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Abstract
The discussion that been done in this paper is regarding the failure that Lehman Brothers suffered due to the credit crunch. It further dives down to analyze the primary reasons of its failure and how it could have been prevented. Necessary measures that could be taken. The discussion gets open up by understanding the factors that led to the collapse and the history behind it. Various reasons have been identified to the failure of this complex bank out which Credit Default Swap, alteration with financial statements and high occurrence of unethical behavior of the higher management can be seen as the primary one. The paper is concluded by certain recommendations which might have mitigated the risk and cushioned the downfall that the firm faced. Also, various steps have been mentioned that can protect the interest of consumers in future scenarios.
Table of Contents
1. Introduction
2. Literature Review
3. Discussion and Analysis
4. Conclusion
5. References
Introduction
The paper discusses about the failure that one of the biggest financial institution of US Lehmann Brothers faced.
It was 2003-2004, when housing boom was happening in USA and loan was given to the common public at very low interest rates. Combine with BNC Mortgage and Aurora Loan Services, Lehmann brothers obtained 5 mortgage lenders which gave loans to borrowers without proper documentation. In the coming time, the firm revenue and profits boosted at a very high rate which was never seen before. It was till 2007 when they recorded profits and announced a revenue of $19.3 billion. (Taylor, 2010).
The time changed very soon for them. In the matter of 72 hours, Lehman Brothers filed for bankruptcy. The biggest bankruptcy in US history was recorded on 15th Sept 2008 when the firm was struggling with total outstanding of USD$613 billion to the creditors. This had an instant trickle-down effect in other markets and financial institutions. As an immediate effect, Dow Jones went down by approx. 500 points. Some major events that were followed after this aftermath were as follows. The share went down by 45% when Korean Development Bank ended the talks about capital infusion. The losses became as huge as $3.9 billion in 3rd quarter. Moody’s threatening to downgrade its rating brought down the value even more by 42%. (Bebchuk,, Cohen,& Spamann,2010)
It can be said that world did fall apart for them. Something this big happened because of the actions taken by them over the past years. We’ll understand why this happened and how it could have been avoided in coming sections.
Literature review
Various researches have been done on the economic crisis that triggered with the downfall of Lehman Brothers. It has significance because of the complex and elongated resolution that was followed up by the downfall. The paper identifies various elements that have resulted in the trickle-down effect of the economy which started by a single bank. This can be attributed to the wide network which connects various financial institutions and explains the impact that is caused to them when action is taken by one of them.
The explanation has been provided about various reasons that have led to crisis situation for the bank. There are many other small reasons which also played their role in interconnected manner but have not been mentioned explicitly. The paper will help in getting a broad perspective about the outcomes that happened after the downfall of Lehman brothers and what actions could have been taken in advance to prevent such scenario in future situations.
Discussion and analysis
To understand what all factors affected Lehman Brothers and brought them to this situation, lets just understand the various actions that the firm took.
The financial structuring of the organization was extremely levered. Only small part of the asset i.e. 3-4 % were supported from stockholders equity while majority of leftover was supported by debt. This implied that investors using debt instruments were main stakeholders of the bank. In 2007, trust started vanishing from the...