |LßIX"DOCID 618355j, e"maiI
from Sle¡hen Lax, Lehman, lo }ames I. Seery, }r. Lehman, $* "30 (A¡r. 11, 2008) |LßIX"DOCID 444768j.
325
I"maiI from Miriam Oh, Lehman, lo IauI Iarker, Lehman, $* "30 (}uIy 5, 2007) |LßIX"DOCID 3197652j,
Lehman, ßig LßO U¡dale (}uIy 3, 2007), al ¡. 2 |LßIX"DOCID 3183564j.

97
for il.
326
In }une 2007, Lehman's Iending ¡ace had aIready doubIed Lehman's 2006
record"selling year for high grade and high yieId combined.
327

When lhe markel slarled lo sIov, Lehman suddenIy found ilseIf vilh a huge
voIume of commilmenls on ils books and a risk ¡rofiIe lhal vas veII above ils high
yieId business's risk a¡¡elile Iimils. Al lhe end of lhe second quarler of 2007,
a¡¡roximaleIy $36 biIIion of conlingenl commilmenls remained on Lehman's books.
328

IID vas aImosl $20 biIIion over ils nel baIance sheel Iimil for lhe quarler.
329
ReIaledIy,
as described beIov, Lehman soon vaslIy exceeded ils risk a¡¡elile Iimils for lhe high
yieId business.
L6I /8<:J:E6?; ?C /6BG (?;E>?<B E? "DD?99?7:E8 \>?]E3
?C $839:;0B $8K8>:H87 $?:;B #AB6;8BB
To accommodale lhe grovlh of Lehman's high yieId Iending aclivilies, Lehman's
managemenl decided lo Ioosen severaI of lhe firm's risk conlroIs lhal olhervise vouId
have Iimiled lhe firm's abiIily lo engage in many of lhese deaIs. Mosl significanlIy, as
discussed above, Lehman's senior managemenl a¡¡roved a number of deaIs lhal
exceeded lhe firm's singIe lransaclion Iimil.

326
I"maiI from Sle¡hen Lax, Lehman, lo AIex Kirk, Lehman, $* "30 (A¡r. 26, 2007) |LßIX"DOCID 259369j.
327
Lehman Credil IaciIilalion Grou¡, 2nd Quarler 2007 Reviev (}une 2007), al ¡. 13 |LßIX"DOCID
514908j, allached lo e"maiI from Ivelle SaIdana, Lehman, lo HYCC members, Lehman, $* "30 (}une 15,
2007) |LßIX"DOCID 494525j.
328
AIex Kirk, Lehman, Leveraged Iinance Risk Iresenlalion (}une 2007) |LßIX"DOCID 158975j, allached
lo e"maiI from OIivia Lua, Lehman, lo Chrislo¡her M. O'Meara, Lehman (}une 21, 2007) |LßIX"DOCID
158975j.
329
Lehman ßrolhers, ßaIance Sheel Trend Iresenlalion (A¡r. 2007), al ¡¡. 4"6 |LßIX"DOCID 251418j,
allached lo e"maiI from Kenlaro Umezaki, Lehman, lo Rebecca MiIIer, Lehman (May 3, 2007) |LßIX"
DOCID 346520j.

98
Many of lhe Ieveraged Ioans lhal Lehman funded in 2006 and 2007 vere ´vay
over lhe Iimil.¨
330
ßy }uIy 2007, Lehman had commilled lo a¡¡roximaleIy 30 deaIs lhal
exceeded lhe ¡re"exisling $250 miIIion Ioss lhreshoId, nine deaIs lhal vouId have
exceeded a nevIy ¡ro¡osed Ioss lhreshoId of $400 miIIion,
331
five deaIs lhal vioIaled lhe
nolionaI Iimil of $3.6 biIIion, and four deaIs lhal vouId have vioIaled lhe nolionaI Iimil
of $4.5 biIIion lhal vas ¡ro¡osed during lhe fourlh quarler of 2007.
332
Some of Lehman's
commilmenls exceeded lhe Ioss lhreshoId Iimil by a faclor of six.
333
Wilh res¡ecl lo 24 of
lhe Iargesl high yieId deaIs in vhich Lehman ¡arlici¡aled, Lehman commilled roughIy
$10 biIIion more lhan lhe singIe lransaclion Iimil, if enforced, vouId have aIIoved.
334

These figures arguabIy underslale lhe exlenl lo vhich Lehman's Ieveraged Ioans
exceeded lhe singIe lransaclion Iimil, since Lehman a¡¡Iied lhe singIe lransaclion Iimil
onIy lo lhe amounl of lhe Ieveraged Ioan lhal Lehman ´ex¡ecled lo fund,¨ nol lhe fuII
amounl of Lehman's commilmenl.
335

To accommodale lhe grovlh of lhe high yieId business, Lehman's managemenl
aIso reIaxed lhe high yieId business's risk a¡¡elile Iimils. Des¡ile having increased lhe

330
I"maiI from }oe Li, Lehman, lo IauI Milrokoslas, Lehman (Aug. 30, 2007) |LßIX"DOCID 2547330j.
331
}oe Li, Lehman, STL ßacklesling IxceI S¡readsheel (}uIy 25, 2007) |LßIX"DOCID 2506462j, allached lo
e"maiI from }oe Li, Lehman, lo Ired S. OrIan, Lehman, $* "30 (}uIy 25, 2007) |LßIX"DOCID 2563167j.
332
'80
333
'80
334
Lehman, Iixed Income ßusiness Slralegy, SingIe Transaclion Limil IoIicy Iro¡osed Im¡rovemenls
(Se¡l. 2007), al ¡. 3 |LßIX"DOCID 2563444j.
335
Lehman, Iresenlalion lo Lehman Ixeculive Commillee on Leveraged Iinance Risk (Ocl. 16, 2007), al ¡.
12 |LßIX"DOCID 506033j, allached lo e"maiI from ßIair Sieff, Lehman, lo Sleven ßerkenfeId, Lehman, $*
"30 (Ocl. 16, 2007) |LßIX"DOCID 569915j.

99
high yieId business's risk a¡¡elile Iimil al lhe beginning of 2006 and again in earIy 2007,
Lehman's increasing IeveI of high yieId commilmenls caused il lo exceed lhe high yieId
business's risk a¡¡elile Iimil by significanl amounls in 2007 and 2008.
336
ßy Iale A¡riI
2007, Lehman had exceeded ils nevIy increased high yieId risk a¡¡elile Iimil,
337
and
slarling in Iale }uIy, lhe high yieId business' usage consislenlIy exceeded ils Iimils.
338

As Lehman funded more of ils commilmenls, lhe Ieveraged Ioan ex¡osure soon
doubIed lhe Iimil amounl.
339

Lehman's managemenl made a conscious decision lo exceed lhe risk a¡¡elile
Iimils on Ieveraged Ioans.
340
Iven lhough lhe risk a¡¡elile Iimils vere divided inlo
subsidiary Iimils for lhe business Iines of each division, lhe Iimils for each business Iine
vere fIexibIe as Iong as lhe aggregale numbers ´roIIed"u¡¨ vilhin lhe divisionaI Iimil.
341

One Lehman execulive queslioned vhelher lhe firm even had a high yieId Iimil. In
A¡riI 2007, Kenlaro Umezaki, Head of Iixed Income Slralegy, e"maiIed Chrislo¡her M.
O'Meara, Lehman CIO al lhe lime, and severaI olhers, ex¡ressing concern lhal in a

336
A¡¡endix: 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.
337
'80 al ¡. 3.
338
'80 al ¡. 4.
339
'80 al ¡. 4"9.
340
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 13, Ixaminer's Inlerviev of }effrey
Goodman, Aug. 28, 2009.
341
Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡. 12, Ixaminer's Inlerviev of MadeIyn
Anloncic, Ocl. 6, 2009, al ¡. 7.

100
recenl firm"vide meeling, IuId senl ´inconsislenl messages¨ by encouraging grovlh al
lhe same lime Lehman vas near ils risk Iimils.
342
Umezaki noled lo O'Meara and olhers:
lhe ma|orily of lhe lrading businesses focus is on revenues, vilh baIance
sheel, risk Iimil, ca¡ilaI or cosl im¡Iicalions being a secondary concern.
The facl lhal lhey haven'l heard lhal lhose ilems maller |inj ¡ubIic forums
from senior managemenl recenlIy reinforces lhis revenue orienled
behavior im¡IicilIy. . . . Ixam¡Ie vhich ve've debaled for years: vas even
a lo¡ic in |lhe Turnberry meeling inj ILA: 5? ]8 ?> 7?;0E ]8 3:K8 : <696E
?; 3?] 9AD3 Oa $#& >8<:E87 <8;76;HbD?996E98;E 8JZ?BA>8 ]8 D:;
3:K8 :E :;4 H6K8; E698= There has been no reaI ´one firm¨ oulcome lo
dale in my o¡inion. I'm nol lhe onIy one vho has lhis viev in IID.
343

LDI +;E8>;:< &ZZ?B6E6?; E? \>?]E3 ?C $8K8>:H87 $?:;B
#AB6;8BB
Lehman's IID, incIuding GeIband, Kirk, and Umezaki, o¡¡osed a number of lhe
Ieveraged Ioan deaIs lo vhich Lehman commilled during lhis ¡eriod, because lhey
beIieved lhal lhese individuaI deaIs vere loo risky lo |uslify lheir Iimiled relurns.
344

Des¡ile lhe o¡¡osilion, lhe Ixeculive Commillee decided lo ¡roceed vilh many of lhe
deaIs.
345


342
I"maiI from Kenlaro Umezaki, Lehman, lo Scoll }. Ireidheim, Lehman, $* "30 (A¡r. 19, 2007) |LßIX"
DOCID 210193j.
343
'80 (em¡hasis added), e"maiI from Kenlaro Umezaki, Lehman, lo Ian T. Lovill, Lehman (A¡r. 18, 2007)
|LßIX"DOCID 743931j.
344
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 10, Ixaminer's Inlerviev of MichaeI
GeIband, Aug. 12, 2009, al ¡¡. 6"9, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡. 2, e"maiI from
Iric IeIder, Lehman, lo MichaeI GeIband, Lehman, $* "30 (Aug. 28, 2008) |LßIX"DOCID 822513j, :$$ "3:, e"
maiI from Sleven ßerkenfeId, Lehman, lo Scoll }. Ireidheim, Lehman (May 11, 2007) |LßIX"DOCID
1379290j, e"maiI from ßerlrand Kan, Lehman, lo Richard Allerbury, Lehman (}an. 30, 2008) |LßIX"
DOCID 1379129j.
345
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 3, Ixaminer's Inlerviev of MichaeI
GeIband, Aug. 12, 2009, al ¡¡. 7"9, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡¡. 2, 7, Ixaminer's
Inlerviev of IauI Shollon, }une 5, 2009, al ¡¡. 2, 6"7, Ixaminer's Inlerviev of Hugh I. (Ski¡) McGee III,
Aug. 12, 2009, al ¡. 9, Ixaminer's Inlerviev of Ired S. OrIan, Se¡l. 21, 2009, al ¡. 4, e"maiI from Iric

101
Some of lhe o¡¡osilion lo Lehman's increase in Ieveraged Iending vas focused
on lhe bridge equily com¡onenl of lhose deaIs.
346
SeveraI former members of Lehman's
senior managemenl, incIuding Nagioff, Anloncic, and ßerkenfeId, ex¡ressed
reservalions regarding lhe firm's IeveI of engagemenl in Ieveraged Ioan bridge equily
aclivilies.
347
The Ixaminer, hovever, aIso found lhal s¡onsors vere aggressive in
demanding equily bridge com¡onenls lo financing
348
and lhal lhe Inveslmenl ßanking
Division (´IßD¨) vas in favor of ¡roviding bridge equily because il beIieved lhal
Lehman needed lo do so lo slay com¡elilive in lhe induslry.
349
Des¡ile various
discussions among Lehman's managemenl regarding vhelher lhe IeveI of Ieveraged
Ioan bridge equily vas acce¡labIe and suslainabIe, Lehman's managemenl never ¡ul
any Iimil on lhe business's Ieveraged Ioan bridge equily commilmenls.
350


IeIder, Lehman, lo MichaeI GeIband, Lehman, $* "30 (Aug. 28, 2008) |LßIX"DOCID 822513j, :$$ "3:, e"maiI
from Sleven ßerkenfeId, Lehman, lo LßIC Member, Lehman, $* "30 (May 11, 2007) |LßIX"DOCID
1379290j, e"maiI from Larry Wieseneck, Lehman, lo AIex Kirk, Lehman (}an. 30, 2008) |LßIX"DOCID
1379129j.
346
I"maiI from Roger Nagioff, Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (}une 29, 2007) |LßIX"
DOCID 1467654), Ixaminer's Inlerviev of Ired S. OrIan, Se¡l. 21, 2009, al ¡. 7.
347
I"maiI from Roger Nagioff, Lehman, lo David GoIdfarb, Lehman (}une 1, 2007) |LßIX"DOCID
1581523j, e"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $* "30 (}une 1, 2007).
348
I"maiI from Sleven ßerkenfeId, Lehman, lo Roberl D. Redmond, Lehman (Se¡l. 23, 2007) |LßIX"
DOCID 1387569j, e"maiI from AIex Kirk, Lehman, lo |xxxxxxxj+archvireIess.nel (May 15, 2007) |LßIX"
DOCID 1379297j (¡hone number redacled), e"maiI from Sleven ßerkenfeId, Lehman, lo LßIC Member,
Lehman, $* "30 (May 11, 2007) |LßIX"DOCID 1379291j.
349
Ixaminer's Inlerviev of Ired S. OrIan, Se¡l. 21, 2009, al ¡. 7.
350
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 13, Ixaminer's Inlerviev of AIex Kirk, }an.
12, 2010, al ¡. 8, e"maiI from Roberl D. Redmond, Lehman, lo Sleven ßerkenfeId, Lehman, $* "30 (May 19,
2007) |LßIX"DOCID 264270j, e"maiI from AIex Kirk, Lehman, lo Roberl D. Redmond, Lehman, $* "30 (May
21, 2007) |LßIX"DOCID 174236j, e"maiI from Sleven ßerkenfeId, Lehman, lo David GoIdfarb, Lehman, $*
"30 (}une 15, 2007) |LßIX"DOCID 859026j.

102
ßy A¡riI 2007, lhe overaII size of lhe firm's Ieveraged Ioan commilmenls became
conlroversiaI.
351
Kirk and GeIband became concerned aboul Lehman's overaII ex¡osure.
In A¡riI 2007, Kirk e"maiIed GeIband:
As a heads u¡ our risk of mandaled commils is u¡ lo 6mm a b¡ lri¡Ie our
¡revious high. AIso lhe commils are coming in fasl and furious I ex¡ecl
us lo be veII norlh of 30ß lhis quarler. This is aIso un¡recedenled. In
addilion ve are nov seeing commilmenls lhal have crossed lhe risk
loIerance so ve may need your heI¡ vilh lhe bank in saying no lo some
key cIienls.
352

Al aboul lhe same lime, ßerkenfeId, vho vas head of lhe Commilmenl Commillee lhal
vas charged vilh evaIualing individuaI Ieveraged Ioans, noled in an e"maiI: ´The
frenzy of lhe Iasl monlh or so concerns me and I don'l Iike being broughl in al lhe very
end and ex¡ecled lo make lhese decisions in Iess lhan 48 hours.¨
353

Anloncic, lhe CRO, aIso o¡¡osed many of lhe lransaclions and lhe overaII size of
lhe business. She recaIIed a conversalion in vhich she loId ßerkenfeId and GoIdfarb
lhal lhe firm's Ieveraged Ioan ex¡osure vas gelling loo Iarge and lhal Iimils had lo be
im¡osed.
354
When ßerkenfeId re¡Iied lhal he Iiked aII of lhe deaIs lhal Lehman vas
considering, Anloncic res¡onded lhal he couId Iike one deaI or anolher, bul nol aII of
lhem al once.
355


351
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 10.
352
I"maiI from AIex Kirk, Lehman, lo MichaeI GeIband, Lehman (A¡r. 20, 2007) |LßIX"DOCID 2763976j.
353
I"maiI from Sleven ßerkenfeId, Lehman, lo }ean"Irancois Aslier, Lehman, $*0 "30 (Mar. 30, 2007) |LßIX"
DOCID 351370j.
354
Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡. 10.
355
'80

103
IuId beIieved lhal IID and GeIband vere nol o¡¡osed lo Lehman ex¡anding ils
Ieveraged Ioan business.
356
IuId beIieved lhal IID sim¡Iy did nol vanl lhe Ieveraged
Ioans on ils ovn baIance sheel, because il received credil for onIy haIf of lhe income.
357

In conlrasl, IßD received credil for haIf of lhe income bul bore no risk.
358
IuId
considered GeIband's concerns an ´inlramuraI I+L grab,¨ vhich concerned him.
359

L7I \>?]E3 ?C $839:;0B (?998>D6:< /8:< %BE:E8 #AB6;8BB :E
!38 *E:>E ?C E38 *A@Z>698 (>6B6B
Al lhe same lime lhal Lehman vas ra¡idIy groving ils Ieveraged Ioan business,
Lehman aIso dramalicaIIy increased ils commerciaI reaI eslale lransaclions. Lehman
aImosl doubIed GRIG's baIance sheel Iimil from $36.5 biIIion in lhe firsl quarler 2007 lo
$60.5 biIIion in lhe firsl quarler 2008, vilh GRIG reguIarIy exceeding ils baIance sheel
Iimils.
360
Ior inslance, GRIG exceeded ils baIance sheel Iimil by a¡¡roximaleIy $600
miIIion in lhe lhird quarler 2007 ($56.6 biIIion baIance sheel usage), by a¡¡roximaleIy
$3.8 biIIion in lhe fourlh quarler 2007 ($64.3 biIIion baIance sheel usage), and by
a¡¡roximaleIy $5.2 biIIion in lhe firsl quarler 2008 ($65.7 biIIion baIance sheel usage).
361


356
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 5, 12, 13.
357
'80 al ¡. 19.
358
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 10.
359
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 19.
360
Lehman, IID"ßaIance Sheel Managemenl Iresenlalion (Se¡l. 2007), al ¡. 3 |LßIX"DOCID 4553137j,
allached lo e"maiI from }anel Marrero, Lehman, lo Gerard ReiIIy, Lehman (Ocl. 8, 2007) |LßIX"DOCID
4552976j, Lehman, IID"ßaIance Sheel Iresenlalion (}an. 17, 2008), al ¡. 3 |LßIX"DOCID 3363221j,
allached lo e"maiI from Sigrid Slabenov, Lehman, lo Irik Addinglon, Lehman (}an. 31, 2008) |LßIX"
DOCID 3384762j, Lehman, Iixed Income Q3 ßaIance Sheel Targels |LßIX"DOCID 1742006j, allached lo e"
maiI from Kevin Horan, Lehman, lo CIemenl ßernard, Lehman (}une 27, 2009) |LßIX"DOCID 1698861j.
361
'80

104
In addilion, belveen lhe second quarler of 2006 and lhe second quarler of 2007,
Lehman's reaI eslale bridge equily ¡osilions in lhe Uniled Slales increased len"foId,
from $116 miIIion lo $1.33 biIIion, and lhen doubIed lo more lhan $3 biIIion by lhe end
of lhe second quarler of 2008.
362

GRIG's baIance sheel grovlh vas IargeIy lhe resuIl of a series of Iarge
lransaclions lhal Lehman concIuded belveen May 2007 and November 2007. Iach of
lhe foIIoving deaIs increased lhe baIance sheel by over $1 biIIion in lhe res¡eclive
monlhs:
363

# May 2007, $2.0 biIIion ÷ Lehman financing lo ßroadvay Iarlners lo acquire a
sub"¡orlfoIio of ßeacon Ca¡ilaI Slralegic Iarlners III, LI.
364

# May 2007, $1.3 biIIion ÷ Lehman financing lo ßroadvay ReaI Islale Iarlners
lo acquire 237 Iark Avenue.
365

# }une 2007, $1.2 biIIion ÷ Lehman financing lo A¡oIIo Inveslmenl Cor¡. for a
lake ¡rivale of Innkee¡ers USA Trusl,
366

# }une 2007, $1.1 biIIion ÷ Lehman financing lo Thomas Iro¡erlies Grou¡ lo
acquire lhe IOI Auslin ¡orlfoIio,
367


362
Ari Koulouvides, Lehman, GIobaI ReaI Islale Grou¡ America's IorlfoIio Summary re lhe Second
Quarler of 2007 (Ocl. 24, 2007), al ¡. 2 |LßIX"DOCID 2501404j, allached lo e"maiI from }onalhan Cohen,
Lehman, lo IauI Higham, Lehman (Ocl. 24, 2007) |LßIX"DOCID 2558146j, GIobaI ReaI Islale Grou¡
Americas IorlfoIio as of }une 30, 2008, al ¡. 15 |LßIX"DOCID 1419825j.
363
The amounls Iisled vere IabeIed as ´|mjovemenls onlo lhe baIance sheel¨ for lhe res¡eclive monlhs.
UnIess olhervise noled in lhe source, lhese amounls are ¡resumed lo be amounls funded in lhal ¡eriod.
1$$ QuarlerIy ReaI Islale Reca¡ Third Quarler and Year"To"Dale Iresenlalion (Nov. 29, 2007), al ¡¡. 118"
25 |LßIX"DOCID 3504242j, allached lo e"maiI from IauI Higham, Lehman, lo DonaId I. Ielrov, Lehman
(Nov. 29, 2007) |LßIX"DOCID 3625043j.
"#$
'80
365
'80
366
'80
367
'80

105
# }une 2007, $1.7 biIIion ÷ Lehman financing for lhe acquisilion of Norlhern
Rock's commerciaI reaI eslale ¡orlfoIio,
368

# }uIy 2007, $1.5 biIIion ÷ Lehman financing lo IroLogis lo acquire lhe
Dermody induslriaI ¡orlfoIio,
369

# }uIy 2007, $2.9 biIIion ÷ Lehman financing for lhe acquisilion of lhe Coeur
Defense office buiIding,
370

# Augusl 2007, $1.0 biIIion ÷ Lehman financing for lhe acquisilion of Norlhern
Rock's commerciaI reaI eslale ¡orlfoIio,
371

# Oclober 2007, $1.5 biIIion ÷ Lehman financing lo ßIackslone for ils
acquisilion of HiIlon HoleIs,
372
and
# Oclober 2007, $5.4 biIIion ÷ Lehman financing for lhe acquisilion of lhe
Archslone Smilh Trusl.
373

ßecause Lehman encounlered subsequenl difficuIlies in seIIing or securilizing ¡orlions
of lhese deaIs, many of lhe above lransaclions remained among lhe Iargesl ex¡osures on
Lehman's baIance sheel as Lehman's financiaI condilion delerioraled veII inlo 2008.
374

L6I /8<:J:E6?; ?C /6BG (?;E>?<B E? "DD?99?7:E8 \>?]E3
?C $839:;0B (?998>D6:< /8:< %BE:E8 #AB6;8BB
As vilh lhe grovlh of lhe Ieveraged Ioan business, lhe grovlh of lhe commerciaI
reaI eslale business vas faciIilaled firsl by an increase in lhe risk Iimils and lhen by a
decision lo exceed lhose Iimils. In a May 9, 2006 e"maiI lo Umezaki, IauI A. Hughson,

368
'80
369
'80
370
'80
371
'80
372
Lehman, CommerciaI morlgages ÷ Q2 2008 (Aug. 6, 2008), al ¡¡. 5"14 |LßIX"DOCID 018868j, allached
lo e"maiI from Gerard ReiIIy, Lehman, lo Ian T. Lovill, Lehman (Aug. 7, 2008) |LßIX"DOCID 011867j.
373
'80
374
Lehman, GIobaI ReaI Islale Grou¡ U¡dale, al ¡¡. 2"11 |LßIX"DOCID 019080j (Iisling lo¡ 10 risks as of
May 31, 2008).

106
GRIG's Head of Credil Dislribulion, inquired as lo hov risk Iimils meshed vilh
GRIG's ¡Ians lo ´ex¡and our business in Asia, Iuro¡e and our bridge equily business
gIobaIIy. I s¡ecificaIIy vanled lo focus on hov ve can grov Asia and bridge equily,
given lhe risk Iimils . . . .¨
375
SeveraI monlhs Ialer, in Se¡lember 2006, in an e"maiI lo
WaIsh, }effrey Goodman, (senior"mosl risk manager for IID direclIy res¡onsibIe for
GRIG) slaled lhal he ´vanled lo foIIovu¡ on a conversalion I had vilh |GjeIband a
vhiIe back concerning a ¡ush (from GoIdfarb el aI) lo lake on more risk in RI (doubIe
your size`) and gel your viev on vhal is reaIislic lo ex¡ecl and vhere you see lhis in
lhe a¡¡rovaI ¡rocess inlernaIIy.¨
376

Lehman's risk a¡¡elile Iimil for lhe reaI eslale business increased from $600
miIIion in 2006 lo $720 miIIion in 2007.
377
ßul lhe reaI eslale business quickIy feIl
¡ressure from managemenl lo exceed ils recenlIy increased Iimil. In a }une 2007 e"maiI,
Goodman loId Anloncic lhal Hughson feIl ´lra¡¡ed in lhal Roger |Nagioffj and olher
senior foIks vanl|edj lhem lo kee¡ groving lhe biz and hilling ¡/I budgels bul on lhe
olher hand lhey |verej over |baIance sheelj Iimils and risk Iimils.¨
378
Goodman advised

375
I"maiI from Kenlaro Umezaki, Lehman, lo IauI A. Hughson, Lehman (May 9, 2006) |LßIX"DOCID
1776281j.
376
I"maiI from }effrey Goodman, Lehman, lo Mark A. WaIsh, Lehman (Se¡l. 19, 2006) |LßIX"DOCID
1368068j.
377
I"maiI from IauI A. Hughson, Lehman, lo Thomas Iearson, Lehman, $* "30 (May 23, 2006) |LßIX"
DOCID 1776282j, Lehman, ReaI Islale >> Risk A¡¡elile / VaR >> Summary " COß 27 Aug 2007 Monday
|LßIX"DOCID 2912096j, allached lo e"maiI from Ialricia Luken, Lehman, lo IauI Higham, Lehman, $* "30
|LßIX"DOCID 2880146j.
378
I"maiI from }effrey Goodman, Lehman, lo MadeIyn Anloncic, Lehman (}une 29, 2007) |LßIX"DOCID
155724j.

107
Hughson lhal Lehman's commerciaI reaI eslale grou¡ ´|couId nolj kee¡ adding deaIs
vilhoul a ¡Ian lo reduce lhe risk somehov,¨ and lhal lhere needed lo be a discussion
vilh Nagioff ´as |lo ask vhelher he couIdj cul risk in olher areas (HY`) lo free u¡ some
room or |vhelher he vouIdj be viIIing lo sil oul some o¡¡orlunilies.¨
379
Managemenl
uIlimaleIy decided lhal GRIG vouId nol be heId lo any risk a¡¡elile Iimils.
380

L66I +;E8>;:< &ZZ?B6E6?; E? \>?]E3 ?C (?998>D6:< /8:<
%BE:E8 #AB6;8BB
As vilh lhe Ieveraged Ioan business, some Lehman execulives voiced concerns
aboul lhe risk associaled vilh Lehman's Iarge concenlralion of commerciaI reaI eslale
¡osilions on ils baIance sheel. ßul, again as vilh lhe Ieveraged Ioan business, Lehman's
managemenl decided lo conlinue lo grov lhe commerciaI reaI eslale business
nolvilhslanding lhose varnings, ´because lhal vas lhe slralegic im¡eralive of lhe
firm.¨
381
Ior exam¡Ie, on May 7, 2007, Goodman e"maiIed Anloncic aboul lhe
Archslone lransaclion discussed beIov and said lhal O'Meara, lhen lhe CIO, ´ha|dj
significanl concerns regarding overaII size of |lhe reaI eslalej book and hov much of lhe
firm's equily |vasj lied u¡ in such bridge equily deaIs.¨
382
Lehman's risk managers
vere aIso concerned vilh lhe reaI eslale bridge equily deaIs in vhich Lehman vas

379
'80
380
Ixaminer's Inlerviev of Mark WaIsh, Ocl. 21, 2009, al ¡¡. 4"5. WaIsh loId lhe Ixaminer lhal he vas
loId lo doubIe lhe commerciaI reaI eslale risk. '8. al ¡. 5.
381
Ixaminer's Inlerviev of IauI A. Hughson, Ocl. 28, 2009, al ¡. 3.
382
I"maiI from }effrey Goodman, Lehman, lo MadeIyn Anloncic, Lehman (May 7, 2007) |LßIX"DOCID
154953j.

108
¡arlici¡aling.
383
The bridge equily ¡osilions vere considered ¡arlicuIarIy risky because
Lehman's baIance sheel vouId be direclIy affecled by lhe decIining markel vaIues of lhe
underIying reaI eslale if lhe firm faiIed lo seII ils bridge equily ¡osilions as ¡Ianned.
384

NeverlheIess, by Iale 2007, Lehman acquired a number of subslanliaI bridge
equily ¡osilions, bolh in lhe Uniled Slales and overseas, incIuding: $2.3 biIIion in
Archslone,
385
$574 miIIion in IroLogis/Dermody ¡orlfoIio,
386
C475 miIIion ($655 miIIion)
in Coeur Defense,
387
$221 miIIion in IOI Auslin,
388
and $195 miIIion in lhe acquisilion of
lhe 200 Iiflh Avenue buiIding.
389
As a resuIl of lhese acquisilions, reaI eslale bridge
equily venl from a negIigibIe business lo a muIli"biIIion doIIar ex¡osure in
a¡¡roximaleIy 18 monlhs.
L666I ">D3BE?;8
:, $839:;0B (?996E98;E
The enormous grovlh of Lehman's commerciaI reaI eslale baIance sheel
cuIminaled in Lehman's commilmenl lo ¡arlici¡ale in an a¡¡roximaleIy $22 biIIion

383
'80, Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡¡. 8"9, e"maiI from MadeIyn
Anloncic, Lehman, lo Roger Nagioff, Lehman, $* "30 (}une 29 , 2007) |LßIX"DOCID 1478403j, e"maiI from
IauI A. Hughson, Lehman, lo Thomas Iearson, Lehman, $* "30 (May 23, 2006) |LßIX"DOCID 1776282j.
384
Ixaminer's Inlerviev of MadeIyn Anloncic, Mar. 27, 2009, al ¡¡. 8"9.
385
GIobaI ReaI Islale Grou¡, Lehman, U¡daled Commilmenl Commillee Memorandum for Archslone
(May 22, 2007) |LßIX"DOCID 1350952j, Lehman, Lehman ßrolhers ßridge Iquily Ii¡eIine (}uIy 3, 2007)
|LßIX"DOCID 638275j, allached lo e"maiI from }effrey Goodman, Lehman, lo DonaId I. Ielrov, Lehman,
$* "30 (}uIy 11, 2007) |LßIX"DOCID 670845j.
386
Lehman, To¡ ReaI Islale Risk Summary (Dec. 12, 2007), al ¡. 2 |LßIX"DOCID 789172j.
387
'80, QuarlerIy ReaI Islale Reca¡ Third Quarler and Year"To"Dale Iresenlalion (Nov. 29, 2007), al ¡. 124
|LßIX"DOCID 3504242j, allached lo e"maiI from IauI Higham, Lehman, lo DonaId I. Ielrov, Lehman
(Nov. 29, 2007) |LßIX"DOCID 3625043j.
388
'80 al ¡. 3.
389
'80 al ¡. 4.

