The In-Depth Analysis of the Agency Problem

The in-depth analysis of the agency problem

The stem of the agency crisis had a number of branches mainly: the improper conduct of the Chief Executive Officer, the role played by the Chief Financial Officer in endorsing the concealment of material information and the careless and negligent manner in which Ernst& Young conducted its oversight role.

The improper conduct of the Chief Executive Officer

The failure by Richard Fuld who at the time was the chief executive officer of the ill-fated company to realize the impending collapse of the housing market was more of agency negligence than a professional oversight. He was charged with the duty of overseeing the entire operations of the company but chose to blindly stick to his leveraged business model thereby exposing the company to risky market conditions. Even as other executives took caution and shielded their companies from the eventualities of bad economic climate, Fuld continued in his not-so-brave efforts of investing in mortgage backed securities.

As if he was not remorseful of the errors he had made, Fuld did not assume responsibility for his mistakes and wrong professional undertakings. While addressing investors and stakeholders, he maintained his stand that at the time of executing his strategies, no foreseeable signs existed. The fate of the company was literally pegged on his honesty; had he frankly spoke with all honesty, the impending financial hemorrhage would have been avoided and amicable solutions would have been crafted.

Had the executive acted more prudently, the transparency would have been appreciated by the large capital investors who after swallowing the shock would have made all the necessary efforts to have the bank on the road to recovery. Similarly the general public which includes but not limited to the Federal government would have engaged more intellectual avenues in the rectification of the problem. Richard Fuld used the opportunity to redeem his image instead.

The endorsement in concealment of material information by the Chief Financial Officer

It is fundamentally wrong and ethically incorrect to hide assets from the very people who happen to be the bona fide owners of those assets. That is what Callan did while serving in the chief financial officer position during the Lehman Brothers' financial woes. While in clear knowledge of the fictitious nature of Hudson Castle which at the time was the phantom company created to benefit the balance sheet of the parent firm, the officer went ahead and endorsed the transfer of funds to the company. As if the siphoning of assets to the fictitious subsidiary was not enough, the officer engaged in the misrepresentation of the financial strength of the firm through the Repo 105 a move that was immoral and totally uncalled for. This painted a rosy image of the company to the stakeholders