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Lehman Brother Collapse - Essay Example

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Once, Lehman Brothers was one of the prestigious names in the financial sector. In its heyday, it was major dealer in U.S. treasury securities, U.S. debt instruments. It was operating in asset management and…
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Lehman Brother Collapse

The news of its bankruptcy sent shock waves not only to the U.S. economy but also to the entire world. It faced around $600 billions of debt from mortgage back securities which caused a significant decline in its stock price. It is considered to be the most formidable case of bankruptcy in the corporate world. Before its bankruptcy, it was a profitable company. According to its 2006 annual Report, the asset under management had jumped to $225 million from the previous year’s $175 million. There were nearly 25936 employees working under the company. It shares were listed in New York stock Exchange and it was traded around $70 during that period.
The bankruptcy of Lehman Brothers can be attributed to the unfavourable market situation and also to its own policies. According to Luigi Zingale, the three main factors that were instrumental in bringing such depression in the market are market complacency, lack of transparency and bad regulations. Apart from these three market conditions, the financial policy adopted by Lehman was also responsible for its bankruptcy (Zingale. 2008). Delinquency rates dropped during the real estate boom and the banks started providing new innovative mortgage options which led to the decline in lending standards. Bad regulations of money market and The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 accelerated the process. There was a lack of sufficient transparency in major markets. The market for credit default swaps (CDS) became unregulated and lost sufficient transparency. Lehman financial policy was not favourable for that period. Its asset to equity ratio (leverage) was abnormally high and it mostly relied on short term debt financing. However, the company tried to maintain its ratio before the crisis but it was too late to save the company from going bankrupt.
The financial turmoil that originated towards the middle of 2007 has ... Read More
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