109
|oinl venlure vilh Tishman S¡eyer for lhe acquisilion of lhe ¡ubIicIy"heId Archslone
RIIT.
390
IncIuding unils under conslruclion, Archslone ovned over 88,000 a¡arlmenls,
vhich vere s¡read across more lhan 340 communilies vilhin lhe Uniled Slales.
391
Mark
WaIsh vas lhe driving force behind lhis deaI, bul IuId and Gregory slrongIy su¡¡orled
il as veII.
392

On May 2, 2007, Lehman and Tishman S¡eyer ¡rovided a non"binding Ieller lo
acquire aII oulslanding shares of Archslone for $64 ¡er share, sub|ecl lo confirmalory
due diIigence.
393
Afler negolialing a ¡rice of $60.75 ¡er share and execuling a ¡Ian of
merger,
394
lhe ¡arlies announced lhe deaI ¡ubIicIy on May 29, 2007.
395
The deaI vas
originaIIy scheduIed lo cIose before Augusl 31.
396

Lehman's Ixeculive Commillee required WaIsh lo find ¡arlners lo reduce
Lehman's risk in lhe deaI. ßank of America Cor¡oralion (´ßofA¨) agreed lo fund haIf

390
Lehman, Archslone Q2 2008 U¡dale, al ¡. 14 |LßIX"DOCID 2929329j, allached lo e"maiI from Leonard
Cohen, Lehman, lo IauI A. Hughson, Lehman (}une 12, 2008) |LßIX"DOCID 2820780j.
391
Archslone"Smilh O¡eraling Trusl, AnnuaI Re¡orl for 2006 as of December 31, 2006 (Iorm 10"K) (fiIed
on Mar. 1, 2007), al ¡. 6.
392
Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 21, 2009, al ¡¡. 8"10, Ixaminer's Inlerviev of }ose¡h
Gregory, Nov. 13, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 3"4.
393
}ames L. Dixson, Lehman, Archslone Transaclion TimeIine (}une 20, 2007), al. ¡. 2 |LßIX"DOCID
2139993j, allached lo e"maiI from }ames L. Dixson, Lehman, lo Roberl Ashmun, Lehman, $* "30 (}une 20,
2007) |LßIX"DOCID 2139994j.
394
'80 al ¡. 5, Agreemenl and IIan of Merger Among Archslone"Smilh Trusl, Archslone"Smilh O¡eraling
Trusl, River HoIding, LI, River Acquisilion (MD), LI, and River Trusl Acquisilion, LI (May 28,
2007) |TSRIV00000460"554j.
395
}ames L. Dixson, Lehman, Archslone Transaclion TimeIine (}une 20, 2007), al. ¡¡. 5, 6 |LßIX"DOCID
2139993j, allached lo e"maiI from }ames L. Dixson, Lehman, lo Roberl Ashmun, Lehman, $* "30 (}une 20,
2007) |LßIX"DOCID 2139994j, Agreemenl and IIan of Merger for Archslone"Smilh and River HoIding
(May 28, 2007) |LßIX"DOCID 1759937j, allached lo e"maiI from KyIe Kr¡ala, WeiI, GolshaI & Manges
LLI, lo David I. Sha¡iro, WachleII, Li¡lon, Rosen & Kalz, $* "30 (May 29, 2007) |LßIX"DOCID 1870993j.
396
I"maiI from Chi¡ HefIin, Lehman, lo Loan SaIes, Lehman (May 29, 2007) |LßIX"DOCID 1488757j.

110
of lhe fIoaling rale bank Ioan and |unior mezzanine Ioan, and lo ¡urchase haIf lhe
bridge equily.
397
ßarcIays Ca¡ilaI Inc. (´ßarcIays¨) signed a ¡arlici¡alion agreemenl lo
lake 15% of lhe bridge equily and 15% of lhe debl in lhe Archslone deaI, and lhen, on
}uIy 2, 2007, amended lhe agreemenl lo lake 25% of lhe debl.
398
ßarcIays' commilmenls
came oul of ßofA's share of lhe debl and equily, and lhus did nol affecl Lehman's
ex¡osure lo Archslone.
399

The Archslone deaI vas an enormous commilmenl by Lehman, bolh in lerms of
debl financing and equily. Afler bringing in ßofA and ßarcIays, Lehman agreed lo
make a ¡ermanenl equily inveslmenl of $250 miIIion, agreed lo ¡urchase bridge equily
of a¡¡roximaleIy $2.3 biIIion, and aIso agreed lo fund various debl lranches lolaIing
$8.5 biIIion.
400


397
!,%."#$ Memorandum from Mark A. WaIsh, Lehman, lo Ixeculive Commillee of Lehman ßoard of
Direclors, Re: Iro|ecl Iasy Living (May 22, 2007) |LßIX"DOCID 1350952j, allached lo e"maiI from }uIia
Alvood, Lehman, lo HYCC Members, Lehman, $* "3. |LßIX"DOCID 1341648j R)*6 Memorandum from
Mark A. WaIsh, Lehman, lo Ixec. Commillee of LßHI ßoard of Direclors, re: Iro|ecl Iasy Living (May 7,
2007), al ¡¡. 1, 3 |LßIX"DOCID 147230j, allached lo e"maiI from Mark A. WaIsh, Lehman, lo Sleven
ßerkenfeId, Lehman, $* "3. (May 8, 2007) |LßIX"DOCID 141217j, Leller from Scoll M. Weiner, ßarcIays
Inveslmenl HoIdings, Inc., lo Lehman, $* "30, Red"Iine Commilmenl Leller for Archslone (}une 11, 2007)
|LßIX"DOCID 2073685j, Leller from Scoll M. Weiner, ßarcIays Inveslmenl HoIdings, Inc., lo Lehman, $*
"30, Ixeculion Co¡y of Commilmenl Leller for Archslone (}une 11, 2007) |LßIX"DOCID 1451573j.
398
'8.
399
Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 21, 2009.
400
Iro|ecl Iasy Living, Term Sheel (S¡onsor) (May 28, 2007), al ¡. 1 |LßIX"DOCID 1624529j, allached lo
e"maiI from David Herman, WeiI, GolshaI & Manges LLI, lo Andrev Dady, SchuIle Rolh & ZabeI LLI, $*
"30 |LßIX"DOCID 1383842j, Iro|ecl Iasy Living, Term Sheel (ßridge Iquily) (May 28, 2007), al ¡. 1 |LßIX"
DOCID 1324526j, allached lo e"maiI from David Herman, WeiI, GolshaI & Manges LLI, lo Andrev Dady,
SchuIle Rolh & ZabeI LLI, $* "30 |LßIX"DOCID 1383842j, River HoIdings LI Senior Secured IaciIilies
Commilmenl Leller (May 28, 2007), al ¡. 1 |LßIX"DOCID 2395952j, allached lo e"maiI from }uIian Chung,
CadvaIader, Wickersham & Tafl LLI, $* "30 (May 29, 2007) |LßIX"DOCID 2268458j.

111
Al lhe lime lhe deaI vas ¡resenled lo lhe Ixeculive Commillee, Lehman
inlended lo seII aII Archslone debl al cIosing.
401
ßecause Lehman had ¡rice fIex on lhe
Archslone debl, Lehman managemenl vas reasonabIy confidenl lhal il couId dislribule
lhe debl vilhoul suffering a Ioss.
402
Irice fIex is a mechanism lhal faciIilales syndicalion
or saIe of a Ioan by lhe iniliaI Iender vilhoul laking a Ioss.
403
As a mechanicaI maller,
¡rice fIex may ¡ermil lhe iniliaI Iender lo increase lhe inleresl rale lo allracl olher
Ienders (in vhich case lhe borrover is required lo ¡ay ils Ienders a higher inleresl rale),
or require lhe borrover lo reimburse lhe debl hoIders for any Ioss lhey may suffer as a
resuIl of syndicaling or seIIing lhe debl lo a lhird ¡arly al a ¡rice Iess lhan ¡ar.
404

ßecause of lhe ¡rice fIex on lhe Archslone debl, lhe risk in lhe Archslone commilmenl
vas heaviIy concenlraled in Lehman's equily and bridge equily commilmenls.
Lehman ¡Ianned lo seII 50% of ils remaining mezzanine debl and bridge equily
¡osilions vilhin lvo lo lhree veeks of cIosing (Lehman had aIready had lvo Iarge
financiaI inslilulions ex¡ress an inleresl), and lhe resl vouId be soId off over lhe six

401
Lehman, Iasy Living TaIking Ioinls for Ixeculive Commillee and Raling Agencies (May 18, 2007), al
¡. 2 |LßIX"DOCID 200792j, allached lo e"maiI from IaoIo R. Tonucci, Lehman, lo Chrislo¡her M.
O'Meara, Lehman, el aI. (May 18, 2007) |LßIX"DOCID 215761j.
402
'80
403
Slandard & Ioor's, Guide lo lhe Loan Markel (Se¡l. 2009), al ¡. 8,
hll¡://vvv2.slandardand¡oors.com/s¡f/¡df/fixedincome/LoanMarkelGuide_2009_IinaI.¡df (Iasl visiled
(Iasl visiled on Ieb. 1, 2010), AIicia TayIor & AIicia Sansone, THI HANDßOOK OI LOAN SYNDICATIONS AND
TRADING 175 (McGrav"HiII 2007), Sleven M. Vavaria, Slandard & Ioor's, 1@(8)/"*$8 5,"(:""C P"*$8
;"#&$*4 "* 5":*S (Ieb. 12, 2002), hll¡://Ieeds"
facuIly.coIorado.edu/madigan/3020/Readings/Syndicaled_Loans""A_Raled_Markel_Al_Lasl.¡df (Iasl
visiled on Ieb. 1, 2010).
404
'80

112
monlhs foIIoving cIosing.
405
Insofar as Lehman's ¡olenliaI ¡rofils vere concerned,
Lehman forecasl earning more lhan $1.3 biIIion over a len"year ¡eriod, incIuding nearIy
$1 biIIion on Lehman's inveslmenl and subslanliaI originalion and assel managemenl
fees.
406

@, /6BG .:;:H898;E ?C $839:;0B ">D3BE?;8
(?996E98;E
Archslone vas re¡ealedIy considered by bolh lhe Commilmenl Commillee and
Ixeculive Commillee.
407
These commillees mandaled significanl aIleralions lo lhe deaI
slruclure, incIuding, mosl im¡orlanlIy, requiring WaIsh lo bring in al Ieasl one ¡arlner
÷ uIlimaleIy ßofA ÷ lo reduce lhe size of Lehman's commilmenl.
408

Nolvilhslanding Archslone's consideralion by lhe senior managemenl of lhe
firm, Lehman's risk managers said lhal lhey had minimaI in¡ul in lhe decision lo
acquire Archslone.
409
As a resuIl, des¡ile lhe exlraordinary size and risk of Lehman's
commilmenl lo lhe lransaclion, Lehman's managemenl did nol conducl quanlilalive

405
Lehman, Iasy Living TaIking Ioinls for Ixeculive Commillee and Raling Agencies (May 18, 2007), al
¡. 2 |LßIX"DOCID 200792j, allached lo e"maiI from IaoIo R. Tonucci, Lehman, lo Chrislo¡her M.
O'Meara, Lehman, $* "30 (May 18, 2007) |LßIX"DOCID 215761j.
406
Memorandum from Mark A. WaIsh, Lehman, lo Ixeculive Commillee, Lehman, re Iro|ecl Iasy Living
(May 7, 2007), al ¡. 3 |LßIX"DOCID 147230j, allached lo e"maiI from Mark A. WaIsh, Lehman, lo Sleven
ßerkenfeId, Lehman, $* "30 (May 8, 2007) |LßIX"DOCID 141217j.
407
Ixaminer's Inlerviev of David S. Lazarus, Nov. 18, 2009, al ¡¡. 6"7, Ixaminer's Inlerviev of IauI A.
Hughson, Ocl. 28, 2009, al ¡. 2, Ixaminer's Inlerviev of Lisa ßeeson, Ocl. 23, 2009, al ¡. 4, Ixaminer's
Inlerviev of Kennelh Cohen, Ocl. 20, 2009, al ¡¡. 5"6.
408
Ixaminer's Inlerviev of Sleven ßerkenfeId, Ocl. 5 & 7, 2009, al ¡¡. 14"15, Ixaminer's Inlerviev of
Richard S. IuId, }r., Se¡l. 25, 2009, al ¡¡. 22"23.
409
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, Ixaminer's Inlerviev of Kenlaro Umezaki,
}une 25, 2009, al ¡. 17, Ixaminer's Inlerviev of MadeIyn Anloncic, Ieb. 25, 2009, al ¡. 5.

113
anaIyses of Lehman's ex¡osure in advance of lhe risk Lehman vas underlaking.
410
Ior
exam¡Ie, il does nol a¡¡ear lhal Lehman syslemalicaIIy anaIyzed lhe effecl lhal lhe
commilmenl vouId have on lhe firm's risk a¡¡elile IeveIs, or conducled slress lesling
on lhe firm's burgeoning commerciaI reaI eslale ex¡osures, in advance of commilling lo
lhe lransaclion. ßecause of lhe exlraordinary size of lhe lransaclion, hovever ÷
incIuding es¡eciaIIy an un¡recedenled bridge equily commilmenl ÷ il vas cIear from
lhe beginning lhal lhe Archslone commilmenl vouId cause Lehman lo exceed ils risk
a¡¡elile Iimils.
411

The Office of Thrifl Su¡ervision (´OTS¨) crilicized Lehman's decision lo enler
inlo lhe Archslone lransaclion in excess of ils risk a¡¡elile Iimils.
412
During OTS's
yearIy reviev of Lehman in 2007, lhe OTS noliced lhal Lehman had exceeded ils risk
a¡¡elile Iimils and lhal lhe Archslone deaI vas IargeIy res¡onsibIe for lhal overage.
413

As a resuIl, in 2008, OTS decided lo conducl a largeled reviev of Lehman's commerciaI
reaI eslale business. Afler lhal largeled reviev, OTS issued a ´negalive¨ re¡orl,
crilicizing Lehman for being ´maleriaIIy overex¡osed¨ in lhe commerciaI reaI eslale
markel and for enlering inlo lhe Archslone deaI vilhoul sound risk managemenl

410
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, Ixaminer's Inlerviev of MadeIyn Anloncic,
Mar. 27, 2009, al ¡. 11.
411
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009.
412
Office of Thrifl Su¡ervision, Re¡orl of Ixaminalion, Lehman ßrolhers HoIdings Inc. (Ixam slarling
}uIy 7, 2008), al ¡. 2 |LßIX"OTS 000392j.
413
Ixaminer's Inlerviev of RonaId Marcus, Nov. 4, 2009, al ¡¡. 7"8.

114
¡raclices.
414
The re¡orl concIuded lhal Lehman's breach of risk Iimils, caused IargeIy by
lhe Archslone deaI, conlribuled lo ´ma|or faiIings in lhe risk managemenl ¡rocess.¨
415

ßy conlrasl, lhe SIC loId lhe Ixaminer lhal il vas avare of lhe risk a¡¡elile Iimil
excesses, and lhal il did nol second"guess Lehman's business decisions so Iong as lhe
Iimil excesses vere ¡ro¡erIy escaIaled vilhin Lehman's managemenl.
416

L8I ):H6?CC0B /8Z<:D898;E ?C \8<@:;7 :B O8:7 ?C '+5
On May 1, 2007, Lehman announced lhal GeIband, lhe lhen"acling GIobaI Head
of IID, had ´decided lo Ieave lhe Iirm lo ¡ursue olher inleresls,¨ and lhal Roger
Nagioff vouId assume lhe lo¡ IID ¡osilion al Lehman.
417
InlernaIIy, Lehman
announced lhal lhe change vas based on ´¡hiIoso¡hicaI differences¨ among IuId,
Gregory, and GeIband as lo lhe direclion lo lake lo grov lhe business.
418

GeIband vas removed from lhe ¡osilion for severaI reasons, incIuding lhal he
vas nol aggressive enough in groving lhe business in accordance vilh IuId's Iong"

414
Ixaminer's Inlerviev of RonaId S. Marcus, Nov. 4, 2009, al ¡¡. 7"8, "//,#8 Office of Thrifl Su¡ervision,
Re¡orl of Ixaminalion, Lehman ßrolhers HoIdings Inc. (Ixam slarling }uIy 7, 2008), al ¡. 2 |LßIX"OTS
000392j.
415
Office of Thrifl Su¡ervision, Re¡orl of Ixaminalion, Lehman ßrolhers HoIdings Inc. (Ixam slarling
}uIy 7, 2008), al ¡. 2 |LßIX"OTS 000392j.
416
Ixaminer's Inlerviev of lhe Securilies and Ixchange Commission, Aug. 24, 2009, al ¡. 8.
417
Lehman ßrolhers HoIdings Inc., Iress ReIease: Lehman ßrolhers Names Roger ß. Nagioff GIobaI Head
of Iixed Income (May 2, 2007), al ¡. 1 |LßIX"DOCID 1470086j, allached lo e"maiI from Monique Wise,
Lehman, lo }as|il (}esse) ßhallaI, Lehman, $* "3. (May 1, 2007) |LßIX"DOCID 1605828j.
418
Lehman ßrolhers, TaIking Ioinls & IAQs (May 1, 2007) |LßIX"DOCID 1470087j, allached lo e"maiI
from Monique Wise, Lehman, lo }as|il (}esse) ßhallaI, Lehman, $* "3. (May 1, 2007) |LßIX"DOCID
1605828j.

115
lerm revenue largels.
419
IuId and Gregory aIso cIashed vilh GeIband vilh res¡ecl lo
groving lhe firm's energy business and ils Ieveraged Ioan business.
420

IuId and Gregory chose Nagioff, lhen lhe CIO of Lehman Iuro¡e, lo succeed
GeIband, even lhough he had no direcl ex¡erience in lhe fixed income business, and he
Iived in London, nol Nev York.
421
Nagioff decided lo commule from London for a
¡orlion of each monlh.
422


419
Ixaminer's Inlerviev of }ose¡h Gregory, Nov. 5, 2009, Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30,
2009, al ¡¡. 5"6 (slaling lhal Gregory informed him lhal GeIband vas forced oul because he vas nol
viIIing lo lhink crealiveIy aboul groving Lehman's business and sharing his beIief lhal GeIband's
o¡¡osilion lo lhe IagIe Inergy deaI vas lhe ´Iasl slrav¨), Ixaminer's Inlerviev of MichaeI GeIband,
Aug. 12, 2009, al ¡¡. 15"16, /,(*#" Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 18,
Ixaminer's Inlerviev of Herberl H. (ßarl) McDade III, }an. 28, 2010, al ¡. 9.
420
Ixaminer's Inlerviev of MichaeI GeIband, Aug. 12, 2009, al ¡¡. 2, 7, 15"16, Ixaminer's Inlerviev of
}ose¡h Gregory, Nov. 5, 2009, Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 5"6,
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 18, e"maiI from MichaeI GeIband,
Lehman lo Richard S. IuId, }r., Lehman (Mar. 6, 2007) |LßIX"DOCID 2762454j (´|Rjisk/revard is nol
good here so I'm lrying lo gel oul of as much iIIiquid risk as ¡ossibIe. . . . Thal is lhe slralegy al lhe
momenl lhal aII my managers are foIIoving. I need lo have lhem be in a ¡osilion lo be abIe lo o¡erale
and ca¡ilaIize if ve go lhrough a ¡eriod of slress.¨).
421
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 5"6, Ixaminer's Inlerviev of Hugh I.
(Ski¡) McGee, Aug. 12, 2009, al ¡. 27 (McGee indicaled lhal re¡Iacing GeIband vilh Nagioff vas an
unusuaI idea because Nagioff's ex¡erience vas vilh Iuro¡ean equilies and McDade vouId have been a
more IogicaI choice lo re¡Iace GeIband.), Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 15
(Umezaki slaled lhal many ¡eo¡Ie, himseIf incIuded, vere sur¡rised al Nagioff's ¡romolion because
Nagioff had no background in fixed income and vas nol Iocaled in lhe Uniled Slales al a lime vhen
Lehman vas deaIing vilh an economic crisis Iocaled ¡rimariIy vilhin lhe Uniled Slales and furlher lhal
AIex Kirk or Andrev }. Morlon vouId have been more IogicaI seIeclions bul lhal Gregory had indicaled
lhal Nagioff vouId be good for lhe |ob because of his abundance of business ex¡erience and a viIIingness
lo lake risks.).
422
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 6 (Nagioff's commule vouId uIlimaleIy
¡rove lo be an unsuslainabIe arrangemenl, as lhe slrain il crealed on Nagioff's famiIy caused him lo Ieave
lhe com¡any in Iebruary 2008.).

116
LCI !38 #?:>7 ?C 56>8DE?>B0 "]:>8;8BB ?C $839:;0B +;D>8:B6;H
/6BG M>?C6<8
In a }une 19, 2007 ßoard meeling, O'Meara ¡resenled lhe second quarler resuIls
lo lhe ßoard.
423
Lehman's managemenl generaIIy discIosed lhe firm's increased risk
¡rofiIe as veII as lhe recenlIy concIuded Archslone deaI. Ior exam¡Ie, O'Meara
re¡orled lhal lhe firm"vide quarlerIy average risk a¡¡elile usage for lhe second quarler
of 2007 vas $2.6 biIIion againsl a Iimil of $3.3 biIIion,
424
and lhe ßoard had an exlended
discussion concerning lhe facl lhal lhe increased risk usage vas s¡read across lhe
firm.
425
In }une 2007, hovever, Lehman's daiIy risk syslems refIecled lhal lhe firm vas
aImosl al lhe $3.3 biIIion risk a¡¡elile Iimil, nol incIuding lhe Archslone lransaclion ÷
veII above lhe $2.6 biIIion quarlerIy average.
426

The incIusion of lhe Archslone lransaclion vas cerlain lo ¡ul Lehman veII over
bolh ils firm"vide risk a¡¡elile Iimil and ils Iimil a¡¡IicabIe lo lhe reaI eslale
business.
427
WhiIe lhe Archslone lransaclion vas discussed al lhe }une meeling,
428


423
Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (}une 19, 2007), al ¡. 3
|LßHI_SIC07940_026267j.
424
'80, Lehman, Second Quarler 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors
(}une 19, 2007), al ¡. 6 |LßHI_SIC07940_026226j.
425
Lehman, Second Quarler 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors vilh
WeIikson's noles (}une 19, 2007), al ¡. 6 |WGM_LßIX_01165j.
426
1$$4 $0+04 Lehman, DaiIy Risk A¡¡elile Re¡orl (}une 19, 2007), al ¡. 1 |LßIX"DOCID 3296221j, allached
lo e"maiI from Rui Li, Lehman, lo Manhua Leng, Lehman, $* "3. (}une 19, 2007) |LßIX"DOCID 3295251j.
427
1$$4 $0+., )80, Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24,
2008) |LßIX"DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl,
Lehman, $* "30 (}uIy 24, 2008) |LßIX"DOCID 265567j.
428
Lehman's ßoard did nol consider or a¡¡rove lhe Archslone lransaclion in advance of lhe commilmenl.
Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 22, 2009, al ¡. 3, E-* />0 Ixaminer's Inlerviev of
MichaeI L. AinsIie, Se¡l. 22, 2009, al ¡. 8 (slaling lhal lhe ßoard never formaIIy a¡¡roved lhe Archslone

117
Lehman's managemenl did nol inform lhe ßoard unliI Oclober 15, 2007 lhal Lehman
had exceeded lhe firm"vide risk a¡¡elile Iimil for more lhan four monlhs.
LPI %:><4 2:>;6;HBY /6BG $696E &K8>:H8B` 'A;76;H (?;D8>;B` :;7
E38 588Z8;6;H *A@Z>698 (>6B6B
Irom May lo Augusl 2007, lhe financiaI crisis lhal had ¡reviousIy been conlained
lo lhe sub¡rime residenliaI morlgage markel began lo s¡read lo olher markels,
incIuding lhe commerciaI reaI eslale and credil markels, vhere Lehman vas
¡arlicuIarIy aclive. These concerns escaIaled in }une and }uIy 2007, vhen lvo ßear
Slearns hedge funds im¡Ioded, Ieading lo ¡anic in lhe credil markels and concerns
more generaIIy lhal lhe sub¡rime crisis vouId s¡iII inlo lhe broader economy.
429
SIC
Chairman Chrislo¡her Cox commenled lhal ´|ojur concerns are vilh any ¡olenliaI
syslemic faIIoul.¨
430

As a consequence of lhis galhering slorm, in lhe firsl lvo veeks of }uIy 2007, S&I
¡Iaced $7.3 biIIion of residenliaI morlgage reIaled securilies on negalive ralings valch
and announced a reviev of coIIaleraIized debl obIigalions (´CDOs¨) ex¡osed lo
residenliaI coIIaleraI, Moody's dovngraded $5 biIIion of sub¡rime morlgage bonds and

acquisilion or even discussed lhe lransaclion ¡rior lo Lehman's commilmenl lo lhe deaI), Ixaminer's
Inlerviev of }ohn I. Akers, A¡r. 22, 2009 (same), Ixaminer's Inlerviev of Roger ßerIind, May 8, 2009, al
¡. 10 (same), Ixaminer's Inlerviev of Thomas Cruikshank, Ocl. 8, 2009, al ¡. 3 (same), Ixaminer's
Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡. 14 (same), Ixaminer's Inlerviev of Sir
Chrislo¡her Genl, Ocl. 22, 2009, al ¡¡. 12"13 (same), Ixaminer's Inlerviev of RoIand A. Hernandez, Ocl.
2, 2009 (same), Ixaminer's Inlerviev of Dr. Henry Kaufman, May 19, 2009, al ¡. 15 (same), Ixaminer's
Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 13 (same).
429
Mark Iillman, =$"# 1*$"#(: ;,#*+"+$ 7-(8 !,33".:$ 1$(8: 16,/& ?6#,-+6 !BJ: IT.8"*$ L), ßIoomberg,
}une 21, 2007.
430
'8.

118
¡Iaced 184 morlgage backed CDO lranches on dovngrade reviev, and Iilch ¡Iaced 33
cIasses of slruclured finance CDOs on credil valch negalive.
431
ßy lhe firsl veek of
Augusl 2007, Germany's IKß announced ma|or sub¡rime"reIaled Iosses and required a
baiIoul, American Home Morlgage fiIed for Cha¡ler 11 bankru¡lcy, and lhe Irench
bank ßNI Iaribas froze redem¡lions on lhree of ils funds, ciling an inabiIily lo vaIue
lhem in lhe currenl markel.
432

Des¡ile lhese evenls, Lehman venl forvard vilh a number of Iarge inveslmenls,
some ¡reviousIy commilled, some nev, unliI Augusl 2007, vhen il draslicaIIy cul back
on ils Ieveraged Iending, and Ialer in 2007, vhen il slo¡¡ed doing nev commerciaI reaI
eslale deaIs.
This Seclion discusses lhe concerns of Lehman's managers aboul lhe slale of lhe
markels as earIy as A¡riI and May 2007 and managemenl's aclions vilh res¡ecl lo lhe
scaIe of ils Ieveraged Ioan business. This Seclion aIso discusses lhe concerns among
some Lehman managers in }uIy and Augusl 2007 lhal Lehman mighl be unabIe lo fund
aII of ils Ieveraged Ioan and reaI eslale commilmenls, incIuding Archslone, and Lehman
managers' decision during lhis ¡eriod nol lo increase lhe magnilude of Lehman's
´macro hedges¨ on ils Ieveraged Ioan and commerciaI reaI eslale ¡orlfoIio. IinaIIy, lhis
Seclion discusses managemenl's decision lo lerminale ils residenliaI morlgage
originalions lhrough ßNC and Aurora.

431
ßank for InlernalionaI SellIemenls, 78lh AnnuaI Re¡orl (}une 30, 2008), al ¡. 95.
432
'80

119
L:I ):H6?CC :;7 c6>G !>4 E? $696E $839:;0B O6H3 a68<7
#AB6;8BB
Nagioff began lo discuss roIIing back lhe grovlh of lhe firm's Ieveraged Ioan
business as soon as he became head of IID on May 2, 2007, bul lhis decision vas nol
fuIIy effeclualed unliI Augusl 2007, by vhich lime Lehman's Ieveraged Ioan ex¡osure
had grovn lo $35.8 biIIion as a resuIl of $25.4 biIIion in nev commilmenls.
433

Nagioff Iearned aboul lhe size of Lehman's Ieveraged Ioan ex¡osures from Kirk,
lhen Head of GIobaI Credil Iroducls.
434
Lehman's Ieveraged Ioan business vas ´so
garganluan ÷ lhe ex¡osures |um¡ed oul al |himj.¨
435
Nagioff and Kirk beIieved lhal lhis
vas ´banker business, nol broker business,¨ vhich Lehman did nol have lhe baIance
sheel lo su¡¡orl.
436
Nagioff aIso lhoughl lhal lhe chance of a sudden markel dovnlurn
vas high, and lhal Lehman vas making reIaliveIy smaII ¡rofils for laking increasingIy

433
Lehman, ßusiness and IinanciaI Reviev Q2 2008 (Aug. 5, 2008), al ¡. 14 |LßHI_SIC07940_659768j,
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}une 8, 2007), al ¡¡. 3"8 |LßIX"DOCID 146379j, Lehman,
Loan IorlfoIio Grou¡ WeekIy Reviev (}une 15, 2007), al ¡¡. 3"8 |LßIX"DOCID 146375j, Lehman, Loan
IorlfoIio Grou¡ WeekIy Reviev (}une 22, 2007), al ¡¡. 3"8 |LßIX"DOCID 146376j, Lehman, Loan
IorlfoIio Grou¡ WeekIy Reviev (}une 29, 2007), al ¡¡. 3"8 |LßIX"DOCID 146377j, Lehman, Loan
IorlfoIio Grou¡ WeekIy Reviev (}uIy 6, 2007), al ¡¡. 3"8 |LßIX"DOCID 146348j, Lehman, Loan IorlfoIio
Grou¡ WeekIy Reviev (}uIy 13, 2007), al ¡¡. 3"8 |LßIX"DOCID 146358j, Lehman, Loan IorlfoIio Grou¡
WeekIy Reviev (}uIy 20, 2007), al ¡. 7 |LßIX"DOCID 146339j, Lehman, Loan IorlfoIio Grou¡ WeekIy
Reviev (}uIy 27, 2007), al ¡¡. 3"8 |LßIX"DOCID 146350j, Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev
(Aug. 10, 2007), al ¡¡. 3"8 |LßIX"DOCID 146341j, e"maiI from }effrey Goodman, Lehman, lo David N.
Sherr, Lehman, $* "30 (}une 22, 2007) |LßIX"DOCID 237094j. There is some evidence of inaccuracies in lhe
LIG re¡orls. 1$$4 $0+0, Gary }. Iox, Lehman, Lehman ßrolhers To¡ Ix¡osure Re¡orl Lehman Ia¡ers
Com¡ared lo LIG Dala (}une 25, 2007) |LßIX"DOCID 2461202j, allached lo e"maiI from Gary }. Iox,
Lehman, lo Greg L. Smilh, Lehman, $* "30 (}une 26, 2009) |LßIX"DOCID 2461203j. The caIcuIalion
excIudes lhe commilmenl lo TXU.
434
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 8.
435
'80 al ¡. 7.
436
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 7.

