Third Amended Complaint - Lehman Brothers Securities Litigation

management policies and systems enabled Lehman to amass billions of dollars of illiquid, riskyassets that it could not monetize to maintain its reported liquidity and net leverage ratio.71. Prior to 2006, Lehman focused primarily on the “moving business” – a businessstrategy of originating assets for securitization or syndication and distribution to others. In thisregard, Lehman’s wholly-owned subsidiaries, BNC, a California-based subprime mortgageoriginator, and Aurora, a leading Alt-A mortgage originator based in Colorado, originated subprimeand other non-prime mortgages for Lehman’s securitization business, which were then sold toinvestors.72. However, in 2006 and the outset of 2007, Lehman’s management began to pursue anaggressive growth strategy that caused the Company to assume significantly greater risk. Thisgrowth strategy depended on Lehman’s ability to increase substantially the leverage on its capital.As a result, Lehman shifted from the “moving business” to the “storage” business, making longerterminvestments using Lehman’s own balance sheet. This expansion strategy focused heavily onacquiring and holding commercial real estate, leveraged loans and private equity assets – areas thatentailed far greater risk and less liquidity than Lehman’s traditional lines of business. From 2007through the first quarter of 2008, as the real estate markets were collapsing, Lehman continued thisstrategy, which was considered “counter-cyclical” in that Lehman sought to acquire assets priced atthe bottom of the economic cycle. Thus, as other institutions reduced their risk exposure, Lehmanincreased its exposure to commercial and residential real estate.73. Although Lehman increased its net assets through this growth strategy (by almost$128 billion, or 48%, from the fourth quarter of 2006 through the first quarter of 2008), the marketwas unaware that the Company had become saddled with an enormous volume of illiquid assets thatit could not readily sell in a downturn. For example, BNC and Aurora continued to originatesubprime and other non-prime mortgages to a greater extent than other mortgage originators, manyof whom had gone out of business, that could not be securitized and sold off to investors, but ratherremained on Lehman’s books. At the same time, during the first two quarters of 2007, Lehman-21-