Case Study Of Counterparty Risk In 2008

Additionally, when America’s economy was melting in 2008, the Federal Reserve played a big role to stabilize it. Besides the Great Depression during the years 1929 through 1939 the worst economic time for the United States, 2008 was unmistakable one of the worst years of America’s economy history. When this economic recession was taking place, the Fed had to take action to avoid another depression and to stop a fall from the financial system. With the help of the Federal Reserve J.P. Morgan Chase and Co.’s they planned to help Bear Stearns (an investment bank) with financial assistance to help the government to buyout AIG, a well-known insurance company. This helped to produce a strategy targeting to stabilize the credit market and also the short-term interest rate from 45% to almost 0 from the benchmark (Coste). Thanks to the Federal Reserve and their well design plan to avoid another recession they prevented the economy of the world or better known as Macroeconomic system from falling and getting it

In Frontline’s The Meltdown, the causes of the stock market crash of 2008 came into discussion. The topics regarding Bear Stearns, the Lehman Brothers’ and their collapse, and the huge bailout made in results to the market crash. There were great points being made on the mistakes Henry Paulson and Ben Bernanke did not view from their perspective, which in turns were the problems that made up the crash.

A Colossal Failure of Common Sense was one of many books to be published in the aftermath of the Financial Crisis of 2007. After seeing the global economy stall in the face of massive losses in word financial markets, many Americans sought to better understand the crisis and its causes. This book, written from the perspective of a financial market insider, provides a glimpse into the world of global finance and also seeks to explain how the players in this world were involved in the crisis. In the words of the author Lawrence McDonald, “My objective in writing A Colossal Failure of Common Sense was twofold. First, to provide … a close-up, inside view of how markets really work…..And, second, to give… as crystal clear an explanation as possible about the real reasons why the legendary Lehman Brothers met with such a swift end”1. By writing about his personal experience at Lehman Brothers and recounting stories from within the famous investment banking firm, Mr. McDonald largely succeeds at his first goal. However, the elements of personal biography and the chronological order of the book make it difficult for the reader to fully appreciate all of the varied causes of the financial crash. I believe that the main value of reading this book is in understanding these causes, with Lehman Brothers acting as a microcosm of the greater financial universe. As such, in this review I have isolated elements from Mr. McDonald’s book which highlight how the crisis

These losses necessitated governmental action in the financial markets. Companies such as Lehman Brothers and Bear Stearns lost all of their stock’s value and were forced into bankruptcy. This risk spread throughout the American banks, forcing the American government to step in and buy all of the securitized, troubled assets from the balance sheets of

Credit risk is the risk that the bank will not be able to repay funds when they ask for them.

The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman 's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. The consequences for the world economy were extreme. Lehman’s ' fall contributed to a loss of confidence in other banks, a worldwide financial crisis and a deep recession in many countries. Lehman 's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government 's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman 's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15.

Market risk is the risk associated with an investors day to day investments, that are affected by constant fluctuations in the markets. With investment banking, a banks reputation is a critical in its success, reputational risk describes the trustworthiness of a business. A firm with a poor reputation will not get as much business, meaning a bad reputation results in a loss in revenue. Concentration Risk is the risk showing the spread of a banks’ accounts to various debtors to whom the bank has lent to. The Basel II accord stated that ‘operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events’. This risk covers the very wade basis of a company’s operations, there are many different factors involved here: people, employees actions and company processes.

Colombo’s case together with that of five other employees was put on hold after the owner of BNC, Lehman Brothers, filed for bankruptcy in late 2008. The company dismissed the allegations made in the suit arguing that they would contest them on the merits in the pending litigation. Meanwhile, the sub prime loan began to go bad, making the lives of thousands of wholesalers in the company very difficult, thus forcing them to quit from the company. Wall Street reined in the company’s mortgage factories, pulling credit lines, tightening its lending principles, and compelling lenders to buy the same risky loan it once consumed. In essence, the company was in the verge of collapse.

Just after ten years of Asian financial crisis, another major financial crisis now concern for all developed and some developing countries is “Global Financial Crisis 2008.” It is beginning with the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and spread like a flood. At first U.S banking sector fall in a great liquidity crisis and simultaneously around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. (Global issue)

On September 10, 2008, Lehman Brothers announced the lowest decline as the shares dropped to 45%. It left the market value at $5.4 billion after the Korea Development Bank rejected to make an investment deal that could rescue Lehman. The company would seek capital from other investors in order to recover their financial situation. These efforts faltered and the situation grew more severe, even after the US government had already saved the Bear Stearns and Fannie Mae and Freddie Mac. Though it is less likely that the US government will keep Lehman's bailout, there should be a resolution from the Federal Reserve System to bolster Lehman’s finance so as to prevent the US economic declination.

Enclosed is a copy of “Group Assignment” about the understanding of CDOs. This report is aim to critically examined how CDOs may help banks to avoid liquidity risk and create more assets, and also problems in term of the purpose of CDOs, the role of three mechanisms in CDOs and problems faced in CDOs. After that, it discusses how CDOs created problem for Lehman Brothers by analysis subprime mortgage crisis. Finally, this report provides some recommendations for making the CDOs as effective liquidity risk

In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld’s aggressive leadership, the company flourished and became one of the largest investment banks in the United States. （Crossley-Holland 2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market.

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of

Another financial vehicle that could be problematic was CDS (credit default swap). CDS is a financial derivative works like insurance on securities. The underwriter is obligated to pay a pre-determined fee to counterparty if a certain security default. In return, underwriters charge a fee as compensation. CDS can be used to hedge against risks. However there are still some difference between a CDS and an insurance contract.