120
Iarge and iIIiquid risks.
437
Nagioff vas concerned because lhe laiI risk of Lehman's
Ieveraged Ioan business lolaIed biIIions of doIIars.
438

Nagioff aIso had broader concerns aboul lhe slale of lhe credil markels. These
concerns vere shared by olhers oulside Lehman and by severaI of Nagioff's senior
coIIeagues, vho beIieved lhal Lehman vas o¡eraling in a ´credil bubbIe.¨
439
Monlhs
Ialer, Anloncic, for exam¡Ie, refIecled back on lhe generaI consensus lhal lhe markels
vere in lroubIe: ´every one sav lhe lrain vreck coming. 64k queslion is vhy didn'l
anyone gel oul of lhe vay```¨
440

AIlhough Nagioff's concerns vere shared by severaI olhers, Nagioff beIieved
lhal il vouId be difficuIl lo curlaiI Lehman's Ieveraged Ioan business, because McGee's
IßD, vhich had cham¡ioned ex¡ansion of lhis business from lhe slarl, had lo aulhorize
lhe change.
441
Moreover, Lehman had many deaIs in lhe ¡i¡eIine, and lhose deaIs vere
su¡¡orling ´100 bankers.¨
442
To make mallers vorse, Kirk beIieved lhal GeIband had
been reIieved of his ¡osilion ¡arlIy as a resuIl of his o¡¡osilion lo lhe Ieveraged Ioan

437
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 8, e"maiI from Gary MandeIbIall, Lehman,
lo Roger Nagioff, Lehman, $* "30 (Nov. 27, 2007) |LßIX"DOCID 156264j.
438
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 10.
439
I"maiI from Sleven ßerkenfeId, Lehman, lo Roger Nagioff, Lehman (May 10, 2007) |LßIX"DOCID
140669j, e"maiI from Roger Nagioff, Lehman, lo Ian T. Lovill, Lehman (May 10, 2007) |LßIX"DOCID
140666j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo IauIo R. Tonucci, Lehman (A¡r. 6, 2007)
|LßIX"DOCID 1349076j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo Ian T. Lovill, Lehman (}uIy
21, 2007) |LßIX"DOCID 211149j.
440
I"maiI from MadeIyn Anloncic, Lehman, lo }ack MaIvey, Lehman (A¡r. 8, 2008)
|LßHI_SIC07940_212356j.
441
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 10.
442
'80

121
business, Nagioff beIieved lhal he vouId onIy gel one chance lo convince IuId lhal lhis
business had lo be slo¡¡ed.
443

Nagioff s¡oke lo IuId on May 31, 2007. Nagioff loId IuId lhal Lehman vas loo
big in lhe Ieveraged Iending business and couId Iose a Iol of money in lhe laiI risk.
444

Nagioff shoved IuId lhe numbers, vhich refIecled a ¡ossibIe $3.2 biIIion Ioss under a
slress scenario lhal vas com¡uled s¡ecificaIIy for lhe ¡ur¡ose of lhis meeling.
445

Nagioff loId IuId lhal Lehman needed lo reduce ils forvard commilmenls from $36
biIIion lo $20 biIIion, im¡ose ruIes on lhe amounl of Ieverage in lhe deaIs, and deveIo¡ a
framevork for Iimiling and evaIualing lhis business.
446

IuId vas sur¡rised and concerned by lhe laiI risk in lhe Ieveraged Ioan ¡osilions
and aulhorized Nagioff lo ¡resenl his anaIysis lo lhe Ixeculive Commillee lo gel
aulhorizalion lo move forvard vilh a ¡Ian lo Iimil lhe firm's Ieveraged Ioan
ex¡osures.
447


443
I"maiI from Roger Nagioff, Lehman, lo AIex Kirk, Lehman (May 31, 2007) |LßIX"DOCID 173414j,
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 11, Ixaminer's Inlerviev of AIex Kirk, }an. 12,
2010, al ¡. 11 (Kirk slaled lhal Nagioff lhoughl lhal GeIband had been fired in ¡arl for o¡¡osing lhe
Ieveraged Ioans business, lhus, lhey had lo move very sIovIy in oblaining aulhorily lo haIl lhe business).
444
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 11, e"maiI from }ormen VaIIeciIIo, Lehman,
lo Roger Nagioff, Lehman, $* "30 (}une 8, 2007) |LßIX"DOCID 1620669j, AIex Kirk, Lehman, Leveraged
Iinance Risk Iresenlalion (}une 8, 2007) |LßIX"DOCID 1416503j.
445
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 11"12, e"maiI from }ormen VaIIeciIIo,
Lehman, lo Roger Nagioff, Lehman, $* "30 (}une 8, 2007) |LßIX"DOCID 1620669j, AIex Kirk, Lehman,
Leveraged Iinance Risk Iresenlalion (}une 8, 2007), al ¡. 10 |LßIX"DOCID 1416503j.
446
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 12.
447
'80

122
SeveraI veeks Ialer, Nagioff discussed lhe Ieveraged Ioan ex¡osure vilh lhe
Ixeculive Commillee. Afler lhal conversalion, on }une 28, 2007, Nagioff vas
aulhorized by IuId, Gregory, and McGee lo conducl a ´cross"firm inilialive¨ lo reduce
commilmenls lo $20 biIIion by lhe end of 2007.
448
The cross"firm inilialive enlaiIed
deveIo¡ing more s¡ecific and effeclive Iimils on Lehman's high yieId business
(incIuding singIe lransaclion Iimils) and bridge equily, and deveIo¡ing a ¡Ian for
reducing lhe exisling ex¡osures.
449

In lhe lvo monlhs belveen Nagioff's conversalion vilh IuId on May 31 and lhe
sIovdovn of Lehman's Ieveraged Ioan commilmenls in Augusl 2007, lhe firm enlered
inlo anolher $25.4 biIIion in commilmenls.
450
Ior exam¡Ie, Lehman agreed on }une 18,
2007 lo commil $2.05 biIIion lo lhe Sequa Cor¡ deaI, lo commil $3.3 biIIion lo lhe Home
De¡ol Su¡¡Iy deaI on }uIy 19, 2007, lo commil $2.4 biIIion lo finance lhe Houghlon
MiffIin deaI, and lo commil $2.14 biIIion lo finance lhe A¡¡Iebee's deaI on }uIy 16,

448
I"maiI from Sleven ßerkenfeId, Lehman, lo Scoll }. Ireidheim, Lehman (}une 26, 2007) |LßIX"DOCID
1819424j, Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 13.
449
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 13.
450
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}une 8, 2007), al ¡¡. 3"8 |LßIX"DOCID 146379j,
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}une 15, 2007), al ¡¡. 3"8 |LßIX"DOCID 146375j,
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}une 22, 2007), al ¡¡. 3"8 |LßIX"DOCID 146376j,
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}uIy 6, 2007), al ¡¡. 3"8 |LßIX"DOCID 146348j, Lehman,
Loan IorlfoIio Grou¡ WeekIy Reviev (}uIy 13, 2007), al ¡¡. 3"8 |LßIX"DOCID 146358j, Lehman, Loan
IorlfoIio Grou¡ WeekIy Reviev (}uIy 27, 2007), al ¡¡. 3"8 |LßIX"DOCID 146350j, Lehman, Loan IorlfoIio
Grou¡ WeekIy Reviev (Aug. 10, 2007), al ¡¡. 3"8 |LßIX"DOCID 146341j. The caIcuIalion excIudes
Lehman's commilmenl lo TXU.

123
2007.
451
As a resuIl, IID ended lhe quarler roughIy $2 biIIion over ils nel baIance sheel
Iimil.
452
As Nagioff ¡ul il, il look lime lo ´slo¡ lhe machine,¨ a Iol of deaIs vere in lhe
¡i¡eIine or under negolialion, and Lehman did nol beIieve lhal il couId abru¡lIy
lerminale lhose deaIs.
453

Nagioff vas concerned lhal his efforls vere loo IillIe loo Iale: ´SadIy in s¡ile of
kiIIing ßCI vhich vas a 5!bn 'KKR disasler I am ¡robabIy 3 monlhs loo Iale in lhe
|ob..a big deaI gol ¡uIIed loday and olhers are being reslruclured dovn..ve are
¡robabIy going lo gel ¡unished for our slu¡idily.¨
454
Tvo days Ialer, Nagioff aIso
vrole: ´I nov have lhe lhing under conlroI . . . if I had lhe |ob 6 monlhs earIier ve
vouId nol be vhere ve are . . . Iel's ho¡e il is onIy scralches.¨
455

L@I dA<4""AHABE NTTV (?;D8>;B /8H:>76;H $839:;0B "@6<6E4 E?
'A;7 +EB (?996E98;EB
ßy }uIy 2007, afler lhe ßear Slearns' funds' im¡Iosion, some Lehman execulives
vere concerned lhal Lehman mighl nol be abIe lo fund aII of ils commilmenls.
456
Ior

451
I"maiI from Lehman Risk, Lehman, lo Risk Limil Ixcess, Lehman (}uIy 16, 2007) |LßIX"DOCID
230109j, Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}uIy 20, 2007), al ¡. 7 |LßIX"DOCID 146339j,
Lehman, Loan IorlfoIio Grou¡ WeekIy Reviev (}uIy 27, 2007), al ¡¡. 6"7 |LßIX"DOCID 146350j,
A¡¡endix: 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.
452
Lehman, 2007 ßaIance Sheel Targels and Usage " GIobaI (Ocl. 17, 2007) |LßIX"DOCID 278229j.
453
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 10, Ixaminer's Inlerviev of AIex Kirk, }an.
12, 2009, al ¡¡. 2"3, "//,#8 Ixaminer's Inlerviev of Richard S. IuId, }r., Dec. 9, 2009, al ¡¡. 10"11, 16"17.
454
I"maiI from Roger Nagioff, Lehman, lo David GoIdfarb, Lehman (}une 26, 2007) |LßIX"DOCID
1585157j. Ior a fuIIer discussion of lhe efforl lo reduce lhe firm's high yieId ex¡osure, see Seclions
III.A.1.b.3 and III.A.1.b.4 of lhis Re¡orl.
455
I"maiI from Roger Nagioff, Lehman, lo David GoIdfarb, Lehman (}une 28, 2007) |LßIX"DOCID
1585167j.
456
1$$4 $0+04 e"maiI from IaoIo R. Tonucci, Lehman, lo Sigrid M. Slabenov, Lehman (Mar. 14, 2007) |LßIX"
DOCID 1342697j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo IaoIo R. Tonucci, Lehman (A¡r. 6,

124
exam¡Ie, Lehman had a maximum cumuIalive oulfIov funding modeI designed lo
ensure lhal Lehman had sufficienl cash sources lo meel lhe ex¡ecled cash oulfIovs in a
slressed markel environmenl.
457
Under lhal modeI, in }uIy 2007, lhe firm's ´|Ljiquidily
IooI one year forvard ¡osilion |vasj shorl $(0.4) biIIion.¨
458

The Iiquidily concerns vere lhe resuIl of severaI faclors. Iirsl, as lhe credil
markels froze, Lehman vas unabIe lo dislribule ils risk in cerlain Ieveraged Ioan and
commerciaI reaI eslale deaIs, incIuding Archslone, Ieaving il vilh more ex¡osure lhan il
had ¡reviousIy anlici¡aled.
459
In addilion, lhe firm had ´effecliveIy been Iocked oul of
lhe ca¡ilaI markels.¨
460

When Nagioff Iearned aboul lhese concerns, he vrole Ian T. Lovill, Lehman's
lhen Co"CAO: ´Kirk and Ken |Umezakij are ¡anicky.. Are lhey over reacling.¨
461


2007) |LßIX"DOCID 1349076j, Lehman, Charl Shoving High Grade and High YieId Loan Commilmenls
(}uIy 19, 2007) |LßIX"DOCID 375444j, allached lo e"maiI from NahiII Younis, Lehman, lo Kenlaro
Umezaki, Lehman (}uIy 19, 2007) |LßIX"DOCID 297877j, e"maiI from Kenlaro Umezaki, Lehman, lo Ian
Lovill, Lehman (}uIy 20, 2007) |LßIX"DOCID 717108j, e"maiI from Ian T. Lovill, Lehman, lo Kenlaro
Umezaki, Lehman (}uIy 20, 2007) |LßIX"DOCID 717108j, e"maiI from Ian T. Lovill, Lehman, lo IaoIo
Tonucci, Lehman, $* "30 (}uIy 11, 2007) |LßIX"DOCID 1901826j.
457
Lehman, Liquidily Managemenl Al Lehman ßrolhers (}uIy 2008), al ¡. 13 |LßIX"DOCID 009007j,
allached lo e"maiI from Rovena T. Carreon, Lehman, lo Roberl Azerad, Lehman, $*0 "30 (}uIy 31, 2008)
|LßIX"DOCID 067762j.
458
3rd Quarler"lo"Dale MCO and CumuIalive OulfIov AnaIysis (}uIy 11, 2007), al ¡. 1 |LßIX"DOCID
1681748j, allached lo e"maiI from NahiII Younis, Lehman, lo IaoIo R. Tonucci, Lehman (}uIy 11, 2007)
|LßIX"DOCID 1901826j.
459
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡. 16, Ixaminer's Inlerviev of Roger
Nagioff, Se¡l. 30, 2009, al ¡. 9, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡. 12.
460
I"maiI from NahiII Younis, Lehman, lo IaoIo R. Tonucci, Lehman (}uIy 11, 2007) |LßIX"DOCID
1901826j.
461
I"maiI from Roger Nagioff, Lehman, lo Ian T. Lovill, Lehman (}uIy 20, 2007) |LßIX"DOCID 175649j.

125
Lovill res¡onded vilh a delaiIed ex¡Ianalion of lhe ¡robIem and his viev of lhe rool of
lhe ¡robIem:
If everylhing goes as badIy as il couId simuIlaneousIy il viII be avfuI, bul
al Ieasl al lhe momenl a Iol of ¡eo¡Ie have money lhey are viIIing lo
|Ijend lo us and if ve cIose lhem quickIy il viII make a difference. I do
lhink ve need lo gel on a `var fooling.' |}amesj MerIi and lhe guys on lhe
desk are ¡anicky and lhal is feeding back inlo fid and oulside lhe firm.
Need ¡eo¡Ie lo be confidenl. I vouId describe my ¡osilion based on vhal
I knov loday as anxious bul nol ¡anicky. C3:, *6$ 8):/).3)($ R$ 6"8 .,:*
UVVW "E,-* >-(8)(+ /,%.3$*$3@ 8)::)."*$8 R6)/6 "88: *, *6$ "3"#%.
462

Nagioff res¡onded: ´Lasl ¡aragra¡h a¡¡Iies lo firm broadIy.¨
463

Lovill lraced Lehman's difficuIly in funding ils commilmenls direclIy lo ils
faiIure lo abide by ils risk Iimils, as Lovill vrole lo O'Meara in a Ialer e"maiI on }uIy 20,
2007: ´In case ve ever forgel, lhis is vhy one has concenlralion Iimils and overaII
¡orlfoIio Iimils. Markels do seize u¡.¨
464

To deaI vilh lhese concerns on a ´var fooling,¨ Lovill, O'Meara, Kirk, Umezaki,
and IaoIo R. Tonucci, (Lehman's GIobaI Treasurer), sel u¡ an Assel"LiabiIily
Commillee (´ALCO¨) so lhal IID and Lehman's Treasury De¡arlmenl couId ´manage
|lhe firm'sj Iiquidily on a daiIy basis.¨
465
Irior lo lhe formalion of ALCO, Lehman's

462
I"maiI from Ian T. Lovill, Lehman, lo Roger Nagioff, Lehman (}uIy 20, 2007) |LßIX"DOCID 175646j
(em¡hasis su¡¡Iied).
463
I"maiI from Roger Nagioff, Lehman, lo Ian T. Lovill, Lehman (}uIy 20, 2007) |LßIX"DOCID 175646j.
464
I"maiI from Ian Lovill, Lehman, lo Chrislo¡her M. O'Meara, Lehman (}uIy 20, 2007) |LßIX"DOCID
194066j.
465
I"maiI from Ian Lovill, Lehman, lo Roger Nagioff, Lehman (}uIy 20, 2007) |LßIX"DOCID 175646j, e"
maiI from Ian Lovill, Lehman, lo Herberl H. McDade III, Lehman, $* "30 (}uIy 20, 2007) |LßIX"DOCID
175646j.

126
Treasury De¡arlmenl reIied on ¡i¡eIine re¡orls from lhe businesses.
466
ALCO convened
frequenl meelings from Augusl 2007 lhrough Iebruary 2008,
467
and began lo lrack and
monilor more cIoseIy lhe firm's monlhIy ¡ro|eclions for cash ca¡ilaI and maximum
cumuIalive oulfIov.
The cash ca¡ilaI modeI vas a ¡iIIar of lhe firm's funding framevork.
468
The
sources of cash ca¡ilaI vere equily and debl vilh a remaining Iife of grealer lhan one
year.
469
The firm aIvays funded Ieveraged Ioans and commerciaI reaI eslale vilh cash
ca¡ilaI.
470
AIlhough lhe firm couId fund Ioans and commerciaI reaI eslale on a secured
basis, il assumed lhal secured finance vouId nol be avaiIabIe under slressed markel

466
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 9.
467
1$$ $0+0, Lehman, LßHI CC Iro|eclions (}uIy 30, 2007) |LßIX"DOCID 214312j, allached lo e"maiI from
IaoIo R. Tonucci, Lehman, lo Chrislo¡her M. O'Meara, Lehman (}uIy 30, 2007) |LßIX"DOCID 187182j,
ALCO Summary Iackage (Aug. 2, 2007) |LßIX"DOCID 514844j, ALCO Summary Iackage (Aug. 7, 2007)
|LßIX"DOCID 514847j, ALCO Summary Iackage (Aug. 16, 2007) |LßIX"DOCID 514851j, ALCO
Summary Iackage (Se¡l. 4, 2007) |LßIX"DOCID 514862j, ALCO Summary Iackage (Se¡l. 5, 2007) |LßIX"
DOCID 514863j, ALCO Summary Iackage (Se¡l. 6, 2007) |LßIX"DOCID 514865j, ALCO Summary
Iackage (Se¡l. 7, 2007) |LßIX"DOCID 514866j, ALCO Summary Iackage (Se¡l. 10, 2007) |LßIX"DOCID
514867j, ALCO Summary Iackage (Se¡l. 12, 2007) |LßIX"DOCID 514869j, ALCO Summary Iackage
(Se¡l. 13, 2007) |LßIX"DOCID 514870j, ALCO Summary Iackage (Se¡l. 14, 2007) |LßIX"DOCID 514871j,
ALCO Summary Iackage (Se¡l. 18, 2007) |LßIX"DOCID 514873j, ALCO Summary Iackage (Se¡l. 21,
2007) |LßIX"DOCID 514875j, ALCO Summary Iackage (Ocl. 25, 2007) |LßIX"DOCID 514887j, ALCO
Summary Iackage (Dec. 4, 2007) |LßIX"DOCID 104102j, ALCO Summary Iackage (Ieb. 12, 2008) |LßIX"
DOCID 104040j.
468
Lehman, Im¡Iicalions for lhe Iunding Iramevork (Aug. 6, 2007), al ¡. 2 |LßIX"DOCID 601971j,
allached lo e"maiI from AngeIo ßeIIo, Lehman, lo Kenlaro Umezaki, Lehman (Aug. 6, 2007) |LßIX"
DOCID 720559j.
469
Lehman, U¡dale on Risk, Liquidily, and Ca¡ilaI Adequacy Iresenlalion lo Slandard and Ioor's (Aug.
17, 2007), al ¡. 72 |LßIX"DOCID 2031705j, allached lo e"maiI from Shaun K. ßulIer, Lehman, lo IIizabelh
R. ßesen, Lehman (Aug. 28, 2007) |LßIX"DOCID 2374876j.
470
'80 al ¡. 67.

127
condilions.
471
Il vas lhe firm's ¡oIicy aIvays lo have a cash ca¡ilaI sur¡Ius of al Ieasl $2
biIIion.
472

On }uIy 30, 2007, ALCO members exchanged an anaIysis shoving lhal Lehman
did nol ¡ro|ecl having lhe usuaI sur¡Ius, and in facl ¡ro|ecled Iarge deficils of cash
ca¡ilaI.
473
More s¡ecificaIIy, Lehman's monlh end cash ca¡ilaI eslimales for Se¡lember,
Oclober, and November of lhe same year vere "$11.4 biIIion, "$14.5 biIIion and "$9.4
biIIion.
474
This meanl lhal Lehman did nol anlici¡ale being abIe lo fund ils Iong"lerm
obIigalions vilh Iong"lerm assels.
Iaced vilh lhis ¡ros¡ecl, in earIy Augusl 2007, Kirk, Lovill and Nagioff decided
lo shul dovn lhe Ieveraged Ioan and commerciaI reaI eslale businesses unliI lhe end of
lhe lhird quarler of 2007. They convinced McGee and ßerkenfeId lo ´kiII everylhing¨
for lhe resl of lhe quarler.
475
Nagioff beIieved lhe Ixeculive Commillee shouId nol have
a¡¡roved any Iarge deaIs before lhe end of lhe quarler, saying: ´Do nol lhink any Iarge
deaI can gel lhru exec|ulive commilleej ¡re qlr end . . . lhis cannol be ex¡ressed

471
'80
472
Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo lhe Iinance and Risk
Commillee of Lehman ßoard of Direclors on (Se¡l. 11, 2007), al ¡. 31 |LßIX"DOCID 505941j, allached lo
e"maiI from IaoIo R. Tonucci, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Se¡l. 9, 2007) |LßIX"
DOCID 552383j.
473
LßHI CC Iro|eclions (}uIy 30, 2007), al ¡. 2 |LßIX"DOCID 214312j, allached lo e"maiI from IaoIo
Tonucci, Lehman, lo Chrislo¡her M. O'Meara, Lehman (}uIy 30, 2007) |LßIX"DOCID 187182j.
474
'80
475
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 10.

128
¡ubIicIy.¨
476
Kirk res¡onded: ´Good. We viII need ski¡ |McGeej lo kiII as much sluff as
earIy as ¡ossibIe.¨
477

Al aboul lhe same lime, lhe Ieveraged Ioan markel generaIIy coIIa¡sed, and nev
issues sIoved lo a lrickIe in lhe lhird quarler.
478
Lehman's Ieveraged Ioan commilmenls
lhus haIled in earIy Augusl 2007, lhree monlhs afler Nagioff firsl concIuded lhal
Lehman's ex¡osure vas aIready ´garganluan,¨ and lvo monlhs afler Nagioff's firsl
conversalion vilh IuId aboul lhe issue.
LDI $839:; 58<:4B E38 ">D3BE?;8 (<?B6;H
ßecause of lhe funding concerns, Lehman deIayed lhe cIosing on Archslone from
lhe originaIIy anlici¡aled Augusl 2007 cIosing dale lo Oclober 5, 2007.
479
As lhe markel
crisis escaIaled in }une and }uIy 2007, Lehman allem¡led lo syndicale ils Archslone
debl. ßul by Iale }uIy 2007, lhe inslilulionaI markel for commerciaI reaI eslale vas
´virluaIIy cIosed,¨
480
and Lehman's allem¡ls al seIIing Archslone bridge equily IargeIy
faiIed.
481


476
I"maiI from Roger Nagioff, Lehman, lo AIex Kirk, Lehman (Aug. 7, 2007) |LßIX"DOCID 173496j.
477
I"maiI from AIex Kirk, Lehman, lo Roger Nagioff, Lehman (Aug. 7, 2007) |LßIX"DOCID 173496j.
478
Lehman, Loan Syndicale/Year"Ind Reca¡ (}an. 4, 2008), al ¡. 5. |LßHI_SIC07940_066190j.
479
I"maiI from RandaII ß. Whileslone, Lehman, lo Sleven ßerkenfeId, Lehman, $* "30 (Aug. 5, 2007) |LßIX"
DOCID 988270j, Archslone"Smilh Trusl, Iress ReIease: Archslone"Smilh Amends Merger Agreemenl
Wilh Tishman S¡eyer Iarlnershi¡ (Aug. 6, 2007) |LßIX"DOCID 2140354j, e"maiI from Chi¡ HefIin,
Lehman, lo Loan SaIes " 4lh IIoor, Lehman (May 29, 2007) |LßIX"DOCID 1488757j.
480
I"maiI from Mark WaIsh, Lehman, lo AIex Kirk, Lehman, $* "3. (}uIy 27, 2007) |LßIX"DOCID 174304j.
481
1$$ A¡¡endix +$($#"33@ e"maiI from IauI A. Hughson, Lehman, lo Mark A. WaIsh, Lehman, $* "30, (}uIy
27, 2007) |LßIX"DOCID 155079j (refIecling lhe facl lhal on }uIy 27, 2007, D.I. Shav informed Lehman
lhal ´given lhe seII"off in lhe reil markel and lhe voIaliIily of lhe credil markels¨ ils Risk Commillee had
re|ecled lhe deaI), e"maiI from }onalhan Cohen, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (}uIy

129
In lhe midsl of lhe markel delerioralion, an anaIysl al Ciligrou¡ issued an
anaIysl re¡orl enlilIed ´Archslone Smilh Trusl (ASN): CouId lhe ßuyers Cul Their
Losses and WaIk Avay`¨
482
The re¡orl suggesled lhal Lehman, ßofA, and ßarcIays
mighl be beller off vaIking avay from lhe Archslone deaI and ¡aying lhe $1.5 biIIion
breaku¡ fee, ralher lhan cIosing lhe deaI al a significanl Ioss.
483

WhiIe lhe re¡orl and a WaII Slreel }ournaI arlicIe discussing il vere videIy read
al Lehman,
484
Lehman never seriousIy considered vaIking avay from lhe deaI.
485
One
reason Lehman vas comforlabIe ¡roceeding vilh lhe deaI vas lhal Lehman vas
uIlimaleIy abIe lo seII a¡¡roximaleIy $2.09 biIIion in Archslone debl lo Ireddie Mac,
486

and anolher $7.1 biIIion of Archslone debl lo Iannie Mae.
487
During lhe same lime

27, 2007) |LßIX"DOCID 1904232j (shoving lhal by }uIy 2007, Lehman began lo vorry lhal lhe markel
´im¡Iosion¨ mighl force Lehman lo ¡rovide $9 biIIion in funding for lhe Archslone lransaclion, ralher
lhan lhe $6.8 biIIion il had ¡reviousIy assumed vouId be necessary.).
482
}onalhan Lill, !)*)+#,-. D3,E"3 ;"#&$*: '(/04 C#/6:*,($ 1%)*6 ?#-:* IC1HKX !,-38 *6$ =-@$#: !-* ?6$)#
5,::$: "(8 Y"3& CR"@Z (}uIy 26, 2007) |LßIX"DOCID 1714588j.
483
'80 al ¡¡. 1"2.
484
1$$ $0+0, e"maiI from Websler Neighbor, Lehman, lo IauI A. Hughson, Lehman (}uIy 31, 2007) |LßIX"
DOCID 2500559j, e"maiI from Gerard ReiIIy, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Aug. 1, 2007)
|LßIX"DOCID 210156j, e"maiI from Sle¡hen I. Rossi, Lehman, lo Anna Yu, Lehman, $* "3. (Aug. 1, 2007)
|LßIX"DOCID 3271158j.
485
Ixaminer's Inlerviev of Lisa ßeeson, Ocl. 23, 2009, al ¡. 5, Ixaminer's Inlerviev of Mark A. WaIsh,
Ocl. 21, 2009, al ¡. 9, Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 4, Ixaminer's
Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 3, Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21,
2009, al ¡. 3, Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡¡. 13"14.
486
Ireddie Mac, HoIdco Term Sheel (Se¡l. 5, 2007) |LßIX"DOCID 4452813j, Ireddie Mac, SeIIco Term
Sheel (Se¡l. 5, 2007) |LßIX"DOCID 4452811j, Lehman, Iro|ecl Iasy Living Debl Iunding DelaiI (Ocl. 5,
2007), al ¡. 1 |LßIX"DOCID 598184j.
487
Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 22, 2009, al ¡. 9, Ixaminer's Inlerviev of Lisa ßeeson,
Ocl. 23, 2009, al ¡. 8, Leller from Lehman ßrolhers HoIdings Inc. lo Iannie Mae re: Rale Lock Terms (Se¡l.
17, 2007), al ¡. 1. |LßIX"DOCID 2704241j.

130
¡eriod, hovever, Lehman and ils ¡arlners vere abIe lo seII onIy $71 miIIion of lhe deaI's
$4.6 biIIion in bridge equily.
488

The Archslone deaI cIosed on Oclober 5, 2007.
489
As of Oclober 12, 2007,
Lehman's lolaI Archslone ex¡osure vas a¡¡roximaleIy $6 biIIion, $2.39 biIIion of vhich
vas in lhe riskiesl equily ¡orlions of lhe deaI (¡ermanenl equily and bridge equily
¡orlions):
490

Iermanenl equily $250 miIIion
ßridge equily $2.14 biIIion
Mezzanine Ioan $240 miIIion
Term Ioan $2.47 biIIion
Senior debl $850 miIIion

When Secrelary of lhe Treasury Henry M. IauIson, }r. Iearned Iale in 2007 lhal Lehman
had cIosed on Archslone, des¡ile lhe shul"dovn in lhe securilizalion markel, he
queslioned lhe visdom of lhe decision and lhe direclion in vhich Lehman vas
heading.
491


488
Lehman, Archslone Smilh MuIlifamiIy }V Debl and Iquily Redem¡lion ScheduIe (}an. 3, 2008), al ¡. 1
|LßIX"DOCID 2502413j, allached lo e"maiI from Keilh Cyrus, Lehman, lo IauI A. Hughson, Lehman, $*
"30 (}an. 1, 2008) |LßIX"DOCID 2646616j.
489
Lehman, Acquisilion of Archslone"Smilh Trusl Cor¡orale CIosing Documenls TabIe of Conlenls (Ocl.
5, 2007), al ¡. 2 |LßIX"WGM 960404j.
490
Lehman, Lehman Ix¡ecled Share of ReaI Islale Commilmenls (Ocl. 17, 2007), al ¡. 2 |LßIX"DOCID
624620j.
491
Ixaminer's Inlerviev of Henry IauIson, }une 25, 2009, al ¡. 9.

