How Did Bear Stearns Increase The Risk Of The Lehman Brothers Crisis

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

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

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.

The beginning of the crisis is marked as the downfall of Bear Stearns Financial. The company, with a triple A rating, was sidelined with problems of lack of cash flow, and a piling up of unpaid debts on housing mortgages. Bear Stearns invested heavily in these mortgages, because they were lucrative so long as the loans were being paid off. Foreclosures did not begin to pile up until after the 2005-2006 years of mass investment in the housing boom had already seeped into every corner of the United States. The first feeling of a tremble in the market caused Bear Stearn's stock to plummet, and the

The Lehman Brothers investment bank was the fourth leading in the United States when it became the largest “victim” of the 2007-2008 crisis. While many other investment banks were bailed out by the government, Lehman was the unfortunate one of the bunch that had to file for Chapter 11

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.

During the recent financial crisis, in the autumn of 2008, the Lehman Brothers bank collapsed. It was the biggest bankruptcy in history

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

It did not matter what type of security it was; the crisis affected the entire market. However, different classes of assets are affected in different ways. To figure out the systemic risk of a particular industry, security, or portfolio, and to see how that systemic risk compares to the overall market’s systemic risk, investors and others use beta.

The result was a private bailout by the major financial firms and supervised by the Federal Reserve. Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, JP Morgan, Morgan Stanley, Salomon Smith Barney, and UBS agreed to contribute with $ 300 million each one, while Société Générale invested $125 million and Lehman Brothers and Paribas did the same thing with $100 million.

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.

It is evident that the immediate causalities of this crisis were focused on “excessive debt leverage or imprudent lending” (Wade). Most of it appeared in the form of credit structures that were complexly structured (i.e. CDS), so therefore when pandemonium hit the market after the fall of the Lehman Brothers bank, the major default risk associated with these investments took many investors to their breaking point. Now in spite this, Bernanke also briefly mentioned that there were various other factors at work in explaining the severity of the crisis—most notably the vulnerabilities in the system in addition to underperformances in government responses. Various factors Bernanke describes included; banks overreliance on short-term wholesale funding, an over-dependence on rating agencies, shortcomings in private sector risk management, excessive leverage on the part of households, businesses and financial firms as well as an overall failure of existing regulatory practices worldwide—such as statutory gaps in regulation on special purpose vehicles (Bernanke).

Three of the largest bankruptcies in history - GM, Wall Street investment bank Lehman Brothers and savings and loan Washington Mutual, have occurred in the last nine months.

The fall of Lehman brothers was the beginning of what would be a long road to recovery, one that we are still on in fact, the financial crisis sparked fierce debates on how the banking sector was run. Many agreed that banks had become ‘too big to fail’ and that they took on risky investments without any thought about the impact this would have on the world economy, this is because they believed they would be bailed out by the government. The question that has been part of an endless drawn out discussion, ever since the beginning of the crash, is whether big banks should be broken up in to smaller more manageable sized institutions. It is something that divides people, there are many differing opinions on how to handle the current financial situation we are surrounded by. Within this essay, some of the key points of view from both sides of the argument will be put forward, analysing both sides will lead the essay to conclude with whether banks should be broken up.

On September 15, 2008, the infamous investment bank Lehman Brothers was forced to file for Chapter 11 bankruptcy by the federal court. The firm was entangled in risky business that ultimately led to its demise because they did not take reasonable care to avoid acts that were foreseeably damaging to the United States economy.