131
L7I $839:; +;D>8:B8B E38 /6BG "ZZ8E6E8 $696E E?
"DD?99?7:E8 E38 "776E6?;:< /6BG "EE>6@AE:@<8 E? E38
">D3BE?;8 !>:;B:DE6?;
The risk in Lehman's book vas dramalicaIIy increasing during 2007.
492
Lehman's
managemenl reacled lo lhe increasing risk a¡¡elile usage by increasing ils Iimil
amounls.
AIlhough Lehman ordinariIy incIuded lhe risk a¡¡elile usage allribulabIe lo a
lransaclion immedialeIy afler enlering inlo lhe commilmenl for lhe lransaclion, Lehman
did nol incIude lhe very subslanliaI increase in risk a¡¡elile usage allribulabIe lo
Archslone in lhe risk a¡¡elile caIcuIalion for aImosl lhree monlhs.
493
Al Ieasl one olher
reaI eslale bridge equily lransaclion, Dermody/IroLogis, aIso vas nol incIuded in risk
a¡¡elile unliI lhal dale.
494


492
Some of lhe increase in risk usage, of course, vas lhe resuIl of markel voIaliIily and ils effecl u¡on
exisling assels, some vas lhe resuIl of decisions lo cIose nev deaIs. In any evenl, usage increased
dramalicaIIy in 2007 and Iimils vere raised accordingIy, from $3.3 biIIion lo $3.5 biIIion lo $4.0 biIIion. 1$$
e"maiI from Manhua Leng, Lehman, lo Mynor GonzaIez, Lehman, $* "30 (Se¡l. 10, 2007) |LßIX"DOCID
262797j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo David GoIdfarb, Lehman (Aug. 15, 2007)
|LßIX"DOCID 211183j, Lehman, MaleriaI for Markel Risk ConlroI Commillee Meeling (}an. 14, 2008), al
¡. 33 |LßIX"DOCID 271352j, allached lo e"maiI from Mark Weber, Lehman, lo IauI Shollon, Lehman, $*
"3. (}an. 14, 2008) |LßIX"DOCID 223263j. As revenues increased, lhe ca¡acily for risk increased,
managemenl caIcuIaled, aIbeil somelimes by ad|usling lhe formuIa, lhal each increase vas |uslified by
anlici¡aled revenues. 1$$ e"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $* "3.
(Aug. 28, 2007) |LßIX"DOCID 193203j, :$$ A¡¡endix 10, shoving lhe caIcuIalion of Lehman's increased
$4.0 biIIion risk a¡¡elile Iimil.
493
1$$ e"maiI from Mark Weber, Lehman, lo }effrey Goodman, Lehman (}une 4, 2007) |LßIX"DOCID
247960j, Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008)
|LßIX"DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl, Lehman,
$* "30 (}uIy 24, 2008) |LßIX"DOCID 265567j, :$$ "3:, e"maiI from Mark Weber, Lehman, lo Laura M.
Vecchio, Lehman (}uIy 31, 2008) |LßIX"DOCID 264849j.
494
Lehman, VaR / Risk A¡¡elile Reslalemenls, (Nov. 12, 2007) al ¡. 17 |LßIX"DOCID 271334j.

132
If Archslone (and lhe olher lransaclions) had been incIuded in lhe firm's risk
a¡¡elile usage from lhe Archslone commilmenl dale in Iale May 2007, consislenl vilh
lhe firm's usuaI ¡raclice, Lehman vouId have been over lhe firm"vide risk a¡¡elile
Iimil for much of lhe inlervening ¡eriod.
495
Lehman vouId aIso have been over lhe risk
a¡¡elile Iimils for IID and lhe reaI eslale business by subslanliaI margins.
496
As lhe
summer of 2007 vore on, lhe voIaliIily in lhe markels began lo exacerbale lhe silualion,
and Lehman's risk a¡¡elile usage increased markedIy, even lhough Lehman generaIIy
slo¡¡ed enlering inlo ma|or nev commilmenls afler lhe lhird quarler of 2007.
497

Archslone and Dermody/IroLogis vere nol incIuded sooner in Lehman's risk
a¡¡elile usage caIcuIalion because Lehman's risk managers vere lrying lo caIcuIale a
slabIe usage amounl for lhese bridge equily lransaclions. IniliaI caIcuIalions yieIded

495
'80
496
'80
497
I"maiI from }effrey Goodman, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Dec. 4, 2007)
|LßIX"DOCID 251204j, e"maiI from IauI Shollon, Lehman, lo Chrislo¡her M. O'Meara, Lehman $* "30
(Dec. 6, 2007) |LßIX"DOCID 251204j, Ixaminer's Inlerviev of Mark Weber, Aug. 11, 2009, al ¡. 9,
Ixaminer's Inlerviev of David GoIdfarb, Se¡l. 21, 2009, al ¡. 8, Ixaminer's Inlerviev of MadeIyn
Anloncic, Ocl. 6, 2009, al ¡. 7, Ixaminer's Inlerviev of Richard S. IuId, }r., Nov. 19, 2009, al ¡. 13, E-* :$$
Lehman, Se¡lember 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors vilh
Chrislo¡her M. O'Meara's handvrillen noles (Ocl. 15, 2007), al ¡. 6 |LIH_CMO_0000001j (allribuling lhe
increase in risk a¡¡elile lo increased markel voIaliIily as veII as increased Ieveraged finance and
commerciaI reaI eslale ¡osilions, ¡arlicuIarIy since lhe markel environmenl had ¡revenled lhe firm from
seIIing lhose assels), e"maiI from }oe Li, Lehman, lo MadeIyn Anloncic, Lehman (Se¡l. 11, 2007) |LßIX"
DOCID 157247j (slaling lhal 50% of lhe recenl VaR increase for GIobaI Ca¡ilaI Iroducls vas due lo
voIaliIily and 50% vas from lhe originalion book), :$$ "3:, Lehman, Iirm"vide Risk Driver (Ocl. 22, 2007)
|LßIX"DOCID 190147j (allribuling lhe firm's rising risk a¡¡elile and VaR usage figures ¡rimariIy lo
increased correIalion across divisions).

133
varying risk a¡¡elile usage figures lhal Lehman's risk managers considered
unreasonabIe.
498

Once lhese ¡osilions vere officiaIIy incIuded in risk a¡¡elile usage in Augusl
2007, il became cIear lo senior managemenl lhal lhe firm had been exceeding lhe firm"
vide risk a¡¡elile on a ¡ersislenl basis for some lime.
499
The firm's risk a¡¡elile usage
slarled lo be discussed more videIy vilhin lhe firm.
500

Lehman raised ils firm"vide risk a¡¡elile Iimil from $3.3 biIIion lo $3.5 biIIion on
Se¡lember 7, 2007.
501
Lehman's risk managers queslioned vhelher Lehman lruIy had
increased risk"laking ca¡acily, hovever. Tvo veeks afler lhe firm firsl incIuded lhe

498
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, Ixaminer's Inlerviev of Mark Weber, Aug.
11, 2009, al ¡. 4, E-* />0 Ixaminer's Inlerviev of MadeIyn Anloncic, Ocl. 6, 2009, al ¡. 11 (refIecling
slalemenls lhal she vas unavare lhal lhe bridge equily ¡orlion of lhe Archslone deaI had been excIuded
from lhe firm's risk measuremenls and lhal she ´hil lhe roof¨ vhen }effrey Goodman loId her lhal lhe
bridge equily had nol been incIuded in lhe firm's melrics).
499
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, Ixaminer's Inlerviev of IauI Shollon, }une 5,
2009, al ¡. 19, A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage versus Iimils, e"maiI from Mark
Weber, Lehman, lo Laura M. Vecchio, Lehman (}uIy 31, 2008) |LßIX"DOCID 264849j, Mark Weber,
Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008) |LßIX"DOCID 425705j,
allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIio Risk Su¡¡orl, Lehman, $* "30 (}uIy 24, 2008)
|LßIX"DOCID 265567j, e"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $* "30 (Aug.
14, 2007) |LßIX"DOCID 211183j.
500
1$$ Lehman, Se¡lember 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors (Ocl.
15, 2007), al ¡. 6 |LßHI_SIC07940_026377j, Lehman ßrolhers HoIdings Inc., Minules of Meeling of lhe
Iinance and Risk Commillee of lhe ßoard of Direclors (Se¡l. 11, 2007), al ¡. 2 |LßIX"AM 067018j, Lehman
ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (Se¡l. 11, 2007), al ¡. 3
|LßHI_SIC07940_026364j, e"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $* "30
(Aug. 14, 2007) |LßIX"DOCID 211183j.
501
I"maiI from Manhua Leng, Lehman, lo Mynor GonzaIez, Lehman, $* "30 (Se¡l. 10, 2007) |LßIX"DOCID
262797j, e"maiI from Chrislo¡her M. O'Meara, Lehman, lo David GoIdfarb, Lehman (Aug. 15, 2007)
|LßIX"DOCID 211183j. =-* :$$ e"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $*
"30 (Aug. 28, 2007) |LßIX"DOCID 193203j (shoving lhal Anloncic did nol beIieve lhal lhe decision lo raise
lhe Iimil had been made " ´ve did nol cIose lhe Ioo¡ on lhis. Roberl vorked u¡ some numbers bul I
lhink ve need lo revisil lhe ex¡ecled rev for Q4 given a sIovdovn¨).

134
Archslone and Dermody/IroLogis bridge equily ¡osilions in lhe firm's risk a¡¡elile
usage caIcuIalion, GoIdfarb e"maiIed O'Meara and Anloncic: ´I lhoughl ve increased
|riskj a¡¡elile lo refIecl YTD ¡erformance`¨
502
Anloncic re¡Iied lhal lhey ´did nol cIose
lhe Ioo¡ on lhis¨ because of concerns reIaled lo a fourlh"quarler sIovdovn in
revenues.
503
Under lhe melhodoIogy for caIcuIaling lhe risk a¡¡elile Iimil, a sIovdovn
in revenues vouId have reduced Lehman's abiIily lo lake risk. SimiIarIy, in an Oclober
2007 CSI meeling, Goodman informed lhe SIC lhal Lehman had increased ils risk
a¡¡elile Iimil, bul ´admilled lhal lhey ¡robabIy shouIdn'l have raised lhe Iimil lo $3.5b
vhen lhey did, given lhal lhey vere aImosl lhere and lhere vasn'l enough
headroom.¨
504

L8I (:B3 (:Z6E:< (?;D8>;B
ALCO conlinued lo have serious concerns aboul Lehman's cash ca¡ilaI and
Iiquidily ¡osilion. UnliI lhe finaI veek of Se¡lember 2007, Lehman did nol ex¡ecl ils
ending cash ca¡ilaI ¡osilions for lhe monlhs of Se¡lember, Oclober, and November lo
meel lhe $2 biIIion minimum requiremenl.
505
The average ending cash ca¡ilaI ¡osilions

502
I"maiI from David GoIdfarb, Lehman, lo MadeIyn Anloncic, Lehman, $* "3. (Aug. 28, 2007) |LßIX"
DOCID 193203j.
503
I"maiI from MadeIyn Anloncic, Lehman, lo David GoIdfarb, Lehman, $* "3. (Aug. 28, 2007) |LßIX"
DOCID 193203j.
504
SIC, Noles from Lehman's MonlhIy Risk Reviev Meeling (Ocl. 19, 2007), al ¡. 6 |LßIX"SIC 007438j.
505
Lehman, ALCO Summary Iackage (Se¡l. 4, 2007), al ¡. 2 |LßIX"DOCID 514862j, Lehman, ALCO
Summary Iackage (Se¡l. 5, 2007), al ¡. 2 |LßIX"DOCID 514863j, Lehman, ALCO Summary Iackage
(Se¡l. 6, 2007), al ¡. 2 |LßIX"DOCID 514865j, Lehman, ALCO Summary Iackage (Se¡l. 7, 2007), al ¡. 2
|LßIX"DOCID 514866j, Lehman, ALCO Summary Iackage (Se¡l. 10, 2007), al ¡. 2 |LßIX"DOCID 514867j,
Lehman, ALCO Summary Iackage (Se¡l. 11, 2007), al ¡. 2 |LßIX"DOCID 514868j, Lehman, ALCO

135
for Se¡lember, Oclober, and November 2007 vere ¡ro|ecled lo be $0.05 biIIion, "$2.15
biIIion and "$1.75 biIIion res¡ecliveIy.
506
The commillee ¡ro|ecled negalive monlh end
cash ca¡ilaI ¡osilions for lhe remainder of lhe year.
507

On lhe day lhal Archslone cIosed, Tonucci informed O'Meara lhal Lehman vas
´Iooking al being $1"2 |biIIionj shorl |in equilyj.shouId nol reaIIy be sur¡rised.¨
508

Moreover, lhe firm's cash ca¡ilaI ¡ro|eclions for lhe end of Oclober venl negalive
immedialeIy afler lhe firm cIosed on Archslone.
509

A drafl ¡resenlalion on lhe firm's equily adequacy daled Oclober 2007 vas
¡re¡ared for lhe Ixeculive Commillee shorlIy afler lhe exchange belveen O'Meara and
Tonucci.
510
O'Meara vas sIaled lo be lhe ¡resenler.
511
The ¡resenlalion concIuded lhal
lhe firm's ca¡ilaI adequacy over lhe Iasl five lo six quarlers had ´maleriaIIy

Summary Iackage (Se¡l. 12, 2007), al ¡. 3 |LßIX"DOCID 514869j, Lehman, ALCO Summary Iackage
(Se¡l. 13, 2007), al ¡. 3 |LßIX"DOCID 514870j, Lehman, ALCO Summary Iackage (Se¡l. 14, 2007), al ¡. 3
|LßIX"DOCID 514871j, Lehman, ALCO Summary Iackage (Se¡l. 17, 2007), al ¡. 3 |LßIX"DOCID 514872j,
Lehman, ALCO Summary Iackage (Se¡l. 18, 2007), al ¡. 3 |LßIX"DOCID 514873j, Lehman, ALCO
Summary Iackage (Se¡l. 19, 2007), al ¡. 3 |LßIX"DOCID 514874j, Lehman, ALCO Summary Iackage
(Se¡l. 21, 2007), al ¡. 3 |LßIX"DOCID 514875j, Lehman, ALCO Summary Iackage (Se¡l. 24, 2007), al ¡. 3
|LßIX"DOCID 514876j, Lehman, ALCO Summary Iackage (Se¡l. 26, 2007), al ¡. 3 |LßIX"DOCID 514877j.
506
'80
507
'80
508
I"maiI from IaoIo R. Tonucci, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Ocl. 5, 2007) |LßIX"
DOCID 1360792j.
509
Lehman, ALCO Summary Iackage (Se¡l. 4, 2007), al ¡. 2 |LßIX"DOCID 514881j.
510
Lehman, Iquily Adequacy Iresenlalion lo Ixeculive Commillee |Draflj (Ocl. 26, 2007) |LßIX"DOCID
1698460j, allached lo e"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Ocl.
26, 2007) |LßIX"DOCID 1912826j.
511
I"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Ocl. 26, 2007) |LßIX"
DOCID 1902541j.

136
delerioraled.¨
512
Lehman vas al lhe bollom of ils ¡eer range vilh res¡ecl lo lhe
reguIalory requiremenl of a minimum 10% lolaI ca¡ilaI ralio im¡osed by lhe SIC.
513

The equily adequacy framevork iIIuslraled hov lhe firm's ca¡ilaI ¡osilion decreased
from a $7.2 biIIion sur¡Ius in lhe beginning of 2006 lo a $42 miIIion deficil al lhe end of
lhe lhird quarler of 2007.
514
The Ixaminer vas unabIe lo find a finaI version of lhis
¡resenlalion, and vas unabIe lo delermine if lhe ¡resenlalion ever vas given. IuId said
lhal he vas nol avare of lhe informalion conlained in lhe ¡resenlalion, and if he had
been, he vouId have been abIe lo resoIve lhe silualion.
515

The delerioralion of Lehman's ca¡ilaI vas aIso a¡¡arenl from lhe decIine in ils
lolaI ca¡ilaI ralio from 18.2% in earIy 2006 lo 10.5% in Augusl 2007.
516
The induslry
high in Augusl 2007 vas 18.7%.
517
Irom Augusl lo November 2007, Lehman ¡osled lhe
Iovesl lolaI ca¡ilaI ralio in lhe induslry.
518
The firm vas al or near ils SIC"im¡osed 10%

512
Ari AxeIrod, Lehman, Iquily Adequacy Iresenlalion Summary Iage |Draflj (Ocl. 25, 2007), al ¡. 1
|LßIX"DOCID 1696067j, allached lo e"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara,
Lehman, $* "30 (Ocl. 26, 2007) |LßIX"DOCID 1902541j.
513
Lehman, Iquily Adequacy Iresenlalion lo Ixeculive Commillee |Draflj (Ocl. 26, 2007), al ¡. 1 |LßIX"
DOCID 1698460j, allached lo e"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $*
"30 (Ocl. 26, 2007) |LßIX"DOCID 1912826j.
514
'80
515
Ixaminer's Inlerviev of Richard S. IuId, }r., Dec. 9, 2009, al ¡. 5.
516
Lehman, MonlhIy CSI Ca¡ilaI Re¡orls for SIC (Mar. 2006), al ¡. 1 |LßIX"SIC 000303j, Lehman,
Iquily Adequacy Iresenlalion lo Ixeculive Commillee |Draflj (Ocl. 26, 2007), al ¡. 5 |LßIX"DOCID
1698460j, allached lo e"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Ocl.
26, 2007) |LßIX"DOCID 1912826j.
517
I"maiI from Anna Yu, Lehman, lo Irin M. CaIIan, Lehman, $* "30 (Dec. 9, 2007) |LßIX"DOCID 3761740j.
518
Lehman, CSI MelhodoIogy Im¡acl Summary (A¡r. 4, 2008), al ¡. 2 |LßIX"DOCID 382980j.

137
requiremenl for six monlhs in 2007"2008.
519
On lhree se¡arale occasions, Lehman had al
Ieasl a concern lhal lhe lolaI ca¡ilaI ralio vouId faII beIov lhe 10% requiremenl.
520

The SIC ex¡ecled Lehman lo nolify il if lhe lolaI ca¡ilaI ralio feII beIov or vas
ex¡ecled lo faII beIov lhe 10% requiremenl, bul Lehman did nol do so.
521
Tonucci loId
lhe SIC lhal Lehman vas ´comforlabIe¨ vilh Ianding cIose lo lhe 10% Iimil al lhe end
of lhe year ´given hov difficuIl il is lo issue righl nov.¨
522

The dominanl cause for lhe ra¡id decIine in Lehman's equily ¡osilion vas a shifl
in lhe firm's assel mix lo iIIiquid assels, incIuding high yieId Ioans, reaI eslale, and
¡rinci¡aI inveslmenls.
523
Irom November 2006 lo Augusl 2007, lhe firm's iIIiquid
hoIdings grev by 72%, vhiIe ´Tier 1 ca¡ilaI grev by onIy 26%.¨
524


519
Lehman, CSI MelhodoIogy Im¡acl Summary (A¡r. 4, 2008), al ¡. 2 |LßIX"DOCID 382980j.
520
I"maiI from Anna Yu, Lehman, lo IaoIo R. Tonucci, Lehman (Ocl. 3, 2007) |LßIX"DOCID 1654567j, e"
maiI from Anna Yu, Lehman, lo undiscIosed reci¡ienls (Nov. 26, 2007) |LßIX"DOCID 638715j, e"maiI
from Anna Yu, Lehman, lo Georges Assi, Lehman, $* "30 (Dec. 7, 2007) |LßIX"DOCID 307968j.
521
17 C.I.R. Ç 240.15c3"1g (e) (1) (i), 17 C.I.R. Ç 240.17i"8 (a) (2) (2007), The GoIdman Sachs Grou¡ Inc.,
QuarlerIy Re¡orl as of May 31, 2008 (Iorm 10"Q) (fiIed on }uIy 7, 2008), al ¡. 90 (´GoIdman Sachs 10"Q
(fiIed on }uIy 7, 2008)¨) (´GoIdman Sachs is required lo nolify lhe SIC in lhe evenl lhal lhe TolaI Ca¡ilaI
Ralio faIIs beIov 10% or is ex¡ecled lo do so vilhin lhe nexl monlh¨), MerriII Lynch & Co., Inc.,
QuarlerIy Re¡orl as of }une 27, 2008 (Iorm 10"Q) (fiIed on Aug. 5, 2008), al ¡. 108 (´MerriII Lynch 10"Q
(fiIed on Aug. 5, 2008)¨) (´MerriII Lynch is required lo nolify lhe SIC in lhe evenl lhal lhe TolaI Ca¡ilaI
Ralio faIIs or is ex¡ecled lo faII beIov 10%¨), Irik R. Sirri, SIC, ?$:*)%,(@ !,(/$#()(+ 5$::,(: 5$"#($8 )(
P):& ;"("+$%$(* J<$#:)+6* "* 7$8$#"3 7)("(/)"3 P$+-3"*,#: ßefore lhe Subcommillee on Securilies, Insurance
and Inveslmenl Commillee on ßanking, Housing and Urban Affairs, Uniled Slales Senale, Mar. 19, 2009
(´CSIs vere aIso required lo fiIe an 'earIy varning' nolice vilh lhe SIC in lhe evenl lhal cerlain
minimum lhreshoIds, incIuding lhe 10% ca¡ilaI ralio, vere breached or vere IikeIy lo be breached¨),
Ixaminer's Inlerviev of Mallhev Iichner, Nov. 23, 2009, al ¡. 13.
522
SIC, Noles from MonlhIy Risk Meeling vilh Lehman (Nov. 15, 2007), al ¡. 2 |LßIX"SIC 007467j.
523
Lehman, Iquily Adequacy Iresenlalion lo Ixeculive Commillee |Draflj (Ocl. 26, 2007), al ¡. 7 |LßIX"
DOCID 1698460j, allached lo e"maiI from Ari AxeIrod, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $*
"30 (Ocl. 26, 2007) |LßIX"DOCID 1912826j.
524
'80 al ¡. 6.

138
Thereafler, Lehman's cash ca¡ilaI and equily adequacy ¡osilion lem¡orariIy
im¡roved. The im¡rovemenl vas lhe resuIl of severaI faclors. Ior one lhing, lhe SIC
changed lhe melhod of caIcuIaling lhe lolaI ca¡ilaI ralio, and, as a resuIl, Lehman
¡icked u¡ severaI ¡ercenlage ¡oinls and saved ´roughIy $4 biIIion in ca¡ilaI charges on
average every monlh.¨
525
In addilion, Lehman vas abIe lo seII some of ils Ieveraged
Ioan ¡osilions, lhereby raising cash ca¡ilaI and reducing ils iIIiquid hoIdings.
526

LCI $839:;0B !8>96;:E6?; ?C +EB /8B678;E6:< .?>EH:H8
&>6H6;:E6?;B
During lhis same ¡eriod, mid"Augusl 2007, Lehman decided lo cIose ßNC and
cease sub¡rime originalions enlireIy.
527
The anlici¡aled lurn in lhe residenliaI morlgage
markel sliII had nol arrived, and managemenl couId nol |uslify Lehman's conlinued
ex¡osure lo IiabiIily on lhe originalion of sub¡rime morlgages.
528
In }anuary 2008,
Lehman's Aurora subsidiary sus¡ended ils originalion lhrough vhoIesaIe and

525
I"maiI from Anna Yu, Lehman, lo Marlin KeIIy, Lehman, $* "30 (Ieb. 6, 2008) |LßIX"DOCID 2799485j.
526
Lehman, ALCO Summary Iackage (}an. 31, 2008), al ¡. 2 |LßIX"DOCID 527115j.
527
Lehman ßrolhers HoIdings Inc., Iress ReIease: Lehman ßrolhers Announces CIosure of ßNC Morlgage
(Aug. 22, 2007) |LßIX"DOCID 880148j, Lehman, Sub¡rime(r) (Se¡l. 6, 2007), al ¡. 14 |LßIX"DOCID
894656j, e"maiI from Idvard Grieb, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Aug. 22, 2007) |LßIX"
DOCID 197143j, e"maiI from Tasha IeIio, Lehman, lo }as|il (}esse) ßhallaI, Lehman, $* "3. (Aug. 22, 2007)
|LßIX"DOCID 176893j.
528
Ixaminer's Inlerviev of Lana Iranks Harber, Se¡l. 23, 2009, al ¡¡. 2, 10, 11, Ixaminer's Inlerviev of
David N. Sherr, Se¡l. 25, 2009, al ¡¡. 2, 6, 8.

139
corres¡ondenl channeIs, vhich re¡resenled lhe buIk of lhe ¡rogram.
529
Lehman had
curlaiIed lhe fIov of Morlgage Maker originalions a¡¡roximaleIy five monlhs earIier.
530

LHI *8ZE89@8>` &DE?@8>` :;7 )?K89@8> NTTV .88E6;HB ?C
#?:>7 ?C 56>8DE?>B
Lehman had a series of ßoard meelings in lhe faII of 2007. Al lhese meelings,
Lehman's managemenl conlinued lo re¡orl on lhe firm's eIevaled risk ¡rofiIe and
concenlralion of reaI eslale and Ieveraged Ioan risk, bul did nol ¡resenl lhe ßoard vilh
addilionaI negalive informalion concerning lhe firm's risk and Iiquidily ¡rofiIe.
L6I /6BG "ZZ8E6E8 56BD<?BA>8B
Al lhe Se¡lember 11, 2007 Iinance and Risk Commillee meeling, lhe Iinance and
Risk Commillee vas shovn a ¡resenlalion discIosing lhal lhe firm's average risk
a¡¡elile usage rose from $2.12 biIIion in November 2006 lo $3.27 biIIion in Augusl
2007.
531
In lhe ¡resenlalion, lhe Commillee vas informed lhal vhiIe risk a¡¡elile usage
had increased, Lehman sliII remained vilhin ils risk a¡¡elile Iimil.
532
The Commillee

529
Lehman ßrolhers HoIdings Inc., Iress ReIease: Lehman ßrolhers Sus¡ends WhoIesaIe and
Corres¡ondenl U.S. ResidenliaI Morlgage Originalion Aclivilies (}an. 17, 2008) |LßIX"DOCID 156125j.
530
Dimilrios Krilikos, Lehman, Aurora Loan Services Risk Reviev }anuary 2008 (Ieb. 7, 2008), al ¡. 12
|LßIX"DOCID 394711j.
531
Lehman, Iresenlalion on Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale lo Iinance and Risk
Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 2 |LßIX"AM 067167j.
532
Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of lhe ßoard of
Direclors (Se¡l. 11, 2007), al ¡. 3 |LßIX"AM 067018j, Lehman, DaiIy Risk A¡¡elile Re¡orl (Se¡l. 6, 2007)
|LßIX"DOCID 1340197j, allached lo e"maiI from Chrislo¡her M. O'Meara, Lehman, lo David GoIdfarb,
Lehman (Se¡l. 7, 2007) |LßIX"DOCID 1345985j.

140
vas informed of lhe recenl increase in lhe risk a¡¡elile Iimil from $3.3 biIIion lo $3.5
biIIion.
533

AIlhough il vas correcl lhal lhe firm's monlhIy average risk a¡¡elile for Augusl
2007 vas vilhin lhe firm's risk a¡¡elile Iimil, by lhe lime of lhe meeling, Lehman
acluaIIy vas over ils nevIy increased Iimil by $97 miIIion.
534
AddilionaIIy, Lehman had
been over lhe $3.5 biIIion Iimil each business day lhal monlh exce¡l for Se¡lember 3,
2007.
535
There is no evidence lhal lhe ßoard vas informed lhal Archslone and al Ieasl
one olher bridge equily deaI had been excIuded from Lehman's risk a¡¡elile usage
caIcuIalion for aImosl lhree monlhs, or lhal Lehman vouId have been over ils risk
a¡¡elile Iimil for much of lhe ¡eriod since }une 1, 2007 if lhose bridge equily deaIs had
been incIuded in lhe caIcuIalion in a limeIy manner.
When lhe fuII ßoard mel again on Oclober 15, 2007, O'Meara discIosed lhal
Lehman vas over ils firm"vide risk a¡¡elile Iimil. ßul O'Meara did nol vanl lhe ßoard
lo concIude lhal Lehman vas ´oul of bounds,¨ so O'Meara ediled lhe slandard charl
¡rovided lo lhe ßoard al each meeling.
536
IreviousIy, lhal charl shoved lhe firm's risk
a¡¡elile usage and risk a¡¡elile Iimil in cIose ¡roximily, so lhal lhe direclors couId

533
Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk
Commillee of Lehman ßoard of Direclors vilh WeIikson's handvrillen noles (Se¡l. 11, 2007), al ¡. 25
|WGM_LßIX_02248j.
534
A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage and Iimils.
535
'80
536
Ixaminer's Inlerviev of Chrislo¡her M. O'Meara, Aug. 14, 2009, al ¡. 11.

141
easiIy see hov much beIov (or above) lhe usage vas com¡ared lo lhe Iimil.
537
ßefore
lhe Oclober 2007 ßoard meeling, hovever, O'Meara direcled lhal lhe Iimil informalion
be removed from lhe finaI version of lhe charl.
538
He ex¡Iained lo lhe Ixaminer lhal
managemenl vas nol lroubIed by being over lhe Iimil and he ¡referred lo ex¡Iain lhe
overage lo lhe ßoard oraIIy ralher lhan lhrough vrillen maleriaIs.
539

In addilion, O'Meara informed lhe ßoard lhal Lehman's average daiIy risk
a¡¡elile usage for lhe ¡rior monlh vas $3.7 biIIion, $200 miIIion above lhe nev risk
a¡¡elile Iimil,
540
bul he did nol discIose lhal on lhe day of lhe ßoard meeling, Lehman's
daiIy risk a¡¡elile usage vas $4.269 biIIion, 22% (or $769 miIIion) above lhe nev risk
a¡¡elile Iimil.
541
Moreover, al lhis Oclober meeling, O'Meara aIso said he loId lhe
ßoard lhal Lehman had a higher ´ca¡acily¨ ÷ lhe oulside edge of lhe amounl of risk
lhal Lehman couId absorb ÷ lhan ils acluaI risk a¡¡elile Iimil and lhal lhe ca¡acily vas
al Ieasl $4.0 biIIion.
542


537
Lehman, Second Quarler IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors (}une 19,
2007), al ¡. 6 |LßHI_SIC07940_026226j, Lehman, Islimaled Third Quarler IinanciaI Informalion
Iresenlalion lo Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 6 |LßHI_SIC07940_026288j.
538
Lehman, Iresenlalion lo Lehman ßoard of Direclors on Se¡lember 2007 IinanciaI Informalion |Draflj
(Ocl. 8, 2007), al ¡. 6 |LßIX"DOCID 510227j, Lehman, IinaI Iresenlalion lo Lehman ßoard of Direclors on
Se¡lember 2007 IinanciaI Informalion (Ocl. 15, 2007), al ¡. 6 |LßHI_SIC07940_026377j, Ixaminer's
Inlerviev of Chrislo¡her M. O'Meara, Se¡l. 23, 2009, al ¡. 4.
539
'80
540
Lehman, Iresenlalion lo Lehman ßoard of Direclors on Se¡lember 2007 IinanciaI Informalion (Ocl. 15,
2007), al ¡. 6 |LßHI_SIC07940_026377j.
541
Lehman, DaiIy Iirm"vide Risk Driver (Ocl. 15, 2007) |LßIX"DOCID 147304j, allached lo e"maiI from
}effrey Goodman, Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (Ocl. 14, 2007) |LßIX"DOCID 155737j.
542
Ixaminer's Inlerviev of Chrislo¡her M. O'Meara, Aug. 14, 2009, al ¡¡. 10, 12.

142
O'Meara did nol inform lhe ßoard lhal Lehman generaIIy had been in excess of
ils firm"vide risk a¡¡elile Iimil since enlering inlo lhe Archslone lransaclion in Iale
May 2007, O'Meara allribuled Lehman's Iimil excesses lo recenl changes in markel
condilions ÷ s¡ecificaIIy, lhe inabiIily lo securilize or syndicale risks lhal Lehman had
¡reviousIy ex¡ecled lo be abIe lo dislribule
543
÷ bul did nol menlion olher faclors such
as lhe addilion of Archslone and olher nev deaIs.
544

Many of Lehman's direclors loId lhe Ixaminer lhal lhis informalion aboul lhe
exlenl and duralion of any risk a¡¡elile Iimil excess vouId have been heI¡fuI for lhem
lo have received.
545
Some direclors did nol recaII knoving lhal Lehman had ever been
in breach of ils risk a¡¡elile Iimils.
546
AIlhough none of lhe direclors said lhal lhey
vouId have changed lheir vievs had lhey received lhal informalion, lhey did say lhal

543
Ixaminer's Inlerviev of Chrislo¡her M. O'Meara, Se¡l. 23, 2009, al ¡¡. 14"15, Lehman, Iresenlalion on
Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale lo Iinance and Risk Commillee of Lehman ßoard of
Direclors (Se¡l. 11, 2007), al ¡. 2 |LßIX"AM 067167j, Lehman ßrolhers HoIdings Inc., Minules of Meeling
of ßoard of Direclors (Ocl. 15, 2007), al ¡. 6 |LßHI_SIC07940_026407j.
544
Lehman, Se¡lember 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors vilh
Chrislo¡her M. O'Meara's handvrillen noles (Ocl. 15, 2007), al ¡. 6 |LIH_CMO_0000001j, Lehman,
Se¡lember 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors vilh }effrey A.
WeIikson's handvrillen noles (Ocl. 15, 2007), al ¡. 6 |WGM_LßIX_00540j.
545
Ixaminer's Inlerviev of Roger ßerIind, May 8, 2009, al ¡. 4, Ixaminer's Inlerviev of Dr. Henry
Kaufman, May 19, 2009, al ¡. 7, Ixaminer's Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡¡. 7"9,
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 3, Ixaminer's Inlerviev of RoIand A.
Hernandez, Ocl. 2, 2009.
546
Ixaminer's Inlerviev of Roger ßerIind, May 8, 2009, al ¡. 4, Ixaminer's Inlerviev of }ohn D.
Macomber, Se¡l. 25, 2009, al ¡. 17, Ixaminer's Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡. 9,
Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡. 14, Ixaminer's Inlerviev of RoIand A.
Hernandez, Ocl. 2, 2009, al ¡. 10.

143
lhey vouId have vanled lo have a conversalion vilh managemenl aboul lhe reason for
lhe Iimil overages and managemenl's slralegy for resoIving lhem.
547

The foIIoving charl iIIuslrales lhe Iag belveen lhe beginning of lhe risk a¡¡elile
Iimil overages and lhe nolificalion of lhe ßoard. The slraighl dolled Iine re¡resenls lhe
firm"vide risk a¡¡elile Iimil and lhe |agged soIid Iine re¡resenls lhe firm"vide usage:

547
Ixaminer's Inlerviev of Roger ßerIind, May 8, 2009, al ¡. 4, Ixaminer's Inlerviev of }ohn D.
Macomber, Se¡l. 25, 2009, al ¡. 13, Ixaminer's Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡. 7,
Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡. 15, Ixaminer's Inlerviev of RoIand A.
Hernandez, Ocl. 2, 2009, al ¡. 10, Ixaminer's Inlerviev of Dr. Henry Kaufman, May 19, 2009, al ¡. 7.

144
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/)01"2)34 5).6 78849)94 :.;<4 =." >)1)9
!567"859" :;*0" !567"859" <575=
!"#$%&' (&)*+,-./0 !#**+$1
2"3&' 4+3&/ *+1 $&56&%3 +%3#+6 7+3&8 "$ 3)& 5.$/3 9#/.,&// 7+1 +53&$ 3)& &:&,3;
>$ $''( >- $''%
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<&$."7 9&3=&&, -> &?%&// +,7 @"+$7 ,"3.5.%+3.",


L66I $8K8>:H87 $?:; 56BD<?BA>8B
ßolh lhe Iinance and Risk Commillee and lhe fuII ßoard vere a¡¡rised of
Lehman's risk ex¡osure lo high yieId bonds and Ieveraged Ioan.
548
O'Meara discussed

548
Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of Lehman ßoard
of Direclors (Se¡l. 11, 2007), al ¡¡. 1"2 |LßIX"AM 067018j, Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance

145
vilh lhe Commillee lhe ´com¡rehensive risk framevork for high"yieId debl ¡roducls¨
and referred lo Lehman's ´exlensive risk conlroIs,¨ s¡anning lhe a¡¡rovaI ¡rocess
lhrough ¡osl"cIosing.
549
O'Meara loId lhe Iinance and Risk Commillee lhal Lehman
had a disci¡Iined a¡¡roach lo risk miligalion lhrough syndicalion, oulrighl saIes, saIe
lhrough siIenl ¡arlner ¡arlici¡alion, and singIe"name and macro hedging.
550
A charl
lhal accom¡anied his ¡resenlalion shovs lhal Lehman's ´macro hedges¨ reduced
Lehman's ´HY CIosed Loan Nel Ix¡osure¨ by a¡¡roximaleIy 20%.
551

The ßoard vas nol informed lhal in 2007 Lehman's managers had decided nol lo
increase lhe size of ils macro hedges on lhe Ieveraged Ioans ex¡osure lo cover lhe
remaining 80% of lhe cIosed Ioans or lo cover any ¡orlion of Lehman's much grealer
voIume of commilmenls because lhese ex¡osures vere considered ¡olenliaIIy nol
ca¡abIe of being hedged.
552
(ReIaledIy, lhere is no evidence lhal managemenl discIosed
lhe exlenl lo vhich Lehman's commerciaI reaI eslale inveslmenls vere unhedged.)
553


Sheel U¡dale Iresenlalion lo Iinance and Risk Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007),
al ¡. 13 |LßIX"AM 067167j, Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors
(Se¡l. 11, 2007), al ¡. 6 |LßHI_SIC07940_026364j.
549
Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of lhe ßoard of
Direclors (Se¡l. 11, 2007), al ¡¡. 2"3 |LßIX"AM 067018j.
550
Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk
Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 14 |LßIX"AM 067167j.
551
'80
552
Ixaminer's Inlerviev of IauI Shollon, }une 5, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of Kenlaro
Umezaki, }une 25, 2009, al ¡. 17, Ixaminer's Inlerviev of Ired OrIan, Se¡l. 21, 2009, al ¡. 6, Ixaminer's
Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 13, Ixaminer's Inlerviev of AIex Kirk, }an. 12, 2010, al ¡.
9, Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of lhe ßoard of
Direclors (Se¡l. 11, 2007), al ¡¡. 2"3 |LßIX"AM 067018j.
553
Ixaminer's Inlerviev of Marsha }ohnson Ivans, May 22, 2009, al ¡¡. 3, 9"10, Ixaminer's Inlerviev of
Roger ßerIind, May 8, 2009, al ¡. 7.

146
Some members of Lehman managemenl vere concerned lhal hedging lhe Ieveraged
Ioans vouId be ineffeclive and couId creale a ´doubIe vhammy¨ ÷ simuIlaneous Iosses
on lhe Ioans and lhe hedges.
554

The ßoard vas nol informed lhal lhe risk a¡¡elile usage of Lehman's Ieveraged
Ioan business vas aImosl doubIe lhe Iimil a¡¡IicabIe lo lhal business and lhal lhe usage
had been over lhe Iimil aImosl conlinuousIy since }uIy 19, 2007,
555
or lhal Lehman's
managemenl had a¡¡roved al Ieasl 30 Ieveraged Ioans lhal exceeded Lehman's singIe
lransaclion Iimil.
556
Some direclors beIieved lhal lhe decision lo exceed Lehman's high
yieId and singIe lransaclion Iimils shouId have been discIosed lo lhe ßoard.
557


554
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡¡. 3, 13, Ixaminer's Inlerviev of MadeIyn
Anloncic, Mar. 27, 2009, al ¡. 10.
555
Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (Se¡l. 11. 2007), al ¡. 6
|LßHI_SIC07940_263264j, Lehman, U¡dale on Liquidily, Leveraged Loan Commilmenls and Morlgage
Iosilions Iresenlalion lo Lehman ßoard of Direclors vilh WeIikson$s handvrillen noles (Se¡l. 11, 2007)
|LßHI_SIC07940_026355j, Mynor GonzaIez, Lehman, DaiIy Risk A¡¡elile and VaR Re¡orl (Se¡l. 11,
2007) |LßIX"DOCID 3296330j, allached lo e"maiI from Mynor GonzaIez, Lehman, lo Mark Weber,
Lehman (Se¡l. 12, 2007) |LßIX"DOCID 3295527j, A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR
usage versus Iimils.
556
Lehman, Risk, Liquidily, Ca¡ilaI, and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk
Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007) |LßIX"AM 067167j, Lehman ßrolhers HoIdings
Inc., Minules of Meeling of lhe Iinance and Risk Commillee of ßoard of Direclors (Se¡l. 11, 2007) |LßIX"
AM 067018j, e"maiI from }oe Li, Lehman, lo Ired OrIan, Lehman, $* "30 (}uIy 25, 2007) |LßIX"DOCID
2563167j.
557
Ixaminer's Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡. 6 (noling im¡orlance of concenlralion
Iimils), Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡¡. 6, 17 (slaling lhal significanl
excesses oughl lo have been discIosed).

147
L666I $8K8>:H8 /:E6?B :;7 #:<:;D8 *388E 56BD<?BA>8B
Al lhese Se¡lember 11, 2007 meelings, O'Meara aIso re¡orled lo lhe Iinance and
Risk Commillee lhal Lehman's nel Ieverage ralio vas in Iine vilh Lehman's ¡eers.
558

Managemenl's ¡resenlalion regarding lhe nel Ieverage melric noled:
In lhe ¡asl, Ieverage vas lhe key measure of equily adequacy. ßelveen
2003 and 2006 ve significanlIy reduced Ieverage. Lov Ieverage vas
¡osiliveIy vieved by raling agencies and conlribuled lo our 2005
u¡grades. In 2006 and 2007, ve vorked vilh lhe reguIalory and raling
agencies lo im¡Iemenl more accurale adequacy measures. As a resuIl, ve
are comforlabIe vilh aIIoving our Ieverage lo increase.
559

The nev adequacy measures incIuded a measuremenl for equily, lhe CSI ca¡ilaI ralios,
and Lehman's inlernaI equily adequacy framevork.
560

O'Meara did nol discIose lhe firm's use of Re¡o 105 lransaclions lo manage ils
nel Ieverage ralio al lhis ßoard meeling or any olher, and no direclor asked by lhe
Ixaminer ever vas avare of lhese off"baIance sheel lransaclions.
561


558
Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo Iinance and Risk
Commillee of Lehman ßoard of Direclors vilh WeIikson's Handvrillen Noles (Se¡l. 11, 2007), al ¡¡. 2, 30
|WGM_LßIX_02247"02340j, Lehman ßrolhers HoIdings Inc., Iinance and Risk Commillee Minules (Se¡l.
11, 2007), al ¡¡. 2"3 |LßIX"AM 067018j.
559
Lehman, Iresenlalion on Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale lo Iinance and Risk
Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 50 |LßIX"AM 067167j.
560
'80 al ¡. 51.
561
Ixaminer's Inlerviev of Roger ßerIind, Dec. 18, 2009, al ¡. 4, Ixaminer's Inlerviev of RoIand A.
Hernandez, Ocl. 2, 2009, al ¡. 22, Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 20,
Ixaminer's Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡. 21, Ixaminer's Inlerviev of MichaeI L.
AinsIie, Dec. 22, 2009, al ¡. 4, Ixaminer's Inlerviev of Thomas Cruikshank, Ocl. 8, 2009, al ¡. 2,
Ixaminer's Inlerviev of Sir. Chrislo¡her Genl, }an. 20, 2010, al ¡. 4, Ixaminer's Inlerviev of }erry A.
Grundhofer, Se¡l. 16, 2009, al ¡. 10, Lehman ßrolhers HoIdings Inc., Minules of lhe ßoard of Direclors
(Se¡l. 11, 2007), al ¡. 3 |LßHI_SIC07940_026364j, Lehman, ßoard of Direclors MaleriaIs for Se¡l. 11, 2007
ßoard Meeling (Se¡l. 7, 2007) |LßHI_SIC07940"026282j, Lehman ßrolhers HoIdings Inc., Minules of lhe
ßoard of Direclors (Ocl. 15, 2007), al ¡. 6 |LßHI_SIC07940_026407j, Lehman, ßoard of Direclors MaleriaIs
for Ocl. 15, 2007 ßoard Meeling (Ocl. 11, 2007) |LßHI_SIC07940"026371j, Lehman ßrolhers HoIdings Inc.,

148
L6KI $6eA676E4 :;7 (:Z6E:< 56BD<?BA>8B
Tonucci re¡orled lo lhe ßoard's Iinance and Risk Commillee lhal Lehman had
record IeveIs of Iiquidily and cash ca¡ilaI sur¡Ius al lhe end of lhe lhird quarler of
2007.
562
He aIso revieved Lehman's ´Iiquidily ¡ooI year"lo"dale and over lhe Iasl four
years, noling lhe conservalive nalure of lhe firm's Iiquidily ¡ooI as com¡ared lo ils
¡eers, vhich |hadj been recognized by lhe Ieading credil raling agencies.¨
563

The maleriaIs ¡resenled lo lhe ßoard shoved lhal Lehman had a lhird quarler
´record¨ Iiquidily ¡ooI of $36 biIIion (an increase from $25.7 biIIion al lhe end of lhe
second quarler 2007) and a cash ca¡ilaI ¡osilion of $8.1 biIIion (an increase from $2.5
biIIion al lhe end of lhe second quarler) againsl a $2 biIIion ¡oIicy minimum.
564
The
maleriaIs slaled lhal Lehman did nol ¡ro|ecl lhe need lo la¡ lhe ca¡ilaI markels because
Lehman had ´significanl Iiquidily lo fund lhese aclivilies.¨
565
Managemenl simiIarIy
em¡hasized lo lhe fuII ßoard Lehman's conservalive a¡¡roach lo funding ils baIance

Minules of lhe ßoard of Direclors (Nov. 8, 2007), al ¡. 6 |LßHI_SIC07940_026650j, Lehman, ßoard of
Direclors MaleriaIs for Nov. 8, 2007 ßoard Meeling (Nov. 2, 2007) |LßHI_SIC07940"026520j, :$$ "3:,
Seclion III.A.4 of lhis Re¡orl.
562
Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of lhe ßoard of
Direclors (Se¡l. 11, 2007), al ¡. 3 |LßIX"AM 067018j.
563
'80
564
Lehman, U¡dale on Liquidily, Leveraged Loan Commilmenls and Morlgage Iosilions Iresenlalion lo
Lehman ßoard of Direclors vilh WeIikson's handvrillen noles (Se¡l. 11, 2007), al ¡. 1
|LßHI_SIC07940_026355j, Lehman, Risk, Liquidily, Ca¡ilaI and ßaIance Sheel U¡dale Iresenlalion lo
Iinance and Risk Commillee of Lehman ßoard of Direclors (Se¡l. 11, 2007), al ¡. 31 |LßIX"AM 067167j.
565
'80

149
sheel and slrong Iiquidily ¡ooI, bul acknovIedged lhal for lhe Iasl lvo monlhs Iiquidily
had been more chaIIenging lo mainlain.
566

Managemenl did nol leII lhe ßoard or lhe Iinance and Risk Commillee aboul
ALCO's concerns aboul Lehman's abiIily lo fund ils commilmenls, or lhal Lehman had
nearIy slo¡¡ed enlering inlo nev deaIs in Augusl 2007.
567
Some direclors said lhal if
any of Lehman's senior managemenl had concerns aboul lhe firm's funding or ca¡ilaI
adequacy, lhal is ´cIearIy¨ somelhing lhey vouId have vanled lo knov.
568

On Se¡lember 20, 2007, Lehman issued a ¡ress reIease announcing lhal O'Meara
vouId re¡Iace Anloncic as Lehman's GIobaI Head of Risk Managemenl (or CRO) as of
December 1, 2007.
569
The Ixaminer did nol find any evidence lo suggesl lhal Anloncic's
re¡Iacemenl vas reIaled lo lhe risk Iimil or risk discIosure issues lhal had occurred
during lhe ¡rior lhree lo four monlhs. Hovever, lhe SIC noled ils concern lhal lhe risk

566
Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (Se¡l. 11, 2007), al ¡. 5
|LßHI_SIC07940_026364j.
567
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡¡. 16"17, Ixaminer's Inlerviev of Roger
Nagioff, Se¡l. 30, 2009, al ¡¡. 9"10, e"maiI from Roger Nagioff, Lehman, lo Ian T. Lovill, Lehman (}uIy 20,
2009) |LßIX"DOCID 175646j, e"maiI from AIex Kirk, Lehman, lo Roger Nagioff, Lehman (Aug. 6, 2007)
|LßIX"DOCID 173492j, e"maiI from AIex Kirk, Lehman, lo Roger Nagioff, Lehman (Aug. 7, 2007) |LßIX"
DOCID 173496j.
568
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 28, 2009, al ¡. 16, Ixaminer's Inlerviev of Dr. Henry
Kaufman, Dec. 22, 2009 (saying il mighl have been a¡¡ro¡riale lo discIose Iiquidily concerns if lhey vere
more lhan shorl"Iived).
569
Lehman ßrolhers HoIdings Inc., Iress ReIease: Lehman ßrolhers Announces Managemenl Changes
(Se¡l. 20, 2007) |LßIX"DOCID 533362j.

150
Iimil excesses occurred during a ¡eriod vhen Lehman's CRO ¡osilion vas in
lransilion.
570

LSI $:E8 /8:DE6?;BY $839:; *<?]<4 %J6EB +EB +<<6eA67 /8:< %BE:E8
+;K8BE98;EB
The Iasl quarler of 2007 and firsl quarler of 2008 ÷ from Se¡lember 2007 lhrough
Iebruary 2008 ÷ vas a cruciaI |unclure for Lehman. Lehman's overaII baIance sheel had
grovn by 37% during 2007,
571
and much of lhe grovlh vas concenlraled in iIIiquid
hoIdings lhal Lehman vas aIready unabIe lo seII vilhoul incurring significanl Iosses.
572

As a resuIl, vilhoul lhe accounling device of Re¡o 105 lransaclions, IID vas aIready
veII over ils baIance sheel Iimil of a¡¡roximaleIy $230 biIIion by $18 biIIion.
573
Indeed,
Lehman had been over ils risk Iimils for lhe ¡rior six monlhs.
574
In hindsighl, lhis
quarler may have been Lehman's finaI o¡¡orlunily lo lake decisive aclion lo im¡rove
ils baIance sheel before lhe near coIIa¡se of ßear Slearns changed lhe ruIes of lhe road
for Lehman and aII of ils ¡eer inveslmenl banks.
ßefore ßear Slearns' near coIIa¡se in March 2008, Lehman had lvo basic vays of
reducing ils Ieverage: (1) seIIing assels, lo reduce lhe numeralor in lhe nel Ieverage
formuIa, or (2) raising equily, lo increase lhe denominalor in lhe nel Ieverage formuIa.

570
SIC, Noles from Lehman's MonlhIy Risk Reviev meeling (Ocl. 11, 2007), al ¡. 6 |LßIX"SIC 007438j.
571
Lehman, 2008 IinanciaI IIan Iresenlalion lo Iinance and Risk Commillee of ßoard of Direclors (}an.
29, 2008), al ¡. 8 |LßHI_SIC07940_068559j.
572
Ixaminer's Inlerviev of Herberl H. (ßarl) McDade III, Se¡l. 16, 2009, al ¡. 3, Ixaminer's Inlerviev of
Treasury Secrelary Timolhy I. Geilhner, Nov. 24, 2009, al ¡. 7.
573
Andrev }. Morlon, Noles: Iirsl Sixly Days (A¡r. 7, 2008), al ¡. 6 |LßIX"DOCID 1734462j.
574
A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.

151
ßul Lehman did nol successfuIIy lake eilher of lhese lacks during lhe finaI quarler of
2007 or lhe firsl quarler of 2008: Lehman's nel baIance sheel vas $23.7 biIIion higher al
lhe end of lhe firsl quarler of 2008 lhan al lhe end of 2007.
575
Lehman did nol raise
subslanliaI amounls of equily during lhis ¡eriod.
576

Lehman's faiIure lo seII assels sooner vas based ¡arlIy on ils ¡revious decision lo
¡ursue a counlercycIicaI grovlh slralegy, vhich enlaiIed a conscious acce¡lance of
grealer risk even vhiIe Lehman's ¡eer inveslmenl banks vere curlaiIing lheir risk"
laking.
577
The counlercycIicaI grovlh slralegy conlinued lo be refIecled in Lehman's
slralegy in lhe firsl quarler of 2008.
578

IuId loId lhe Ixaminer lhal he decided afler lhe December 2007 hoIiday season
lo inslrucl his senior managers lo reduce lhe firm's baIance sheel.
579
Hovever,
documenlary evidence shovs lhal Lehman did nol aggressiveIy begin lo seII assels
unliI lhe second quarler of 2008.
580


575
LßHI 10"Q (fiIed on A¡r. 9, 2008), al ¡. 70.
576
Lehman, 2008 IinanciaI IIan Iresenlalion lo Iinance and Risk Commillee of ßoard of Direclors (}an.
29, 2008), al ¡. 16 |LßHI_SIC07940_068559j, Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al
¡¡. 25"27.
577
1$$ Lehman, 2008 IinanciaI IIan Iresenlalion lo Iinance and Risk Commillee of ßoard of Direclors
(}an. 29, 2008), al ¡. 6 |LßHI_SIC07940_068559j.
578
'80
579
Ixaminer's Inlerviev of Richard S. IuId, }r., Nov. 19, 2009, al ¡. 2.
580
Lehman, CommerciaI ReaI Islale U¡dale (Mar. 25, 2008), al ¡. 3 |LßHI_SIC07940_127250j, Lehman,
ßaIance Sheel and DiscIosure Scorecard Ior Trade Dale A¡riI 21, 2008 (A¡r. 22, 2008), al ¡. 3 |LßIX"
DOCID 3187588j, allached lo e"maiI from TaI Lilvin, Lehman, lo Herberl H. (ßarl) McDade III, Lehman, $*
"3. (A¡r. 22, 2008) |LßIX"DOCID 3187333j, e"maiI from Gary MandeIbIall, Lehman, lo AIex Kirk, Lehman
(}an. 15, 2008) |LßIX"DOCID 1600235j, e"maiI from Irin M. CaIIan, Lehman, lo Herberl H. (ßarl) McDade
III, Lehman, $* "3. (A¡r. 3, 2008) |LßIX"DOCID 1538729j, e"maiI from IauI A. Hughson, Lehman, lo Mark

152
During lhe firsl quarler of 2008, IuId aIso decided lhal Lehman vouId nol raise
equily unIess il couId do so al a ¡remium.
581
WhiIe many of Lehman's com¡elilors
enlered inlo slralegic lransaclions lo raise equily in Iale 2007 and earIy 2008,
582
Lehman
did nol vanl lo signaI veakness by raising equily al a discounl,
583
and, unIike ils ¡eers,
had nol yel suffered Iosses lhal mighl have signaIed a more urgenl need for such
aclion.
L:I '6BD:< NTTW /6BG "ZZ8E6E8 $696E +;D>8:B8
In Oclober 2007, lhe firm"vide risk a¡¡elile usage conlinued lo increase, and for
severaI days vas more lhan $500 miIIion over lhe Iimil, lhe Iimil excess ¡eaked al
aImosl 22% of lhe Iimil amounl.
584
The Iimil excess vas ¡arlIy lhe resuIl of Lehman's
decision lo enler inlo severaI significanl commerciaI reaI eslale and Ieveraged Ioan
lransaclions in May, }une, and }uIy 2007, vhich vere graduaIIy being funded and lhus

WaIsh, Lehman (A¡r. 1, 2008) |LßIX"DOCID 1866761j, Lehman, ßaIance Sheel and DiscIosure Scorecard
Ior Trade Dale Augusl 12, 2008 (Aug. 13, 2008), al ¡. 7 |LßIX"SIIA 006539j.
581
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 8, Ixaminer's Inlerviev of }eremy
Isaacs, Ocl. 1, 2009, al ¡. 3.
582
1$$4 $0+0, MerriII Lynch & Co., Inc., AnnuaI Re¡orl for 2007 as of Dec. 28, 2007 (Iorm 10"K) (fiIed on Ieb.
25, 2008), al ¡. 23 (´MerriII Lynch 2007 10"K¨) (slaling lhal MerriII Lynch issued $6.2 biIIion in common
slock during lhe fourlh quarler of 2007, and $6.6 biIIion of mandalory converlibIe ¡referred slock during
lhe firsl quarler of 2008), Morgan SlanIey, AnnuaI Re¡orl for 2007 as of Nov. 30, 2007 (Iorm 10"K) (fiIed
on }an. 29, 2008), al ¡¡. 178"79 (´Morgan SlanIey 2007 10"K¨) (slaling lhal Morgan SlanIey soId equily
unils lo lhe Chinese Inveslmenl Cor¡oralion for a¡¡roximaleIy $5.579 biIIion in December 2007),
Ciligrou¡ Inc., AnnuaI Re¡orl for 2007 as of Dec. 31, 2007 (Iorm 10"K) (fiIed on Ieb. 22, 2008), al ¡. 77
(´Ciligrou¡ 2007 10"K¨) (slaling lhal Ciligrou¡ soId $7.5 biIIion of equily unils lo lhe Abu Dhabi
Inveslmenl Aulhorily on December 3, 2007), UßS AG, AnnuaI Re¡orl for 2007 as of Dec. 31, 2007 (Iorm
20"I) (fiIed on Mar. 18, 2008), al ¡¡. 276"77 (´UßS AG 2007 20"I¨) (slaling lhal UßS issued shares
corres¡onding lo a¡¡roximaleIy 13.4% of lhe lhen currenl share ca¡ilaI on Iebruary 27, 2008), :$$ Seclion
III.A.3 of lhis Re¡orl.
583
I"maiI from David GoIdfarb, Lehman, lo Richard S. IuId, }r., Lehman, $* "3. (}an. 9, 2008)
|LßHI_SIC07940_670045j.
584
A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.

153
increasing Lehman's risk a¡¡elile usage, ¡arlIy lhe resuIl of Lehman's inabiIily lo
securilize or syndicale lhose and olher lransaclions, and ¡arlIy lhe resuIl of increased
voIaliIily in lhe markel.
585

Lehman increased lhe firm"vide risk a¡¡elile Iimil for fiscaI 2008. A¡¡rovaI for
lhe increase vas given on }anuary 14, 2008, vhen Lehman raised lhe Iimil from $3.5
biIIion lo $4 biIIion, ´vilh |lhej increase |beingj backdaled lo December 3, 2007.¨
586
The
Iimil increase had lhe effecl of eIiminaling any firm"vide Iimil excesses from lhal dale
forvard.
587

To arrive al lhe $4 biIIion risk a¡¡elile Iimil figure, Lehman's officers made
significanl changes lo lhe Iimil caIcuIalion as com¡ared lo ¡rior years' caIcuIalions. The
Ixaminer's financiaI advisors caIcuIale lhal if lhe same assum¡lions used for lhe 2007
risk a¡¡elile Iimil had been used lo delermine lhe Iimil for 2008, lhe 2008 Iimil vouId
have been a¡¡roximaleIy $2.5 biIIion ralher lhan $4.0 biIIion.
588

The 2008 risk a¡¡elile Iimil aIso vas based on a very aggressive ¡ro|ecled
revenue figure. Lehman's ¡ro|ecled revenues vere lhe slarling ¡oinl for selling lhe
Iimil, and ¡erha¡s lhe singIe mosl im¡orlanl in¡ul lo lhe formuIa. Lehman used a $21

585
SIC, Noles from Lehman's MonlhIy Risk Reviev Meeling (Aug. 17, 2007), al ¡. 7 |LßIX"SIC 007383j,
e"maiI from }effrey Goodman, Lehman, lo Chrislo¡her M. O'Meara, Lehman, $* "30 (Dec. 4, 2007) |LßIX"
DOCID 251204j.
586
Lehman, MaleriaI for Markel Risk ConlroI Commillee Meeling (}an. 14, 2008), al ¡. 33 |LßIX"DOCID
271352j, allached lo e"maiI from Mark Weber, Lehman, lo IauI Shollon, Lehman, $* "3. (}an. 14, 2008)
|LßIX"DOCID 223263j.
587
A¡¡endix No. 9, com¡aring risk a¡¡elile and VaR usage versus Iimils.
588
Ior a more delaiIed ex¡Ianalion of lhe changes in lhe risk a¡¡elile caIcuIalion, :$$ A¡¡endix 10,
describing caIcuIalion of increased $4.0 biIIion risk a¡¡elile Iimil.

154
biIIion ¡ro|ecled revenue figure in caIcuIaling lhe $4 biIIion Iimil amounl.
589
Des¡ile lhe
difficuIlies in lhe markel, lhis amounl consliluled a 9% increase over 2007 revenues.
Conlem¡oraneous exlernaI anaIysl re¡orls ¡ro|ecled 2008 revenues of onIy aboul $19.2
biIIion ÷ a figure lhal vouId have resuIled in a much Iover risk a¡¡elile Iimil for lhe
year.
590

L@I d:;A:>4 NTTW .88E6;H ?C #?:>7 ?C 56>8DE?>B
On }anuary 29, 2008, lhe Iinance and Risk Commillee and lhe enlire ßoard mel.
During lhese meelings, managemenl discussed lhe difficuIl markel, bul beIieved lhal il
¡resenled o¡¡orlunilies for Lehman lo grov.
591
Lehman's senior officers loId lhe ßoard:
´|The markel environmenlj ¡resenls an o¡¡orlunily for lhe firm lo ¡ursue a
counlercycIicaI grovlh slralegy, simiIar lo vhal il did during lhe 2001"2002 dovnlurn,
lo im¡rove ils com¡elilive ¡osilion and, over lime, generale su¡erior relurns for our
sharehoIders.¨
592

Managemenl ¡rovided lhe Iinance and Risk Commillee vilh an overviev of
Lehman's nel assels and Ieverage IeveIs and loId lhe Commillee lhal Lehman's baIance

589
IaoIo R. Tonucci, Lehman, 2008 IinanciaI IIan Iresenlalion (}an. 29, 2008), al ¡. 1
|LßHI_SIC07940_068559j.
590
20+0, DougIas Si¡kin, Wachovia Ca¡ilaI Markels, L.L.C., Tough Year Ahead " Soving Seeds for Share
Gains (}an. 15, 2008), al ¡. 1 |LßIX"DOCID 095883j, A¡¡endix 10, describing caIcuIalion of increased $4.0
biIIion risk a¡¡elile Iimil.
591
Lehman, 2008 IinanciaI IIan Summary (}an. 29, 2009), al ¡. 5 |LßHI_SIC07940_027374j.
592
'80

155
sheel conlinued lo grov across aImosl aII assel cIasses and businesses.
593
Al lhe fuII
ßoard meeling, Kaufman re¡orled lo lhe ßoard on Lehman's baIance sheel grovlh and
Lehman's year end increase in nel Ieverage.
594
CaIIan discussed Lehman's largel
Ieverage ralio vilh lhe ßoard and said lhal il vouId come back dovn.
595

Al lhe Iinance and Risk Commillee meeling, managemenl revieved Lehman's
monlhIy slress lesls and scenario anaIyses.
596
Slress lesls indicaled a vorsl"case Ioss of
$3.2 biIIion.
597
Managemenl did nol inform lhe Commillee of a nev ´Credil Crunch¨
scenario lhal vas added lo Lehman's ¡orlfoIio of slress lesling scenarios in Oclober
2007 lhal ¡redicled lhe vorsl Ioss of aII lhe scenarios, vilh a Ioss of $3.99 biIIion
(aIlhough earIy drafls of lhe ¡resenlalion did incIude lhe scenario).
598

Al lhese }anuary meelings, Lehman's managemenl aIso recommended lhe nev
risk a¡¡elile Iimil lo lhe ßoard.
599
The direclors vere generaIIy nol avare or did nol

593
Lehman ßrolhers HoIdings Inc., Minules of Meeling of Iinance and Risk Commillee of lhe ßoard of
Direclors (}an. 29, 2008), al ¡¡. 2"3 |LßIX"AM 067022j, Lehman, AddilionaI MaleriaIs for lhe Iinance and
Risk Commillee (}an. 29, 2008), al ¡. 3 |LßIX"AM 067260j.
594
Lehman ßrolhers HoIdings Inc., Minules of Meeling of ßoard of Direclors (}an. 29, 2008), al ¡. 3
(LßHI_SIC07940_027446j.
595
'80 al ¡. 8, Lehman, December 2007 Iresenlalion lo Lehman ßoard vilh WeIikson's handvrillen noles
(}an. 29, 2008), al ¡. 6 |WGM_LßIX_00708j.
596
Lehman, 2008 IinanciaI IIan Iresenlalion lo Iinance and Risk Commillee of lhe ßoard of Direclors
(}an. 29, 2008), al ¡. 18 |LßHI_SIC07940_068559j.
597
'80 al ¡. 19.
598
Lehman, MonlhIy Risk Reviev Iackage (Ocl. 11, 2007), al ¡. 10 |LßIX"SIC 007438j (noling Lehman
´added a nev slress lesl, caIIed lhe Credil Crunch vhich is essenliaIIy Summer 2007¨), Lehman, 2008
IinanciaI IIan Iresenlalion lo Lehman ßoard of Direclors |Draflj (}an. 2008), al ¡. 5 |LßIX"DOCID
384192j, allached lo e"maiI from Mark Weber, Lehman, lo }ennifer ßaIe, Lehman, $* "3. (}an. 16, 2008)
|LßIX"DOCID 306708j.
599
Lehman, 2008 IinanciaI IIan Summary (}an. 29, 2008), al ¡. 11 |LßHI_SIC07940_027374j.

156
recaII any discussion regarding lhe ad|uslmenls of lhe risk a¡¡elile caIcuIalion.
600
Tvo
of lhe direclors said lhal lhey vouId have vanled lo knov aboul significanl changes in
lhe melhodoIogy.
601
Hovever, Lehman's managers loId lhe ßoard lhal lhe $21 biIIion
revenue ¡ro|eclion vas ´very aggressive,¨ and lhe ßoard had an exlended discussion of
lhe im¡acl of ¡olenliaIIy Iover revenues on Lehman's business.
602

LDI %J8DAE6K8 !A>;?K8>
In }anuary 2008, Nagioff decided for ¡ersonaI reasons lo resign as gIobaI head of
IID.
603
In addilion, lhal monlh, AIex Kirk, co"chief o¡eraling officer of IID since
Oclober 2007, Iefl Lehman. Kirk agreed vilh IuId lhal he vouId Ieave Lehman al aboul
lhe same lime.
604


600
Ixaminer's Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡. 16, Ixaminer's Inlerviev of Dr.
Henry Kaufman, Se¡l. 2, 2009, al ¡. 2, Ixaminer's Inlerviev of RoIand A. Hernandez, Ocl. 2, 2009, al ¡.
14, Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 18.
601
Ixaminer's Inlerviev of Dr. Henry Kaufman, Se¡l. 2, 2009, al ¡. 2, Ixaminer's Inlerviev of }ohn
Macomber, Se¡l. 25, 2009, al ¡. 2.
602
}effrey A. WeIikson, Lehman, Noles from lhe 2008 IinanciaI IIan Iresenlalion (}an. 29, 2008), al ¡. 1
|WGM_LßIX_03249j.
603
Ixaminer's Inlerviev of Roger Nagioff, Se¡l. 30, 2009, al ¡. 20, Ixaminer's Inlerviev of Richard S.
IuId, }r., Se¡l. 25, 2009, al ¡. 22 (IuId indicaled lhal Nagioff's decision lo sle¡ dovn vas enlireIy
voIunlary and vas lhe resuIl of Nagioff's fruslralion vilh his commule from London), Ixaminer's
Inlerviev of Sir Chrislo¡her Genl, Ocl. 21, 2009, al ¡. 5 (Genl ex¡Iained lhal, based on conversalions vilh
Nagioff, he beIieved Nagioff's resignalion vas enlireIy due lo lhe IogislicaI disru¡lion of Nagioff's famiIy
Iife on accounl of his commule), Ixaminer's Inlerviev of Hugh I. (Ski¡) McGee III, Aug. 12, 2009, al ¡. 13
(McGee denied lhal Nagioff's resignalion had anylhing lo do vilh Lehman's cessalion of residenliaI
morlgage originalions, and lied Nagioff's decision lo lhe difficuIly of Nagioff's commule), Ixaminer's
Inlerviev of }ohn I. Akers, A¡r. 22, 2009, al ¡. 2 (Akers ex¡ressed lhe beIief lhal Nagioff Iefl voIunlariIy
and lhal his de¡arlure vas muluaI belveen him and managemenl, bul aIso noled lhal aIong vilh lhe
commule from London, difficuIly aIso arose because Nagioff faiIed lo meel IuId's ex¡eclalions),
Ixaminer's Inlerviev of Iric IeIder, May 21, 2009, al ¡. 6 (IeIder indicaled lhal Nagioff Iefl Lehman
voIunlariIy).
604
Transcri¡l of de¡osilion leslimony of AIex Kirk, '( #$ 5$6%"( =#,*6$#: G,38)(+: '(/0, Case No. 08"13555,
ßankr. S.D.N.Y., Aug. 31, 2009, al ¡¡. 7"8.

157
L7I (?998>D6:< /8:< %BE:E8 *8<<"&CCY !?? $6EE<8` !?? $:E8
AIlhough Lehman uIlimaleIy look aggressive aclion lo reduce ils baIance sheel
and lhus ils nel Ieverage, Lehman's managemenl did nol make a firm"vide decision lo
reduce lhese figures unliI veII afler lhe beginning of lhe risk a¡¡elile and baIance sheel
Iimil overages in mid"2007. Moreover, even afler Lehman's senior officers direcled lhe
business Iines lo reduce lheir baIance sheels, il look severaI monlhs for lhe reduclion lo
be effeclualed, ¡arlicuIarIy vilh res¡ecl lo Lehman's iIIiquid hoIdings of commerciaI
reaI eslale assels.
AIlhough lhe firm ¡ersislenlIy vas over ils baIance sheel Iimils, and had been
over lhe risk a¡¡elile Iimil since aboul }une 1, 2007, lhe firsl vrillen indicalion lhal lhe
Risk Commillee considered lhe risk Iimil overage vas in Oclober 2007.
605
On Oclober 2,
2007, O'Meara noled in an e"maiI lhal lhe Risk Commillee agreed lo ´lem¡orariIy
a¡¡rove lhe Risk A¡¡elile Iimil overage, due lo lhe unusuaI circumslances in lhe
markel¡Iace loday / recenlIy, es¡eciaIIy concerning Leveraged Iinance and ReaI Islale
businesses.¨
606
Thus, Lehman's managemenl decided nol lo reduce ils risk ¡osilion
aggressiveIy al lhal lime.
Laler in Oclober, in advance of a ¡Ianned conversalion vilh lhe Ixeculive
Commillee, O'Meara ¡ro¡osed formuIaling ´s¡ecific recommendalions aboul vhere lo

605
I"maiI from Chrislo¡her M. O'Meara, Lehman, lo IauI Shollon, Lehman, $* "30 (Ocl. 2, 2007) |LßIX"
DOCID 155020j.
606
I"maiI from Chrislo¡her M. O'Meara, Lehman, lo IauI Shollon, Lehman, $* "30 (Ocl. 2, 2007) |LßIX"
DOCID 155020j.

158
make lhe culs¨ lo bring dovn risk a¡¡elile.
607
Goodman ex¡ressed a viIIingness lo
´lake some Iosses¨ lo achieve lhis goaI.
608
In a November 2007 ¡resenlalion lo IuId, lhe
commerciaI reaI eslale grou¡ recommended reducing ils gIobaI baIance sheel by $15
biIIion.
609

When Irin M. CaIIan became CIO on December 1, 2007, one of her ob|eclives
vas lo reduce baIance sheel, ¡arlicuIarIy in lhe areas of residenliaI and commerciaI reaI
eslale.
610
IuId decided during lhe December 2007 hoIiday season lhal il vas lime lo
¡ursue an aggressive reduclion of Lehman's risk ¡rofiIe.
611

Lehman did nol aggressiveIy ¡ursue lhese reduclions for severaI monlhs,
hovever. According lo CaIIan, she had discussions vilh IuId and Gregory aboul
reducing baIance sheel in }anuary and Iebruary 2008, bul ´didn'l gel lraclion quickIy
on il.¨
612
ßelveen lhe fourlh quarler of 2007 and lhe firsl quarler of 2008, Lehman's
gross and nel assels acluaIIy increased from $691 biIIion lo $786 biIIion, and from $373

607
I"maiI from }effrey Goodman, Lehman, lo Mark Weber, Lehman, $* "30 (Ocl. 22, 2007) |LßIX"DOCID
318367j.
608
'80
609
GIobaI ReaI Islale Grou¡, Lehman, GIobaI ReaI Islale U¡dale (Nov. 6, 2007), al ¡¡. 1, 2 |LßIX DOCID
514264j, allached lo e"maiI from }effrey Goodman, Lehman, lo MadeIyn Anloncic, Lehman, $* "30 (Nov. 6,
2007) |LßIX DOCID 531492j, e"maiI from }onalhan Cohen, Lehman, lo Chrislo¡her M. O'Meara, Lehman,
$* "30 (Nov. 3, 2007) |LßIX DOCID 523669j (indicaling lhal IuId vas lhe inlended audience of lhe
¡resenlalion).
610
Ixaminer's Inlerviev of Irin M. CaIIan, Ocl. 23, 2009, al ¡¡. 10"13.
611
Ixaminer's Inlerviev of Richard S. IuId, }r., Dec. 9, 2009, al ¡. 10.
612
Ixaminer's Inlerviev of Irin M. CaIIan, Ocl. 23, 2009, al ¡¡. 10"13.

159
biIIion lo $397 biIIion, res¡ecliveIy.
613
In addilion, IID exceeded ils baIance sheel Iimil
in lhe fourlh quarler of 2007 by $11.17 biIIion, vilh overages concenlraled in securilized
¡roducls and reaI eslale.
614
In lhe firsl quarler of 2008, IID vas over lhe baIance sheel
Iimil by $18 biIIion vilh nearIy 50% of lhe overages concenlraled in securilized
¡roducls and reaI eslale.
615
Lehman's Treasurer al lhe lime, IaoIo Tonucci, vas
comforlabIe vilh IID's baIance sheel overages in lhe firsl quarler of 2008.
616
Al lhe end
of lhe firsl quarler of 2008, Tonucci did nol require IID lo seII off more assels.
617

Il vas nol unliI Iebruary 26, 2008 lhal Gregory inslrucled WaIsh lo ´gel baIance
sheel dovn quickIy,¨
618
and GRIG sel oul lo reduce ils gIobaI baIance sheel by $5 biIIion
by March 18, 2008.
619
Iven afler lhal, CaIIan loId lhe Ixaminer lhal she ¡Ieaded vilh
IuId and Gregory lo reduce lhe baIance sheel and finaIIy ¡ersuaded lhem lo add lhe
issue lo lhe Ixeculive Commillee's March 20, 2008 agenda afler lhe near coIIa¡se of

613
Lehman, Q2 2008 U¡dale (}une 18, 2008), al ¡. 5 |LßIX"DOCID 1302959j, allached lo e"maiI from Anu
}acob, Lehman, lo Dennis Rodrigues, Lehman, $* "3. (}uIy 8, 2008) |LßIX"DOCID 1326944j.
614
Andrev }. Morlon, Noles: Iirsl Sixly Days (A¡r. 7, 2008), al ¡. 6 |LßIX"DOCID 1734462j, allached lo e"
maiI from Gary MandeIbIall, Lehman, lo Andrev }. Morlon, Lehman, $* "30 (A¡r. 7, 2008) |LßIX"DOCID
1834937j.
615
'80 al ¡. 4.
616
I"maiI from CIemenl ßernard, Lehman, lo Andrev }. Morlon, Lehman, $* "3. (Ieb. 27, 2008) |LßIX"
DOCID 1849839j.
617
'80
618
I"maiI from Mark A. WaIsh, Lehman, lo Andrev }. Morlon, Lehman (Ieb. 26, 2008)
|LßHI_SIC07940_115814j.
619
I"maiI from IauI A. Hughson, Lehman, lo Mark Gabbay, Lehman, $* "30 (Ieb. 27, 2008) |LßIX"DOCID
1869265j (discussing lhe scheduIe for lhe $5 biIIion reduclion largel), e"maiI from IauI A. Hughson,
Lehman, lo Mark Gabbay, Lehman, $* "30 (Mar. 7, 2008) |LßIX"DOCID 1723168j (Hughson gives u¡dale
on saIes ¡rogress and asks for u¡dales from olhers on lheir ¡rogress lovards lhe $5 biIIion reduclion
largel).

160
ßear Slearns.
620
McDade vas made lhe firm's ´baIance sheel czar¨ in mid"March and
vas given aulhorily lo enforce firm"vide baIance sheel largels.
621
IuId inlended lo
reduce aII of Lehman's ¡osilions, incIuding commerciaI reaI eslale and Ieveraged Ioans
¡osilions.
622
ßaIance sheel reduclion largels vere nol senl oul lo Lehman's businesses
unliI afler lhe Ixeculive Commillee meeling on March 20, 2008.
623

On May 13, 2008, lvo veeks before lhe end of lhe second quarler, CaIIan urged
Gregory and IuId lo ´deIiver on lhe baIance sheel reduclion lhis quarler¨ and nol give
´any room lo IID for sIi¡¡age.¨
624
GRIG's overseas businesses in ¡arlicuIar vere sIov
lo reduce lheir ¡osilions in lhe firsl and second quarlers of 2008,
625
bul GRIG's U.S.
business mel ils baIance sheel reduclion largels, des¡ile conlinuing lo engage in some
originalions.
626

Some vilnesses beIieved lhal GRIG vas nol aggressive enough in seIIing off ils
¡orlfoIio, hoIding on lo ¡osilions in a beIief lhal lhe markel vouId evenluaIIy

620
Ixaminer's Inlerviev of Irin M. CaIIan, Ocl. 23, 2009, al ¡¡. 10, 11.
621
'80 al ¡. 12, Ixaminer's Inlerviev of Andrev }. Morlon, Se¡l. 21, 2009, al ¡. 11.
622
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 25, 2009, al ¡. 26.
623
Ixaminer's Inlerviev of Irin M. CaIIan, Ocl. 23, 2009, al ¡¡. 11"12.
624
I"maiI from Irin M. CaIIan, Lehman, lo }ose¡h Gregory, Lehman, $* "30 (May 13, 2008)
|LßHI_SIC07940_034732j.
625
Ixaminer's Inlerviev of IauI A. Hughson, Ocl. 28, 2009, al ¡. 5, Lehman, ßaIance Sheel and DiscIosure
Scorecard for Trade Dale }une 23, 2008 (}une 24, 2008), al ¡. 10 |LßIX"DOCID 1742000j, allached lo e"maiI
from MichaeI McGarvey, Lehman, lo IauI Milrokoslas, Lehman, $* "30 (}une 25, 2008) |LßIX"DOCID
1856557j, e"maiI from IauI A. Hughson, Lehman, lo Kenlaro Umezaki, Lehman, $* "3. (Ocl. 2, 2007)
|LßIX"DOCID 1809381j, e"maiI from IauI A. Hughson, Lehman, lo }onalhan Cohen, Lehman (}uIy 20,
2007) |LßIX"DOCID 1426881j.
626
Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 21, 2009, al ¡¡. 10"11 (slaling lhal he and Gregory
reaIized al lhe lime lhal haIling originalions vas nol as easy as fIi¡¡ing a svilch).

161
rebound.
627
In one memorandum, Lehman's Head of GIobaI Slralegy ex¡ressed lhe
concern lhal ´lhe leam res¡onsibIe for seIIing dovn lhese ¡osilions is lhe same one lhal
originaled lhem.¨
628
ßul severaI vilnesses denied lhere vas any incenlive nol lo seII
dovn lhe ¡orlfoIio because lhey knev lhal no one in GRIG vouId be gelling a 2008
bonus.
629

RegardIess of lhe reasons for Lehman's sIov reaclion lo ils oversized commerciaI
reaI eslale hoIdings, lhe facl remains lhal Lehman's baIance sheel did nol decIine unliI
lhe end of lhe second quarler of 2008, afler ßear Slearns had aIready nearIy coIIa¡sed.
L8I $839:;0B (?9Z8;B:E6?; M>:DE6D8B
The Ixaminer considered, in lhe course of delermining vhelher lhe officers and
direclors of Lehman breached lheir fiduciary dulies, lhe im¡acl lhal Lehman's
com¡ensalion ¡raclices may have had on Lehman's conducl such as lhe ex¡ansion inlo
¡olenliaIIy highIy ¡rofilabIe, bul riskier, Iines of business, as discussed above.
Lehman's com¡ensalion ¡oIicy vas designed, in lheory, lo ¡enaIize excessive
risk laking. Al limes, IID businesses lhal exceeded baIance sheel Iimils and breached

627
Ixaminer's Inlerviev of Irin M. CaIIan, Ocl. 23, 2009, al ¡. 13, Ixaminer's Inlerviev of Mark Weber,
Aug. 11, 2009, al ¡¡. 8"9.
628
Memorandum from Timolhy Lyons, Lehman, lo David GoIdfarb, Lehman, Slralegic Im¡eralives for
lhe Iirm (}uIy 3, 2008), al ¡. 1 |LßIX"DOCID 1377945j.
629
Ixaminer's Inlerviev of David O'ReiIIy, Ocl. 26, 2009, al ¡. 3, Ixaminer's Inlerviev of Mark A. WaIsh,
Ocl. 21, 2009, al ¡. 11, Ixaminer's Inlerviev of Kennelh Cohen, Ocl. 20, 2009, al ¡. 11, Ixaminer's
Inlerviev of Andrev }. Morlon, Se¡l. 21, 2009, al ¡¡. 19"20 (Morlon noles lhal WaIsh knev by Iebruary
2008 lhal he vouId receive onIy a slraighl saIary for 2008, vilh no bonus, lhus WaIsh had no
com¡ensalion"based incenlive lo infIale his marks). Ior a more delaiIed discussion of lhe effecl of
Lehman's officers' com¡ensalion slruclure on lhe incenlive lo lake risks, see A¡¡endix 11, Com¡ensalion.

162
risk Iimils faced diminulion of lheir com¡ensalion ¡ooI.
630
Al olher limes, IID used a
´Com¡ensalion Scorecard¨ lhal incIuded risk"veighled melrics such as relurn on risk
equily and relurn on nel baIance sheel lo delermine com¡ensalion ¡ooI aIIocalions.
631

The IID Com¡ensalion Commillee assessed ¡erformance againsl VaR, baIance sheel
usage, and risk a¡¡elile.
632

ßul in ¡raclice, Lehman revarded ils em¡Ioyees based u¡on revenue vilh
minimaI allenlion lo risk faclors in selling com¡ensalion. None of lhese risk"reIaled
ad|uslmenls vas a¡¡Iied rigorousIy or consislenlIy. Ken Umezaki, lhen Head of IID
Slralegy, noled afler a firm"vide s¡eech by IuId:
|Tjhe ma|orily of lhe lrading businesses focus is on revenues, vilh baIance
sheel, risk Iimil, ca¡ilaI or cosl im¡Iicalions being a secondary concern.
633

To caIcuIale revenue for ils com¡ensalion ¡ooI, Lehman incIuded revenue nol
yel recognized bul recorded based on mark"lo"markel ¡osilions.
634
In lheory, lherefore,
lraders and business unils vere incenled lo enler inlo lransaclions for shorl"lerm
¡rofils, even if lhose lransaclions crealed Iong"lerm risks for lhe firm.
635


630
Ixaminer's Inlerviev of Kenlaro Umezaki, }une 25, 2009, al ¡¡. 8"9, Lehman, GIobaI ConsoIidaled
ßaIance Sheel (May 31, 2007) |LßIX"DOCID 276740j, e"maiI from Kenlaro Umezaki, Lehman, lo Kaushik
Amin, Lehman, $* "30 (}uIy 10, 2007) |LßIX"DOCID 252873j.
631
Lehman, 2004 Iixed Income Division Com¡ensalion Scorecard (Undaled) |LßIX"DOCID 1748807j.
632
Lehman, COMIMITRICS IxceI S¡readsheel (Undaled), al ¡¡. 1"9 |LßIX"LL 1054327j, Lehman, 2007
IID Iorecasl ßudgel Su¡¡orl IxceI S¡readsheel (Undaled), al ¡¡. 1"11 |LßIX"ßARCMI 0000001j.
633
I"maiI from Kenlaro Umezaki, Lehman, lo Scoll }. Ireidheim, Lehman, $* "30 (A¡r. 19, 2007) |LßIX"
DOCID 318475j.
634
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡¡. 5, 22, Ixaminer's Inlerviev of }ames
Immerl, Ocl. 9, 2009, al ¡. 2"3.
635
1$$ Seclion III.A.1.b.1.2 of lhis Re¡orl. The Ixaminer finds lhal Lehman's assum¡lion of ever"
increasing business risk did nol come from lhe bollom u¡ bul ralher from lhe lo¡ dovn. SimiIarIy

163
Lehman's mark"lo"markel accounling aIso incenled Lehman lo vaIue
inveslmenls al lhe high end lo generale higher nel revenues. Lehman had ¡rocedures
lo conlroI such vaIualions, hovever, and in ¡raclice, lhe Ixaminer found no evidence lo
su¡¡orl a finding lhal any im¡ro¡er vaIualions vere laken lo affecl com¡ensalion.
A more delaiIed descri¡lion of Lehman's com¡ensalion ¡raclices may be found
al A¡¡endix 11.
DI ";:<4B6B
The Ixaminer invesligaled lhree ¡olenliaI cIaims in conneclion vilh Lehman's
managemenl of ils risks: (1) vhelher any Lehman officer breached lhe fiduciary duly of
care lo lhe firm by assuming excessive risk vilh res¡ecl lo Lehman's inveslmenls, or by
faiIing lo foIIov lhe firm's risk managemenl ¡oIicies, (2) vhelher any Lehman officer
breached lhe fiduciary duly of good failh and candor by nol ¡roviding lhe ßoard vilh
maleriaI informalion concerning risk issues, and (3) vhelher any Lehman direclor
breached lhe fiduciary duly of good failh lo monilor Lehman's risk managemenl.

Lehman's senior officers ÷ IuId and Gregory in ¡arlicuIar ÷ had sizeabIe hoIdings of Lehman slock and
may have been more incenled lo increase Lehman's Iong"lerm slock ¡rice lhan lo generale shorl"lerm
revenues.


164
LFI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
*8;6?> &CC6D8>B #>8:D387 !386> '67AD6:>4 5AE4 ?C (:>8 @4
':6<6;H E? &@B8>K8 $839:;0B /6BG .:;:H898;E M?<6D68B :;7
M>?D87A>8B
L:I $8H:< *E:;7:>7
To asserl a coIorabIe duly of care cIaim concerning cor¡orale conducl, lhe
¡Iainliff musl firsl overcome lhe ¡roleclion of lhe business |udgmenl ruIe. Under lhe
lradilionaI business |udgmenl ruIe as il a¡¡Iies lo direclors, lhere is a ´¡resum¡lion lhal
in making a business decision lhe direclors of a cor¡oralion acled on an informed basis,
in good failh and in lhe honesl beIief lhal lhe aclion laken vas in lhe besl inleresls of
lhe com¡any.¨
636
Thus, ´a courl viII nol subslilule ils |udgmenl for lhal of lhe board if
lhe Ialler's decision can be 'allribuled lo any ralionaI business ¡ur¡ose.'¨
637

The business |udgmenl ruIe has rareIy been a¡¡Iied lo officers. Hovever, based
u¡on a recenl decision by lhe DeIavare Su¡reme Courl
638
hoIding lhal lhe fiduciary
dulies of direclors and officers are idenlicaI, lhe Ixaminer concIudes lhal DeIavare
courls viII IikeIy hoId, al a minimum, lhal officers are ¡rolecled by lhe business
|udgmenl ruIe vhenever lhey acl under an ex¡ress deIegalion of aulhorily from lhe
ßoard, lhe DeIavare courls are aIso IikeIy lo hoId lhal officers are ¡rolecled by lhe ruIe

636
T(,/"3 !,#.0 <0 ;$:" 9$*#,3$-% !,0, 493 A.2d 946, 954 (DeI. 1985) (quoling C#,(:,( <0 5$R):, 473 A.2d
805, 812 (DeI. 1984)) (inlernaI quolalion marks omilled).
637
'80 (F-,*)(+ 1)(/3")# J)3 !,#.0 <0 5$<)$(, 280 A.2d 717, 720 (DeI. 1971)), :$$ lhe discussion of DeIavare
cor¡orale fiduciary Iav in A¡¡endix 1, LegaI Issues.
638
D"(*3$# <0 1*$.6$(:, 965 A.2d 695, 709 (DeI. 2009).

165
vhenever lhey acl vilhin lhe sco¡e of lheir discrelion even if nol ¡ursuanl lo ex¡ress
deIegalion by lhe ßoard.
639

The Ixaminer concIudes lhal lhe DeIavare courls are IikeIy lo hoId lhal an
officer can be slri¡¡ed of lhe ¡roleclion of lhe business |udgmenl ruIe onIy in fairIy
narrov circumslances nol ¡resenled here.
640

If lhe evidence overcomes lhe ¡resum¡lion of lhe business |udgmenl ruIe, lhe
¡Iainliff musl lhen ¡rove a vioIalion of lhe duly of care.
641
The slandard of ¡roof for a
duly of care cIaim for cor¡orale misconducl is generaIIy defined as gross negIigence.
642

Gross negIigence means ´reckIess indifference lo or a deIiberale disregard¨ of lhe
cor¡oralion's inleresls, or ´aclions vhich are vilhoul lhe bounds of reason.¨
643

Overcoming lhe business |udgmenl ruIe and eslabIishing gross negIigence are
¡arlicuIarIy difficuIl vhen a ¡Iainliff is chaIIenging lhe risk"laking of a financiaI
inslilulion. As a courl a¡¡Iying DeIavare Iav has recenlIy noled, laking risks is al lhe
hearl of a financiaI inslilulion's business, and decisions aboul vhal risks lo lake are

639
!>0 )80 (hoIding lhal lhe fiduciary dulies of officers and direclors are idenlicaI).
640
1$$4 $0+04 ;/;-33)( <0 =$#"(, 765 A.2d 910, 922 (DeI. 2000), :$$ "3:, 1%)*6 <0 ["( D,#&,%, 488 A.2d 858, 872
(DeI. 1985), ,<$##-3$8 ,( ,*6$# +#,-(8: E@ D"(*3$#, 965 A.2d al 713 n.54, C#,(:,(, 473 A.2d al 812, ,<$##-3$8
,( ,*6$# +#,-(8: E@ =#$6% <0 2):($#, 746 A.2d 244, 254 (DeI. 2000). P@"( <0 D)>>,#84 918 A.2d 341, 354 (DeI.
Ch. 2007), ;"::"#, <0 [$#()*#,( !,#., 559 I. Su¡¡. 1068, 1080 (D. Mass. 1983), J%()E"(& ,> ;"(*$$ <0 T()*$8
10 ="(&, 607 So. 2d 76, 84"85 (Miss. 1992) !>. ;)33: C/F-):)*),( !,0 <0 ;"/;)33"(4 '(/0, 559 A.2d 1261, 1279
(DeI. 1989) (´|}judiciaI reIuclance lo assess lhe merils of a business decision ends in lhe face of iIIicil
mani¡uIalion of a board's deIiberalive ¡rocess by seIf"inleresled cor¡orale fiduciaries.¨).
641
UnIike lhe direclors, Lehman's officers are nol immunized by Lehman's arlicIes of incor¡oralion from
¡ersonaI IiabiIily for breaching lhe duly of care. 1$$ Lehman ßrolhers HoIdings Inc., Cerlificale of
Incor¡oralion, al Ç 10.1, 5)%)*"*),( ,> 5)"E)3)*@ ,> B)#$/*,#:0
642
["( D,#&,%, 488 A.2d al 873.
643
?,%/O"& <0 ;,#*,( ?6),&,34 '(/., No. 7861, 1990 WL 42607, al ®12 (DeI. Ch. A¡r. 5, 1990).

166
inherenlIy ¡rolecled by lhe business |udgmenl ruIe from hindsighl chaIIenge.
644

Therefore, a ¡Iainliff asserling a breach of lhe duly of care by Lehman's senior
managers vouId face significanl burdens.
L@I #:DGH>?A;7
The Ixaminer finds insufficienl evidence lo su¡¡orl a cIaim lhal any Lehman
officer breached lhe fiduciary duly of care in conneclion vilh managing lhe risks
associaled vilh lhe more aggressive business slralegy Lehman ado¡led in 2006.
As menlioned above, Lehman's business slralegy in 2006 and 2007 vas ¡remised
on using more of ils baIance sheel lo increase ils ¡rinci¡aI inveslmenls. In addilion lo
lhe risks in lhe ¡ro¡rielary inveslmenls lhemseIves, many of lhe firm's ¡ro¡rielary
inveslmenls enlaiIed a commilmenl by Lehman lo a much Iarger amounl of debl or
equily lhan Lehman uIlimaleIy ex¡ecled lo relain for ilseIf. AIlhough lhese bridge
equily and bridge debl lransaclions vere risky, Lehman's managemenl decided lo
engage in lhese lransaclions because lhey vere ¡rofilabIe in lheir ovn righl, because
lhey heI¡ed Lehman ¡arlici¡ale in more and Iarger deaIs, and because lhey heI¡ed
Lehman lo deveIo¡ Iong"lerm cIienl reIalionshi¡s.

644
'( #$ !)*)+#,-. '(/0 1A6,38$# B$#)<"*)<$ 5)*)+0, 964 A.2d 106, 126 (DeI. Ch. 2009) (´The essence of lhe
business |udgmenl of managers and direclors is deciding hov lhe com¡any viII evaIuale lhe lrade"off
belveen risk and relurn. ßusinesses ÷ and ¡arlicuIarIy financiaI inslilulions ÷ make relurns by laking on
risk, a com¡any or inveslor lhal is viIIing lo lake on more risk can earn a higher relurn.¨).

167
Lehman's officers vere enlilIed under DeIavare Iav lo ¡ursue lhis aggressive
high"risk slralegy, and lhe Ixaminer does nol queslion lheir business decision lo do so,
decisions of lhis ly¡e are al lhe core of lhe business |udgmenl ruIe.
AIlhough ils managemenl vas enlilIed lo ¡ursue a business slralegy of
increasing ils ¡rinci¡aI inveslmenls and engaging in subslanliaI bridge debl and equily
lransaclions, Lehman's ovn ¡oIicies required managemenl lo consider and anaIyze lhe
risks of lhal slralegy in a syslemalic manner. The Ixaminer has found evidence lhal
raises queslions vhelher Lehman's senior managemenl disregarded Lehman's risk
managemenl framevork, incIuding ils risk a¡¡elile Iimils, ils singIe lransaclion Iimils,
ils slress lesling, ils baIance sheel Iimils, and lhe advice of lhe risk managers. As one
former risk manager ¡ul il, ´vhalever risk governance ¡rocess ve had in ¡Iace vas
uIlimaleIy nol effeclive in ¡rolecling lhe Iirm. . . . The funclion Iacked sufficienl
aulhorily vilhin lhe Iirm. Decision"making vas dominaled by lhe business.¨
645

Indeed, lhere is subslanliaI evidence lhal afler Lehman ado¡led a more aggressive
business slralegy in 2006, ils risk managemenl ¡oIicies and Iimils vere nol a ma|or
faclor in lhe firm's inveslmenl decisions, even lhough managemenl conlinued lo leII lhe

645
I"maiI from Vincenl DiMassimo, Lehman, lo Chrislo¡her M. O'Meara, Lehman (Se¡l. 1, 2008) |LßIX"
DOCID 203219j.

168
ßoard, lhe raling agencies, and reguIalors lhal Lehman vas ¡rudenlIy managing risk
lhrough ils risk managemenl syslem.
646

The evidence lhal Lehman disregarded ils risk conlroIs is ¡arlicuIarIy slrong
vilh res¡ecl lo bridge equily and bridge debl. In severaI im¡orlanl conlexls, Lehman
excIuded bridge equily and bridge debl commilmenls enlireIy from ils risk melrics.
These excIusions vere a¡¡arenlIy based on managemenl's assum¡lion lhal il vouId be
abIe lo dislribule lhe equily and debl successfuIIy lo olher ¡arlies. When lhe sub¡rime
crisis eru¡led inlo lhe credil markels generaIIy, lhis ex¡eclalion ¡roved lo be erroneous.
Hovever, lhe Ixaminer does nol find lhal lhe decisions by Lehman's officers
vere nol enlilIed lo lhe ¡roleclion of lhe business |udgmenl ruIe. AIlhough Lehman's
senior officers chose lo disregard indicalions from Lehman's risk managemenl syslems
lhal lhe firm vas underlaking excessive risk, lhe Ixaminer did nol find evidence lhal
Lehman's managemenl enlered inlo financiaI lransaclions vilhoul informing
lhemseIves of lhe basic facls of lhe lransaclions, as vouId be necessary lo slri¡ lhem of
lhe business |udgmenl ruIe's ¡roleclion and ¡rove gross negIigence. Lehman's officers
vere enlilIed lo sel and decide lo exceed risk Iimils, vhich vere mereIy looIs lo assisl

646
20+0, SIC, Lehman MonlhIy Risk Reviev Meeling Noles (}uIy 19, 2007), al ¡. 5 |LßIX"SIC 007363j
(´}eff |Goodmanj loId us lhal . . . VaR is |usl one measure lhal Lehman uses, and is more of a s¡eed
bum¡/varning sign lhan a lrue, hard Iimil "" lhal roIe faIIs lo RA |(i.e. risk a¡¡elile)j. |..j He said lhal
MadeIyn |Anloncicj, Dave |GoIdfarbj, and lhe execulive commillee lend lo Iook more al RA. As an aside,
MadeIyn came in afler }eff's ex¡Ianalion and gave virluaIIy lhe same s¡eech.¨).

169
lhem in lheir inveslmenl decisions, nol IegaI reslrainls on lheir aulhorily. They made
considered business decisions lo do so because of ¡rofil"making o¡¡orlunilies.
Nor does lhe Ixaminer find lhal Lehman's officers exceeded lhe sco¡e of lheir
aulhorily by ¡ursuing an aggressive counlercycIicaI grovlh slralegy. Lehman's
managemenl vas enlilIed lo caIcuIale lhal lhe sub¡rime crisis offered Lehman lhe
o¡¡orlunily lo become a dominanl residenliaI morlgage originalor, lo ex¡and ils
aIready ¡overfuI commerciaI reaI eslale franchise, and lo use Iarge Ieveraged Ioans as a
means lovards deveIo¡ing ils inveslmenl banking business. AIlhough managemenl's
discIosures lo lhe ßoard on lhe risks of lhis slralegy vere nol as delaiIed or as ob|eclive
as lhey mighl have been, lhe Ixaminer does nol find lhal managemenl's discIosures
vere so Iacking as lo de¡rive lhe officers of lhe ¡roleclion of lhe business |udgmenl
ruIe.
Iven if lhe business |udgmenl ruIe did nol a¡¡Iy lo lhe officers' ¡ursuil of a
counlercycIicaI grovlh slralegy, lhe Ixaminer vouId nol find gross negIigence
sufficienl lo eslabIish a breach of lhe duly of care. Gross negIigence requires ¡roof lhal
lhe officer made decisions lhal vere irralionaI or reckIess. Lehman's senior officers
decided lo make business decisions ¡rimariIy based on lheir inluilive underslanding of
lhe markels and lheir evaIualion of lhe risks and revards of enlering inlo cerlain
lransaclions. Their decision lo use lheir ¡raclicaI business ex¡erience ralher lhan reIy

170
on cerlain quanlilalive risk Iimils and olher melrics cannol be considered irralionaI or
reckIess.
The decisions by Lehman's managemenl musl aIso be considered in conlexl. In
many res¡ecls, Lehman's lransaclions vere no differenl from lhose conducled by olher
markel ¡arlici¡anls, and vere, in some res¡ecls, Iess aggressive lhan lhose of lheir
com¡elilors. Ior exam¡Ie, severaI financiaI inslilulions suffered calaslro¡hic Iosses on
inveslmenls in CDOs and credil defauIl sva¡s, Lehman ¡rudenlIy Iimiled ils ex¡osure
in lhese areas. Lehman's officers vouId argue lhal an anaIysis of lheir managemenl of
Lehman's risks shouId consider lhe risks lhal Lehman ¡rudenlIy avoided aIong vilh
lhe risks lhal Lehman unsuccessfuIIy look.
Moreover, a breach of lhe duly of care cIaim vouId reIy heaviIy on lhe leslimony
and e"maiI communicalions of Lehman's risk managers and financiaI conlroIIers. ßul
risk managers and conlroIIers are by definilion more risk"averse lhan ´risk"lakers¨ ÷ lhe
business ¡eo¡Ie vho acluaIIy make lhe decisions on behaIf of lhe enler¡rise. Indeed,
risk managers and conlroIIers are naluraIIy incIined lo see Iimils and conlroIs as
´harder¨ and Iess susce¡libIe lo |udgmenl lhan business¡ersons. Lehman's officers
vouId have a com¡eIIing argumenl lhal lhe risk managers' o¡¡osilion lo various
slralegies and lransaclions musl be considered in lhis conlexl.

171
L6I (?A;E8>D4D<6D:< \>?]E3 *E>:E8H4 ]6E3 /8BZ8DE E?
/8B678;E6:< .?>EH:H8 &>6H6;:E6?;
The Ixaminer does nol find lhal Lehman's counlercycIicaI grovlh slralegy vilh
res¡ecl lo ils residenliaI morlgage originalion gives rise lo a coIorabIe duly of care
cIaim. Lehman's managemenl look significanl sle¡s lo curlaiI and conlroI ils
originalion of sub¡rime morlgages, incIuding disconlinuing cerlain morlgage
¡rograms, inslaIIing im¡roved risk managemenl syslems, and re¡Iacing managemenl of
ils sub¡rime originalor. Lehman's managemenl aIso successfuIIy hedged ils sub¡rime
morlgage risk, al Ieasl unliI earIy 2008, and avoided some of lhe calaslro¡hic
inveslmenls lhal olher financiaI inslilulions made in lhe morlgage markel, for exam¡Ie
in CDOs.
Lehman's managemenl can be second"guessed, ¡erha¡s, for ils decision lo
conlinue originaling AIl"A morlgages lhrough ils Aurora subsidiary even as il vas
curlaiIing lhe originalion of sub¡rime morlgages lhrough ils ßNC subsidiary, and for
faiIing lo curlaiI ils sub¡rime morlgage originalions more quickIy. As described above,
hovever, lhese business decisions vere ¡arl of Lehman's slralegy lo benefil from a
consoIidalion in lhe morlgage originalion induslry. In 2007, Lehman curlaiIed
originalion of riskier segmenls of ils AIl"A ¡roduclion afler il became evidenl lhal lhese
riskier segmenls vere ¡erforming as ¡oorIy as sub¡rime Ioans.
The business |udgmenl ruIe shieIds from |udiciaI reviev lhe foregoing decisions
by Lehman concerning ils AIl"A and sub¡rime originalions. The Ixaminer does nol

172
find lhal Lehman's managemenl shouId be de¡rived of lhal ¡roleclion, or lhal lhese
business decisions vere irralionaI or reckIess.
L66I $839:;0B (?;D8;E>:E6?; ?C /6BG 6; +EB (?998>D6:<
/8:< %BE:E8 #AB6;8BB
As described above, Lehman enlered inlo Iarge commerciaI reaI eslale
lransaclions during lhe course of 2007, incIuding lransaclions lhal Iefl Lehman vilh a
subslanliaI inveslmenl in bridge equily. The mosl significanl of lhese lransaclions vas
Archslone.
Lehman enlered inlo lhese commerciaI reaI eslale bridge equily lransaclions al a
¡recarious lime in lhe financiaI markels. Afler lhe onsel of lhe sub¡rime morlgage
crisis in December 2006 or }anuary 2007, lhere vas a risk of conlagion lo lhe commerciaI
reaI eslale markel. Lehman's officers recognized lhis risk bul concIuded lhal il vas
manageabIe.
647
AIlhough in hindsighl lhis concIusion vas vrong, lhe Ixaminer cannol
concIude lhal al lhe lime il vas reckIess or irralionaI.
Lehman's officers exercised |udgmenl lo ¡ursue commerciaI reaI eslale
o¡¡orlunilies, and lo override indicalors from lhe firm's risk syslems. ßefore Lehman
enlered inlo lhe Archslone lransaclion, Lehman's ReaI Islale grou¡ vas aIready near ils
risk Iimils. And lhe risk in lhe Archslone commilmenl and severaI conlem¡oraneous
reaI eslale bridge equily deaIs vas enormous ÷ ¡erha¡s as Iarge as or Iarger lhan

647
Ixaminer's Inlerviev of Richard S. IuId, }r., Se¡l. 30, 2009, al ¡¡. 14"15, Ixaminer's Inlerviev of }ose¡h
Gregory, Nov. 13, 2009, al ¡¡. 7"8, Ixaminer's Inlerviev of Mark A. WaIsh, Ocl. 21, 2009, al ¡¡. 7"9.

173
Lehman's enlire ¡re"exisling reaI eslale book ¡ul logelher.
648
Thus, il vas obvious lhal
enlering inlo Archslone and lhese olher lransaclions vouId ¡ul Lehman veII over ils
reaI eslale risk a¡¡elile Iimil. SeveraI vilnesses, incIuding }effrey Goodman, lhe risk
manager ¡rimariIy res¡onsibIe for GRIG, said in lheir inlervievs lhal lhe commerciaI
reaI eslale grou¡ vas nol sub|ecl lo ils risk a¡¡elile Iimils.
649
SimiIarIy, Mark WaIsh, lhe
head of GRIG, said he vas informed lhal GRIG vas aIIocaled excess risk a¡¡elile from
olher business divisions.
650

The risk a¡¡elile Iimil a¡¡IicabIe lo an individuaI business Iine may be vieved as
a ly¡e of concenlralion Iimil. Concenlralion Iimils are im¡orlanl lo ensure lhal a firm
does nol lake loo much risk in a singIe, undiversified business or area. ßy exceeding
lhe concenlralion Iimils a¡¡IicabIe lo Lehman's reaI eslale business, Lehman's officers
look lhe risk lhal lhe firm vouId over"concenlrale ils ca¡ilaI in commerciaI reaI eslale
inveslmenls.

648
1$$ Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008)
|LßIX"DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl, Lehman,
$* "30 (}uIy 24, 2008) |LßIX"DOCID 265567j (shoving lhal as a resuIl of lhe incIusion of lhe Archslone
¡osilions inlo lhe firm's risk measuremenls, GRIG's risk a¡¡elile usage increased from $689 miIIion lo
$1.233 biIIion), e"maiI from MadeIyn Anloncic, Lehman, lo Roger Nagioff, Lehman, $* "30 (}une 29, 2007)
|LßIX"DOCID 1478403j, e"maiI from }effrey Goodman, Lehman, lo Mark A. WaIsh, Lehman, $* "30 (}une
29, 2007) |LßIX"DOCID 2538925j (same).
649
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, Ixaminer's Inlerviev of David S. Lazarus,
Nov. 18, 2009, al ¡. 4, Ixaminer's Inlerviev of IauI A. Hughson, Ocl. 28, 2009, al ¡. 4, Ixaminer's
Inlerviev of Kennelh Cohen, Ocl. 20, 2009, al ¡. 6, Ixaminer's Inlerviev of Mark Weber, Aug. 11, 2009, al
¡. 3.
650
Ixaminer's Inlerviev of Mark WaIsh, Ocl. 21, 2009, al ¡. 5.

174
The risk allribulabIe lo Archslone and al Ieasl one olher bridge equily
lransaclion vas excIuded from Lehman's risk a¡¡elile usage caIcuIalion for aImosl
lhree monlhs afler lhe May 2007 commilmenl dale for Archslone.
651
These lvo
lransaclions vere nol incIuded in lhe firm's risk a¡¡elile caIcuIalion unliI Augusl 13,
2007.
652
Afler lhe excIusion vas acknovIedged in Augusl 2007, Lehman relroacliveIy
correcled ils risk a¡¡elile figures lo incIude lhe ¡reviousIy omilled risks.
653
The
relroaclive caIcuIalion shovs lhal if lhese lransaclions had been incIuded in lhe risk
a¡¡elile usage, Lehman vouId have been over ils firm"vide and reaI eslale risk
a¡¡elile Iimils aImosl conlinuousIy from lhe dale of lhe Archslone commilmenl.
AIlhough Lehman's decision lo concenlrale heaviIy in reaI eslale bridge equily
vas unvise in relros¡ecl, and excIuding ma|or lransaclions from Lehman's risk usage
caIcuIalion vas a breach of risk managemenl ¡rolocoI, lhe facl remains lhal Lehman's
managemenl seriousIy considered lhe risks in lhe Archslone lransaclion in a series of

651
Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008) |LßIX"
DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl, Lehman, $* "30
(}uIy 24, 2008) |LßIX"DOCID 265567j, "//,#8 Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009, e"
maiI from Mark Weber, Lehman, lo Laura Vecchio, Lehman, $* "30 (}uIy 31, 2008) |LßIX"DOCID 264849j,
Lehman, Markel Risk ConlroI Commillee Meeling Agenda (Nov. 12, 2007), al ¡. 17 |LßIX"DOCID
271334j, allached lo e"maiI from Mark Weber, Lehman, lo IauI Shollon, Lehman, $* "30 (Nov. 12, 2007)
|LßIX"DOCID 265289j.
652
Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008) |LßIX"
DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl, Lehman, $* "30
(}uIy 24, 2008) |LßIX"DOCID 265567j, :$$ "3:, e"maiI from Mark Weber, Lehman, lo Laura Vecchio,
Lehman, $* "30 (}uIy 31, 2008) |LßIX"DOCID 264849j, Lehman, Markel Risk ConlroI Commillee Meeling
Agenda (Nov. 12, 2007), al ¡. 17 |LßIX"DOCID 271334j, allached lo e"maiI from Mark Weber, Lehman, lo
IauI Shollon, Lehman, $* "30 (Nov. 12, 2007) |LßIX"DOCID 265289j.
653
Mark Weber, Lehman, Charl Shoving Risk A¡¡elile Ad|uslmenl for Archslone (}uIy 24, 2008) |LßIX"
DOCID 425705j, allached lo e"maiI from Mark Weber, Lehman, lo IorlfoIioRisk Su¡¡orl, Lehman, $* "30
(}uIy 24, 2008) |LßIX"DOCID 265567j.

175
Ixeculive Commillee and Commilmenl Commillee meelings over a ¡eriod of veeks,
modified lhe lransaclion in severaI im¡orlanl vays lo lry lo manage lhe risk, and
uIlimaleIy decided lhal lhe revards from lhe lransaclion oulveighed lhe risk.
Moreover, Lehman's managemenl ¡IainIy vas avare of lhe risk associaled vilh lhe
Archslone lransaclion during lhis ¡eriod. In facl, Lehman's managemenl vas focused
on lrying lo dislribule lhe Archslone debl and equily and reduce lhe firm's risk in
advance of lhe cIosing of lhal lransaclion.
The Ixaminer lhus concIudes lhal lhere is no coIorabIe cIaim of breach of
fiduciary duly on lhe ¡arl of Lehman's officers. Lehman managemenl's decision lo
exceed ils Iimil for lhis business and invesl heaviIy in commerciaI reaI eslale is
¡rolecled by lhe business |udgmenl ruIe. Thal ruIe does nol o¡erale relroacliveIy lo
|udge a business decision based on ils uIlimale faiIure, bul inslead focuses on lhe
reasons for making lhal decision as of lhe lime and in lhe conlexl in vhich il vas made.
The officers' decision nol lo foIIov lhe guidance of ils inlernaI and voIunlary risk
managemenl syslem does nol give rise lo a breach of lhe duly of care.
L666I (?;D8;E>:E87 +;K8BE98;EB 6; $8K8>:H87 $?:;B
As described above, Lehman's ¡rinci¡aI inveslmenl slralegy aIso incIuded
¡arlici¡aling in Ieveraged Ioan lransaclions. This business grev s¡eclacuIarIy in 2006
and lhe firsl haIf of 2007. Many of lhese Ioans vere made lo ¡rivale equily firms, or
s¡onsors, vho vere ¡urchasing com¡anies as ¡arl of Ieveraged buy"ouls. These

176
lransaclions vere risky for Lehman because lhey consumed lremendous amounls of
ca¡ilaI, vere made on lerms lhal slrongIy favored lhe borrovers, and oflen invoIved
bridge equily or bridge debl lhal Lehman ho¡ed lo dislribule lo olher financiaI
inslilulions (bul vas commilled lo kee¡ for ilseIf if il vas unabIe lo do so).
The evidence is lhal during lhe firsl eighl monlhs of Lehman's fiscaI 2007,
Lehman's Ieveraged Ioan business, Iike ils commerciaI reaI eslale business, vas nol
sub|ecl lo any Iimils. ßelveen Augusl 2006 and }uIy 2007, Lehman enlered inlo
a¡¡roximaleIy 30 Ieveraged Ioans lhal exceeded lhe singIe lransaclion Iimil lhal had
¡reviousIy been ado¡led for lhese lransaclions, oflen by significanl margins.
654
The
charl beIov demonslrales lhe magnilude of lhese overages:

654
}oe Li, Lehman, STL ßacklesling IxceI S¡readsheel (}uIy 25, 2007) |LßIX"DOCID 2506462j, allached lo
e"maiI from }oe Li, Lehman, lo Ired S. OrIan, Lehman, $* "30 (}uIy 25, 2007) |LßIX"DOCID 2563167j.

177

$8K8>:H87 '6;:;D8 58:<B ]6E3 *6;H<8 !>:;B:DE6?; $?BB L^*!$_I 6; %JD8BB ?C $696E
F

(}uIy 2007 AnaIysis, DeaIs belveen Augusl 2006 and }uIy 2007) ($ in MiIIions)
58:< ):98 &>6H6;:<
(?996E98;E
5:E8
2

^&<7 '>:98]?>G_ *!$
C?> 78:<B ]6E3 *!$
?K8> QNXT..
3

^)8] '>:98]?>G_
*!$ C?> 78:<B ]6E3
*!$ ?K8> QSTT..
3

InleIsal " 2,090 1,045
Wealherford 4/30/2007 2,030 1,015
Houghlon MiffIin Riverdee¡ Grou¡ 7/16/2007 1,389 694
TXU Cor¡ 2/26/2007 1,368 684
Iirsl Dala Cor¡oralion 4/2/2007 1,203 601
AIcoa Inc. 5/24/2007 1,200 600
Home De¡ol Su¡¡Iy 6/19/2007 971 486
CDW Cor¡oralion 5/29/2007 909 455
DoIIar GeneraI 3/1/2007 882 441
Harman InlernalionaI Induslries 4/25/2007 692 346
US IoodService " 651 326
CVS 1/16/2007 600 300
ßCI 6/29/2007 553 277
ßAWAG ISK 3/1/2007 550 275
Tognum AG " 515 258
IroSiebenSal.1 Media AG 1/31/2007 500 250
CßS Cor¡oralion " 476 238
Wesl Cor¡ " 465 232
IßM InlernalionaI Grou¡ ßV " 440 220
Sequa Cor¡ 6/18/2007 431 216
Tesoro 4/10/2007 431 215
AIIiance Dala 5/31/2007 424 212
A¡¡Iebee's InlernalionaI, Inc. 7/16/2007 403 202
AIIison Transmission 5/21/2007 390 195
Dockvise " 388 194
Univision Communicalions 7/14/2006 387 193
IHH Cor¡oralion 3/15/2007 386 193
IormuIa One Grou¡ " 378 189
Uniled RenlaIs, Inc. 7/22/2007 372 186
Thermo IIeclron Cor¡. 5/7/2006 360 180
NalionaI ßeef Iacking Co. 5/11/2007 335 168
ßuIgarian TeIecommunicalions 3/28/2007 327 164
IndemoI HoIdings 5/11/2007 322 161
Linde MaleriaI HandIing Grou¡ " 293 146
IinnacIe Ioods 2/10/2007 277 138
The KIockner Ienla¡Iasl Grou¡ " 276 138
Guilar Cenler, Inc. 6/20/2007 263 132

Nole: G)+63)+6*$8 /$33: )(8)/"*$ *#"(:"/*),(: R)*6 1?5 )( $\/$:: ,> *6$ 3)%)* /,(8)*),(: 8$:/#)E$8 E$3,R:
1
TabIe incIudes aII deaIs from Augusl 2006 lo }uIy 2007 lhal are in excess of $900M and aIso have a caIcuIaled STL of > $250M under lhe Ioss
caIcuIalion melhodoIogy in ¡Iace }uIy 2007 (See ´OId Iramevork¨ STL coIumn). HighIighled deaIs have an STL in excess of lhe a¡¡Iied Iimil slaled in
coIumn lilIe. Transaclions in excess of lhe Limils vouId have required Ixeculive Commillee a¡¡rovaI (LßIX"DOCID 2170674).
2
´OriginaI commilmenl¨ indicales earIiesl knovn dale on vhich a deaI vas commilled lo by Lehman, as ¡resenled in lhe LIG WeekIy Revievs.
3
AII deaI dala is from an IxceI s¡readsheel (LßIX"DOCID 2506463) allached lo a }uIy 25, 2007 }oe Li emaiI (LßIX"DOCID 2563148) slaling:
´IreviousIy ve have used a Ioss Iimil of 250mm lo 350mm. We vouId Iike lo ¡ro¡ose a 400mm as lhe Iirm's revenue has increased.¨ In addilion lo
changing lhe Iimil, il vas ¡ro¡osed lhal risk faclors be ad|usled lo excIude defauIl risk, Ieaving onIy syslemalic risk as lhe SingIe Transaclion Loss.
This ¡ro¡osed change had lhe effecl of haIving lhe STL (caIcuIaled risk of lhe ¡osilion), and simuIlaneousIy increasing lhe Iimil. +E89B 36H3<6H3E87 6;
E38 ^&<7 '>:98]?>G_ D?<A9; :>8 *!$ ;A9@8>B D:<DA<:E87 A;78> E38 98E3?7?<?H4 6; Z<:D8 6; dA<4 NTTV E3:E 8JD887 E38 QNXT. <?BB <696E 6; Z<:D8
:E E38 E698, O6H3<6H3E87 6E89B 6; E38 ^)8] '>:98]?>G_ D?<A9; >8Z>8B8;E *!$ ;A9@8>B D:<DA<:E87 A;78> E38 Z>?Z?B87 98E3?7?<?H4 L]36D3
3:<K87 E38 *!$ :9?A;EI E3:E 8JD887 E38 Z>?Z?B87 QSTT. $696E, IIease nole lhal a Se¡lember 2007 ¡resenlalion on STL (LßIX"DOCID 194075)
slaled lhal lhe currenl Iimil vas $250 and ¡ro¡osed lhal lhe Iimil be increased lo $300M. A Ieveraged finance risk ¡resenlalion lo lhe Ixeculive
Commillee one monlh Ialer recommended lhal lhe Iimil be increased lo $400M (LßIX"DOCID 569902).


178
Lehman's decision lo exceed lhe singIe lransaclion Iimil ¡roved lo be unvise.
}usl as Lehman vas enlering inlo a ¡arlicuIarIy Iarge voIume of commilmenls, Lehman
von a huge voIume of deaIs, and lhe credil markels froze, causing Lehman lo be Iefl
vilh lremendous risk on ils books. ßefore Iong, Lehman's high yieId book shoved a
risk a¡¡elile usage aImosl doubIe lhe Iimil for lhose ex¡osures ÷ an enormous
concenlralion of risk in a singIe, iIIiquid assel cIass.
As a resuIl of lhis high voIume of commilmenls, some in Lehman's managemenl
became concerned, as earIy as }uIy 2007, lhal lhe firm vouId nol be abIe lo fund aII of ils
commilmenls. As Ian Lovill, lhen lhe CAO, vrole in an e"maiI daled }uIy 20, 2007: ´In
case ve ever forgel, lhis is vhy one has concenlralion Iimils and overaII ¡orlfoIio Iimils.
Markels do seize u¡.¨
655

AIlhough Lehman's decision lo enler inlo huge iIIiquid lransaclions during a
recognized ´credil bubbIe¨
656
vas unvise, lhe Iarge Ieveraged Ioan lransaclions vere
considered and a¡¡roved by Lehman's Ixeculive Commillee, vhich vas enlilIed lo
increase or override lhe singIe lransaclion Iimil, |usl as il vas enlilIed lo increase or
override lhe risk a¡¡elile Iimils. Such decisions are sub|ecl lo lhe business |udgmenl
ruIe.

655
I"maiI from Ian T. Lovill, Lehman, lo Chrislo¡her M. O'Meara, Lehman (}uIy 20, 2007) |LßIX"DOCID
194066j.
656
I"maiI from Chrislo¡her M. O'Meara, Lehman, lo IauIo R. Tonucci, Lehman (A¡r. 6, 2007) |LßIX"
DOCID 1349076j.

179
L6KI '6>9"2678 /6BG "ZZ8E6E8 %JD8BB8B
The Ixaminer aIso considered vhelher Lehman's handIing of ils overaII risk
Iimils vas a breach of lhe duly of care. As described above, Lehman's managemenl
decided lo lreal lhe firm's risk a¡¡elile Iimil as a sofl Iimil ralher lhan as a meaningfuI
conslrainl on managemenl's assum¡lion of risk.
Lehman decided lo exceed lhe firm"vide risk a¡¡elile Iimil al severaI |unclures.
Iirsl, lhough Lehman dramalicaIIy increased lhe Iimil for fiscaI 2007, Lehman
neverlheIess a¡¡roached lhe nev Iimil by May 2007. Lehman enlered inlo Archslone
and severaI olher bridge equily lransaclions nolvilhslanding lhe obvious facl lhal lhose
lransaclions vouId immedialeIy ¡ul Lehman over ils firm"vide risk a¡¡elile Iimils.
657

SeveraI monlhs Ialer, vilh Lehman's firm"vide risk usage acluaIIy in excess of
lhe Iimil, Lehman decided lo increase lhe Iimil again, even as one of ils senior risk
managers admilled lo lhe SIC lhal Lehman did nol in facl have increased risk"laking
ca¡acily.
658

Then, in earIy Oclober 2007, vhen Lehman's risk a¡¡elile excesses vere al lheir
¡eak, al Ieasl some members of Lehman's senior managemenl discussed lhe Iimil
breaches and decided lo granl a lem¡orary re¡rieve from lhe Iimils based on lhe
difficuIl condilions in lhe reaI eslale and Ieveraged Ioan markels. Ior lhe mosl ¡arl,

657
Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009.
658
SIC, Noles from Lehman's MonlhIy Risk Reviev meeling (Ocl. 11, 2007), al ¡. 6 |LßIX"SIC 007438j.

180
Lehman did nol ¡ursue aggressive risk reduclion slralegies unliI somelime in 2008,
¡arlicuIarIy vilh res¡ecl lo commerciaI reaI eslale.
Ralher lhan reduce ils risk usage, Lehman cured ils risk a¡¡elile overages by
increasing lhe firm"vide risk a¡¡elile Iimil yel again.
659
There is evidence vhich raises
lhe queslion vhelher Lehman's risk"laking ca¡acily had in facl increased. The
increased Iimil amounl vas caIcuIaled by subslanliaIIy changing lhe assum¡lions
¡reviousIy used in caIcuIaling lhe risk a¡¡elile Iimil, and by using a very aggressive
2008 budgeled revenue figure. If Lehman had used lhe same assum¡lions as il had
¡reviousIy used for caIcuIaling lhe risk a¡¡elile Iimil, and a more reaIislic revenue
figure, il vouId IikeIy have concIuded lhal il vas necessary lo reduce ils risk a¡¡elile
Iimil lo lake accounl of ils diminished ¡rofilabiIily reIalive lo ils equily base. Such a
concIusion mighl have im¡eIIed managemenl more urgenlIy lo seII assels, reduce lhe
firm's risk ¡rofiIe, and reduce lhe firm's Ieverage.
AIlhough Lehman's risk a¡¡elile Iimils uIlimaleIy ¡rovided IillIe or no Iimiling
funclion al aII, lhe Ixaminer does nol find lhal lhe decision lo exceed or disregard lhese
Iimils gives rise lo a coIorabIe cIaim of breach of fiduciary duly. These inlernaI Iimils
vere inlended onIy for lhe guidance of Lehman's ovn managemenl, lhey did nol ¡ul

659
Ixaminer's Inlerviev of Chrislo¡her M. O'Meara, Aug. 14, 2009, al ¡. 10, Lehman's MaleriaI for
Markel Risk ConlroI Commillee Meeling (}an. 14, 2008), al ¡. 33 |LßIX"DOCID 271352j, allached lo e"
maiI from Mark Weber, Lehman, lo IauI Shollon, Lehman, $* "3. (}an. 14, 2008) |LßIX"DOCID 223263j,
Islimaled Third Quarler 2007 IinanciaI Informalion Iresenlalion lo Lehman ßoard of Direclors (Se¡l. 11,
2007), al ¡. 6 |LßHI_SIC07940_026288j.

181
any IegaI conslrainls on lhe sco¡e of managemenl's aulhorily. And because business in
generaI and inveslmenl banking in ¡arlicuIar is an inherenlIy risky enler¡rise,
Lehman's managemenl vas enlilIed lo ¡ursue a counlercycIicaI grovlh slralegy based
on ils evaIualion of lhe markels and of Lehman's business, even if lhal slralegy
necessariIy ¡osed a risk lo lhe firm. Moreover, Lehman's risk a¡¡elile Iimil overages
vere re¡orled lo lhe SIC. The Ixaminer does nol find lhal managemenl's decision lo
increase and lhen exceed Lehman's risk a¡¡elile IeveIs gives rise lo a coIorabIe cIaim for
breach of fiduciary dulies.
LKI '6>9"2678 #:<:;D8 *388E $696EB
Lehman aIso faiIed lo a¡¡Iy ils baIance sheel Iimils in Iale 2007. A¡¡Iicalion of
lhese Iimils vouId aIso have reslricled Lehman's risk"laking. Inslead, Lehman
dramalicaIIy increased lhe size of ils baIance sheel, and used increasingIy Iarge voIumes
of Re¡o 105 lransaclions lo creale lhe a¡¡earance lhal lhe firm's nel Ieverage ralio
remained vilhin a reasonabIe range of such ralios eslabIished by lhe raling agencies.
660

LK6I *E>8BB !8BE6;H
As described above, Lehman's slress lesls suffered from a significanl fIav.
AIlhough Lehman made a slralegic decision in 2006 lo lake more ¡rinci¡aI risk, Lehman
did nol modify ils slress lesls lo incIude lhe risks arising from many of ils ¡rinci¡aI
inveslmenls ÷ incIuding ils reaI eslale inveslmenls olher lhan commerciaI morlgage"

660
Ior furlher delaiI regarding lhe Re¡o 105 lransaclions, see Seclion III.A.4 of lhis Re¡orl.

182
backed securilies (´CMßS¨), ils ¡rivale equily inveslmenls, and, during a cruciaI
¡eriod, ils Ieveraged Ioan commilmenls.
661
Thus, Lehman's managemenl ¡ursued ils
counlercycIicaI grovlh slralegy, incIuding an increasing concenlralion of risk in iIIiquid
assels, vilhoul avaiIing ilseIf of a common risk managemenl lechnique for evaIualing
lhe ¡olenliaI risk lo lhe firm from lhal slralegy.
ßul slress lesls, Iike risk Iimils, are an inslrumenl avaiIabIe for use of
managemenl as il deems a¡¡ro¡riale, Lehman's managemenl vas nol IegaIIy required
lo make business decisions based on lhe resuIls of slress lesling.
662
Moreover, lhe SIC
vas avare lhal Lehman's slress lesls excIuded unlraded inveslmenls and did nol
queslion lhe excIusion, because hisloricaIIy il had been lhe norm lo Iimil slress lesls
onIy lo lraded ¡osilions.
663
ßased on lhese facls, lhe Ixaminer does nol find lhal
Lehman managemenl's use of lhe slress lesls gives rise lo a coIorabIe cIaim for a breach
of lhe duly of care.
LK66I *A99:>4Y &CC6D8>B0 5AE4 ?C (:>8
The Ixaminer revieved exlensive evidence concerning Lehman's senior officers'
decision lo disregard lhe guidance ¡rovided by Lehman's risk managemenl syslem as
lhey im¡Iemenled lhe firm's aggressive business slralegy in 2006 and 2007. Thal

661
I"maiI from MeIda IIagoz, Lehman, lo Sle¡hen Lax, Lehman, $* "30 (}une 21, 2007) |LßIX"DOCID
2546617j, Ixaminer's Inlerviev of IauI Shollon, Ocl. 16, 2009, al ¡¡. 4"5.
662
Lehman vas required lo conducl cerlain slress lesling as ¡arl of ils ¡arlici¡alion in lhe CSI ¡rogram.
1$$ 17 C.I.R. 240.15c3"1 (2007).
663
Ixaminer's Inlerviev of Mallhev Iichner, Nov. 23, 2009, al ¡. 12, Ixaminer's Inlerviev of IauI
Shollon, Ocl. 16, 2009, al ¡¡. 4"5[ Ixaminer's Inlerviev of }effrey Goodman, Aug. 28, 2009.

183
evidence goes lo lhe hearl of Lehman's uIlimale financiaI faiIure because lhe iIIiquid
inveslmenls acquired during lhal ¡eriod couId nol be soId off sufficienlIy quickIy, and
Lehman's Iiquidily and confidence suffered as a resuIl. When lhe run on Lehman
began in Se¡lember 2008, Lehman Iacked lhe Iiquidily lo survive. Thus, Lehman's
coIIa¡se can be lraced in ¡arl lo Lehman managemenl's ado¡lion of a counlercycIicaI
grovlh slralegy in 2006 and 2007. AIlhough managemenl lurned oul lo be vrong in
lheir business |udgmenls, lhe evidence does nol eslabIish lhal managemenl's aclions
and decisions vere so reckIess and irralionaI as lo give rise lo a coIorabIe cIaim of
breach of fiduciary duly.
|ßjusiness faiIure is an ever"¡resenl risk. The business |udgmenl ruIe
exisls ¡reciseIy lo ensure lhal direclors and managers acling in good failh
may ¡ursue risky slralegies lhal seem lo ¡romise greal ¡rofil. If lhe mere
facl lhal a slralegy lurned oul ¡oorIy is in ilseIf sufficienl lo creale an
inference lhal lhe direclors vho a¡¡roved il breached lheir fiduciary
dulies, lhe business |udgmenl ruIe viII have been denuded of much of ils
uliIily.
664

LNI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
*8;6?> &CC6D8>B #>8:D387 !386> '67AD6:>4 5AE4 E? +;C?>9 E38
#?:>7 ?C 56>8DE?>B (?;D8>;6;H E38 $8K8< ?C /6BG $839:; O:7
"BBA987
The Ixaminer aIso does nol find a coIorabIe cIaim lhal, during lhe ¡eriod from
May 2007 lhrough }anuary 2008, Lehman's senior officers breached lheir duly of candor
vilh res¡ecl lo lheir discIosures lo lhe ßoard of Direclors concerning Lehman's risk

664
?#$(R)/& C%0 5)*)+0 ?#-:* <0 2#(:* ] ^,-(+4 505090, 906 A.2d 168, 193 (DeI. Ch. 2006), ">>A8 :-E (,%0
?#$(R)/& C%0 5)*)+0 ?#-:* <0 =)33$**, 931 A.2d 438 (DeI. 2007).

184
managemenl syslem. Lehman's managemenl gave lhe ßoard reguIar re¡orls
concerning lhe slale of lhe firm's business, incIuding re¡orls conlaining quanlilalive
risk, baIance sheel, revenue, and olher melrics. Lehman's managemenl aIso discussed
markel condilions and lheir ¡olenliaI im¡acl on lhe firm vilh lhe ßoard. The Ixaminer
did nol find evidence lhal managers knovingIy made faIse slalemenls lo lhe ßoard.
In Iighl of lhe ßoard's Iimiled roIe in su¡ervising lhe risk managemenl of lhe
enler¡rise, and lhe absence of aulhorily mandaling grealer discIosure lo lhe ßoard, lhe
Ixaminer does nol beIieve lhal lhe officers had a IegaI duly lo ¡rovide lhe ßoard vilh
addilionaI negalive informalion. The Ixaminer does nol find lhal lhe evidence gives
rise lo a coIorabIe cIaim for a breach of lhe duly of candor.
Lehman's managemenl re¡ealedIy discIosed lo lhe ßoard lhal Lehman inlended
lo grov ils business dramalicaIIy, increase ils risk ¡rofiIe, and embrace risk even in
decIining markels. The ßoard undoubledIy underslood and a¡¡roved of Lehman's
grovlh slralegy.
During 2007, lhere vere a number of inslances in vhich managemenl did nol
¡rovide informalion lo lhe ßoard. Ior exam¡Ie, managemenl did nol discIose ils
decision lo exceed or disregard lhe various concenlralion Iimils a¡¡IicabIe lo lhe
Ieveraged Ioan business and lo lhe commerciaI reaI eslale businesses, incIuding

185
es¡eciaIIy lhe singIe lransaclion Iimil, conlrary lo re¡resenlalions lo lhe ßoard lhal
managemenl look sle¡s lo ´avoid |j over"concenlralion in any one area.¨
665

In hindsighl, various ßoard members slaled lhal il vouId have been heI¡fuI lo
have had more informalion. Ior exam¡Ie, some direclors said lhal if lhe risk Iimil
breaches vere sufficienlIy Iarge and Iong"Iasling,
666
if managemenl's Iiquidily concerns
vere more lhan a ´singIe incursion¨,
667
or if lhe excIusions from lhe slress lesling vere
sufficienlIy significanl,
668
lhey vouId have vanled lo knov aboul lhese facls.
669

On lhe olher hand, lhe ßoard did nol ex¡IicilIy direcl managemenl lo ¡rovide il
vilh lhis informalion, and lhere is no evidence lhal lhe ßoard asked queslions lhal
managemenl did nol ansver, or ansvered inaccuraleIy. Moreover, as discussed above,
managemenl vas nol required by any reguIalory aulhorily or by DeIavare common
Iav lo ¡rovide such delaiIed informalion lo lhe ßoard of Direclors.
AIlhough Lehman's managemenl did nol ¡rovide lhe ßoard vilh aII avaiIabIe
informalion concerning lhe risks faced by lhe firm during 2007 and earIy 2008, lhal facl
is nol sur¡rising given lhe ßoard's Iimiled roIe in overseeing lhe firm's risk
managemenl, and lhe exlraordinariIy delaiIed informalion avaiIabIe lo managemenl.

665
David GoIdfarb, $* "3, Managing lhe Iirm Iresenlalion lo Lehman ßoard of Direclors (May 15, 2007), al
¡. 20 |LßHI_SIC07940_026136j
666
Ixaminer's Inlerviev of Roger ßerIind, May 8, 2009, al ¡. 4, Ixaminer's Inlerviev of Marsha }ohnson
Ivans, May 22, 2009, al ¡. 6, Ixaminer's Inlerviev of RoIand A. Hernandez, Ocl. 2, 2009, al ¡. 10,
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡. 17. Ixaminer's Inlerviev of Dr. Henry
Kaufman, May 19, 2009, al ¡. 17.
667
Ixaminer's Inlerviev of Dr. Henry Kaufman, Dec. 22, 2009.
668
Ixaminer's Inlerviev of }ohn D. Macomber, Se¡l. 25, 2009, al ¡¡. 6, 17.
669
1$$ III.A.1.b of lhis Re¡orl.

186
Afler revieving lhis evidence, lhe Ixaminer finds insufficienl evidence lo su¡¡orl a
coIorabIe cIaim lhal Lehman's managemenl vas eilher grossIy negIigenl or
inlenlionaIIy dece¡live in ¡roviding informalion lo lhe ßoard concerning risk
managemenl.
Iirsl, lhe Ixaminer has found no coIorabIe cIaim lhal Lehman's senior managers
vioIaled lheir fiduciary duly of care lhrough lheir handIing of risk issues.
Managemenl's discIosure of lhe risk a¡¡elile excesses lo lhe SIC su¡¡orls lhe viev lhal
managemenl did nol beIieve il vas acling im¡rudenlIy, much Iess vioIaling lhe Iav, by
laking on a higher IeveI of risk lhan vas consislenl vilh lhe firm's ¡re"exisling risk
¡oIicies and Iimils. Under lhese circumslances il vouId lake very subslanliaI evidence
of managemenl's inlenl lo misIead lhe ßoard in order lo Iay a sufficienl foundalion for a
cIaim lhal Lehman's senior officers breached lheir duly of candor.
IslabIishing a vioIalion of lhe duly of candor vilh res¡ecl lo risk managemenl is
¡arlicuIarIy difficuIl. As lhe DeIavare Chancery Courl recenlIy ex¡Iained in conneclion
vilh direclors' moniloring of risk decisions by managemenl: ´Il is aImosl im¡ossibIe for
a courl, in hindsighl, lo delermine vhelher lhe direclors of a com¡any ¡ro¡erIy
evaIualed risk and lhus made lhe 'righl' business decision. . . . ßusiness decision"makers
musl o¡erale in lhe reaI vorId, vilh im¡erfecl informalion, Iimiled resources, and an
uncerlain fulure.¨
670


670
'( #$ !)*)+#,-. '(/0 1A6,38$# B$#)<"*)<$ 5)*)+0, 964 A.2d 106, 126 (DeI. Ch. 2009).

187
Managemenl's duly of candor concerning risk managemenl adds anolher IeveI of
com¡Iexily beyond lhe issues raised by lhe duly of care. Risk Iimils, ¡oIicies, and
melrics vere designed for use by managemenl, nol lhe board. Absenl ex¡ress direclion
from lhe board as lo vhal informalion concerning risk managemenl il shouId be given
(and lhere vas no such direclion here), managemenl musl make lhe delerminalion of
vhal IeveI of delaiI lhe board needs lo fuIfiII ils obIigalion lo monilor risk decisions.
A¡¡Iying lhe slandard of ¡roof requiring al Ieasl gross negIigence and ¡erha¡s
inlenlionaI dece¡lion lo eslabIish a breach of lhe duly of candor means lhal senior
managers may make a good"failh mislake by nol ¡roviding maleriaI informalion lo lhe
board vilhoul vioIaling lheir fiduciary dulies. AIlhough il can be fairIy debaled
vhelher Lehman's managemenl shouId have ¡rovided ils ßoard vilh more informalion
and more limeIy informalion concerning lhe firm's risk usage, slress lesl resuIls, and
Iiquidily, lhe Ixaminer does nol find lhal any mislake by managemenl in lhis regard
consliluled gross negIigence or inlenlionaI dece¡lion.

188
LPI !38 %J:96;8> 5?8B )?E '6;7 (?<?>:@<8 (<:69B !3:E $839:;0B
56>8DE?>B #>8:D387 !386> '67AD6:>4 5AE4 @4 ':6<6;H E? .?;6E?>
$839:;0B /6BG"!:G6;H "DE6K6E68B
L:I $839:;0B 56>8DE?>B :>8 M>?E8DE87 '>?9 5AE4 ?C (:>8
$6:@6<6E4 @4 E38 %JDA<Z:E?>4 (<:AB8 :;7 E38 #AB6;8BB
dA7H98;E /A<8
Cor¡orale direclors' duly of care is a duly of informed decision making.
671
Il
invoIves lhe ¡rocess by vhich direclors make business decisions, nol lhe conlenl of
lhose decisions.
672
Hovever, direclors are generaIIy afforded addilionaI ¡roleclion by
lhe business"|udgmenl ruIe, a |udiciaI ¡resum¡lion lhal a courl shouId ´nol subslilule
ils |udgmenl for lhal of lhe board if lhe Ialler's decision can be 'allribuled lo any
ralionaI business ¡ur¡ose.'¨
673

Lehman, Iike many DeIavare cor¡oralions, immunized ils direclors from cIaims
of breaching lhe duly of care. Lehman's cerlificale of incor¡oralion ¡rovides:
A direclor shaII nol be ¡ersonaIIy IiabIe lo lhe Cor¡oralion or ils
slockhoIders for monelary damages for breach of fiduciary duly as a
direclor, ¡rovided lhal lhis senlence shaII nol eIiminale or Iimil lhe
IiabiIily of a direclor (i) for any breach of his duly of IoyaIly lo lhe
Cor¡oralion or ils slockhoIders, (ii) for acls or omissions nol in good failh
or vhich invoIve inlenlionaI misconducl or a knoving vioIalion of Iav,
(iii) under Seclion 174 of |lhe DeIavare GeneraI Cor¡oralion Lavj, or (iv)

671
1%)*6 <0 ["( D,#&,%, 488 A.2d 858, 872 (DeI. 1985), ,<$##-3$8 ,( ,*6$# +#,-(8:4 D"(*3$# <0 1*$.6$(:, 965
A.2d 695, 713 n.54 (DeI. 2009).
672
'( #$ !"#$%"#& '(*A30 '(/0 B$#)<"*)<$ 5)*)+0, 698 A.2d 959, 967 (DeI. Ch. 1996).
673
T(,/"3 !,#.0 <0 ;$:" 9$*#,3$-% !,0, 493 A.2d 946, 954 (DeI. 1985) (quoling 1)(/3")# J)3 !,#.0 <0 5$<)$(, 280
A.2d 717, 720 (DeI. 1971)). Ior a more delaiIed discussion of DeIavare Iav governing cor¡orale direclors'
fiduciary dulies, see A¡¡endix 1, LegaI Issues.

189
for any lransaclion from vhich lhe direclor derives an im¡ro¡er ¡ersonaI
benefil.
674

The vording of lhis cIause is nearIy idenlicaI lo lhal in Seclion 102(b)(7) of lhe
DeIavare GeneraI Cor¡orale Lav, vhich aulhorizes a cor¡oralion lo excuI¡ale ils
direclors from ¡ersonaI IiabiIily for breaches of fiduciary dulies, exce¡l in lhe four
exce¡lions slaled in lhe slalule: conducl vioIaling lhe direclors' duly of 3,@"3*@, acls or
omissions (,* )( +,,8 >")*6, )(*$(*),("3 %):/,(8-/*, and &(,R)(+ <),3"*),(: ,> 3"R.
675
Courls
u¡hoId such a cIause lo ¡rolecl direclors from IiabiIily ¡rovided lhal lhe conducl in
queslion does nol vioIale lheir duly of IoyaIly.
676
In addilion, DeIavare ¡rolecls
direclors from ¡ersonaI IiabiIily lo lhe exlenl lheir decisions are based on informalion
¡rovided lo lhem by managemenl.
677

Therefore, DeIavare has chosen lo im¡ose ¡ersonaI IiabiIily onIy on lhose
direclors vho have handIed lheir res¡onsibiIily in a reckIess or irralionaI manner:
Direclors' decisions musl be reasonabIe, nol ¡erfecl. ´In lhe lransaclionaI
conlexl, |anj exlreme sel of facls |isj required lo suslain a disIoyaIly cIaim
¡remised on lhe nolion lhal disinleresled direclors vere inlenlionaIIy
disregarding lheir dulies.¨ . . . OnIy if lhey knovingIy and com¡IeleIy

674
Lehman ßrolhers HoIdings Inc., Cerlificale of Incor¡oralion, al Ç 10.1, 5)%)*"*),( ,> 5)"E)3)*@ ,> B)#$/*,#:0
675
1$$ DIL. CODI ANN. lil. 8, Ç 102(b)(7) (2009).
676
1$$ 1*,($ $\ #$30 C%1,-*6 ="(/,#.,#"*),( <0 P)**$#, 911 A.2d 362, 367 (DeI. 2006) (´Such a ¡rovision can
excuI¡ale direclors from monelary IiabiIily for a breach of lhe duly of care, bul nol for conducl lhal is nol
in good failh or a breach of lhe duly of IoyaIly.¨).
677
1$$ DIL. CODI ANN. lil. 8, Ç 141(e) (2009), :$$ "3:, =#$6% <0 2):($#, 746 A.2d 244, 261 (DeI. 2000), '( #$
!)*)+#,-. '(/0 1A6,38$# B$#)<"*)<$ 5)*)+0, 964 A.2d 106, 132 & n.86 (DeI. Ch. 2009)0

190
faiIed lo underlake lheir res¡onsibiIilies vouId lhey breach lheir duly of
IoyaIly.
678

L@I $839:;0B 56>8DE?>B 567 )?E f6?<:E8 !386> 5AE4 ?C $?4:<E4
A direclor's duly of IoyaIly ´|ejssenliaIIy . . . mandales lhal lhe besl inleresl of
lhe cor¡oralion and ils sharehoIders lake ¡recedence over any inleresl ¡ossessed by a
direclor, officer or conlroIIing sharehoIder and nol shared by lhe slockhoIders
generaIIy.¨
679
The duly of IoyaIly chiefIy invoIves silualions in vhich direclors uliIize
lheir ¡osilions lo confer s¡eciaI benefils onlo lhemseIves or ma|orily slockhoIders.
680

These silualions are frequenlIy referred lo as ´seIf"deaIing¨ or ´inleresled¨ silualions.
681

´A direclor is considered inleresled vhen he viII receive a ¡ersonaI financiaI benefil
from a lransaclion lhal is nol equaIIy shared by lhe slockhoIders.¨
682
Direclors are aIso
considered inleresled vhere lheir molivalions in execuling a business decision a¡¡ear
lo be subservienl lo lhe inleresls of a ma|orily slockhoIder.
683

The Ixaminer has found no evidence of seIf"deaIing by Lehman's direclors, and
Lehman did nol have a ma|orily slockhoIding inleresl.

678
5@,(8$33 !6$%0 !,0 <0 P@"(, 970 A.2d 235, 243"44 (DeI. 2009) (quoling '( #$ 5$"# !,#.0 1A6,38$# 5)*)+0, 967
A.2d 640, 654"55 (DeI. Ch. 2008)).
679
!$8$ ] !,0 <0 ?$/6()/,3,#4 '(/0, 634 A.2d 345, 361 (DeI. 1993), %,8)>)$8 ,( ,*6$# +#,-(8:, 636 A.2d 956 (DeI.
1994).
680
C#,(:,( <0 5$R):, 473 A.2d 805, 812 (DeI. 1984), ,<$##-3$8 ,( ,*6$# +#,-(8:4 =#$6% <0 2):($#, 746 A.2d 244,
254 (DeI. 2000).
681
1$$ )8.
682
D3,E): 9"#*($#:4 5090 <0 93-%*#$$ 1,>*R"#$4 '(/0, No. 1577"VCI, 2007 WL 4292024, al ®5 (DeI. Ch. Nov. 30,
2007).
683
1$$4 $0+0, 2%$#"38 9"#*($#: <0 =$#3)(, 787 A.2d 85 (DeI. 2001), ?,,3$@ <0 C_C 7)(04 '(/0, No. 18414, 2005 WL
1252378, al ® 5 (DeI. Ch. May 13, 2005).

191
LDI $839:;0B 56>8DE?>B 567 )?E f6?<:E8 !386> 5AE4 E? .?;6E?>
Under DeIavare Iav, direclors have a fiduciary duly lo monilor managemenl's
com¡Iiance vilh cor¡orale re¡orling and conlroI syslems. The DeIavare Su¡reme
Courl has ado¡led lhe !"#$%"#& slandard ´for assessing direclor oversighl IiabiIily.¨
684

Under !"#$%"#&, lhe fiduciary duly lo monilor managemenl is breached if ´(a) lhe
direclors ullerIy faiIed lo im¡Iemenl any re¡orling or informalion syslem or conlroIs, ,#
(b) having im¡Iemenled such a syslem or conlroIs, consciousIy faiIed lo monilor or
oversee ils o¡eralions lhus disabIing lhemseIves from being informed of risks or
¡robIems requiring lheir allenlion.¨
685
The DeIavare Su¡reme Courl slressed, hovever,
lhal a direclor can be heId IiabIe onIy for a ´conscious¨ faiIure lo fuIfiII lhe oversighl
funclion:
|Ijm¡osilion of IiabiIily requires a shoving lhal lhe direclors knev lhal
lhey vere nol discharging lheir fiduciary obIigalions. Where direclors faiI
lo acl in lhe face of a knovn duly lo acl, lhereby demonslraling a
conscious disregard for lheir res¡onsibiIilies, lhey breach lheir duly of
IoyaIly by faiIing lo discharge lhal fiduciary obIigalion in good failh.
686

L6I "ZZ<6D:E6?; ?C !"#$%"#& E? /6BG &K8>B6H3EY '( #$
!)*)+#,-. '(/0
In lhe !)*)+#,-. case, lhe DeIavare Chancery Courl re|ecled a cIaim lhal
Ciligrou¡'s currenl and former direclors and officers had ´breached lheir fiduciary
dulies by faiIing lo ¡ro¡erIy monilor and manage lhe risks lhe Com¡any faced from

684
1*,($, 911 A.2d al 364"65.
685
'( #$ !)*)+#,-. '(/0 1A6,38$# B$#)<"*)<$ 5)*)+0, 964 A.2d 106, 123 (DeI. Ch. 2009) (quoling 1*,($, 911 A.2d al
370).
686
1*,($, 911 A.2d al 370 (inlernaI cilalions omilled).

192
¡robIems in lhe sub¡rime Iending markel and for faiIing lo ¡ro¡erIy discIose
Ciligrou¡'s ex¡osure lo sub¡rime assels.¨
687
The com¡Iainl aIIeged various lheories of
IiabiIily incIuding a breach of lhe duly lo monilor under !"#$%"#&. IIainliffs based lheir
cIaim on severaI ´red fIags¨ lhal aIIegedIy ´shouId have given defendanls nolice of lhe
¡robIems lhal vere breving in lhe reaI eslale and credil markels.¨
688
Noling lhal lhe
su¡¡osed red fIags ´amounl|edj lo IillIe more lhan ¡orlions of ¡ubIic documenls lhal
refIecled lhe vorsening condilions in lhe sub¡rime morlgage markel and in lhe
economy generaIIy,¨ lhe Courl found lhe aIIegalions IegaIIy insufficienl ´lo shov lhal
lhe direclors vere or shouId have been avare of any vrongdoing al lhe Com¡any or
vere consciousIy disregarding a duly somehov lo ¡revenl Ciligrou¡ from suffering
Iosses.¨
689

The Courl aIso heId lhal a !"#$%"#& cIaim invoIving risk managemenl musl be
consislenl vilh lhe business |udgmenl ruIe:
Il is aImosl im¡ossibIe for a courl, in hindsighl, lo delermine vhelher lhe
direclors of a com¡any ¡ro¡erIy evaIualed risk and lhus made lhe ´righl¨
business decision.
. . .
To im¡ose IiabiIily on direclors for making a 'vrong' business decision
vouId cri¡¡Ie lheir abiIily lo earn relurns for inveslors by laking business
risks.
690


687
!)*)+#,-., 964 A.2d al 111.
688
'80
689
'80 al ¡. 128.
690
'8. al ¡. 126.

193
The Courl heId lhal ¡Iainliffs had faiIed lo lie lhe !"#$%"#& cIaim lo a faiIure of
lhe cor¡orale risk managemenl syslem:
|IjIainliffs' aIIegalions do nol even s¡ecify hov lhe board's oversighl
mechanisms vere inadequale or hov lhe direclor defendanls knev of
lhese inadequacies and consciousIy ignored lhem. Ralher, ¡Iainliffs seem
lo ho¡e lhe Courl viII acce¡l lhe concIusion lhal since lhe Com¡any
suffered Iarge Iosses, and since a ¡ro¡erIy funclioning risk managemenl
syslem vouId have avoided such Iosses, lhe direclors musl have breached
lheir fiduciary dulies in aIIoving such Iosses.
691

The Courl em¡hasized lhal ´red fIags¨ sufficienl lo slale a !"#$%"#& cIaim musl
go beyond ´signs in lhe markel lhal refIecled vorsening condilions and suggesled lhal
condilions may deleriorale even furlher. . . .¨
692
The Courl vas ¡roleclive of direclors
facing ¡ersonaI IiabiIily because lhe risk assumed by lheir cor¡oralion resuIled in
Iosses:
Oversighl dulies under DeIavare Iav are nol designed lo sub|ecl
direclors, even ex¡erl direclors, lo .$#:,("3 3)"E)3)*@ for faiIure lo ¡redicl lhe
fulure and lo ¡ro¡erIy evaIuale business risk.
693

L66I "ZZ<6D:E6?; ?C !"#$%"#& :;7 !)*)+#,-. E? $839:;0B
56>8DE?>B
The Ixaminer does nol find lhal Lehman's direclors breached lheir !"#$%"#&
duly lo monilor managemenl's com¡Iiance vilh lhe Iav.
Iirsl, lhe Ixaminer does nol find lhal ´lhe direclors ullerIy faiIed lo im¡Iemenl
any re¡orling or informalion syslem or conlroIs.¨
694
As ex¡Iained above, lhe ßoard

691
'80 al 128.
692
'8. al 130.
693
!)*)+#,-., 964 A.2d al 131.

194
received reguIar informalion al every ßoard meeling concerning lhe firm's risk,
Iiquidily, and baIance sheel silualion. The ßoard aIso crealed a Iinance and Risk
Commillee lo receive considerabIy more delaiIed informalion aboul lhese lo¡ics.
Moreover, lhe ßoard received reguIar re¡orls aboul lhe firm's risk managemenl syslems
and conlroIs. The direclors ¡IainIy im¡Iemenled a sufficienl re¡orling syslem and
conlroIs.
Second, lhe Ixaminer does nol find lhal lhe direclors ´consciousIy faiIed lo
monilor or oversee ils o¡eralions lhus disabIing lhemseIves from being informed of
risks or ¡robIems requiring lheir allenlion.¨
695
As ex¡Iained above, lhe Ixaminer has
nol found coIorabIe cIaims lhal Lehman's senior officers breached lheir fiduciary dulies
lhrough lhe manner in vhich lhey managed risk. To lhe conlrary, managemenl's
conducl is ¡rolecled from IiabiIily by lhe business |udgmenl ruIe. There is aIso
insufficienl evidence lhal Lehman's managemenl vioIaled any IegaI requiremenls or
obIigalions reIaling lo risk managemenl. The risk Iimils, ¡oIicies, melrics, and slress
lesls lhal Lehman deveIo¡ed vere inlended lo be used inlernaIIy and did nol conslilule
IegaI obIigalions. ßecause Lehman managemenl's handIing of risk did nol vioIale lhe
Iav, lhe direclors cannol be IiabIe for a breach of lheir duly lo monilor managemenl lo
¡revenl such vioIalions.

694
'80 al ¡. 123.
695
'80

195
Moreover, lhere is no evidence, as DeIavare Iav requires, lhal Lehman's
direclors ´consciousIy disregarded¨ vioIalions by Lehman's senior officers of lheir
fiduciary or olher IegaI dulies lhrough lheir decisions concerning lhe amounl of risk
lhal Lehman assumed and lheir managemenl of lhal risk. The direclors vere nol
¡resenled vilh ´red fIags¨ of such misconducl. And in moniloring risk issues, lhe
ßoard |uslifiabIy reIied enlireIy on informalion ¡rovided by managemenl. Under
DeIavare Iav, lhe direclors are lhereby immunized from ¡ersonaI IiabiIily.
696


696
1$$ DIL. CODI ANN. lil. 8, Ç 141(e) (2009).

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