The Failure of Lehman Brother

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

In 1844, Henry Lehman moved from Rimpar, Germany, to Montgomery, Alabama where he set up a little shop offering basic needs, dry merchandise, and utensils to the nearby cotton ranchers. By 1850, his two siblings, Emanuel and Mayer, had gone along with him in the business, and they named it Lehman Siblings. After Henry Lehman 's demise in 1855 at 33 years old, the two more youthful siblings headed the firm for the following four decades. Amid their residency, just relatives—children, siblings, and cousins—were allowed as accomplices. This was an approach that proceeded until the 1920s.

On its way to becoming the nation’s largest mortgage lender, Countrywide Financial became one of the nation’s largest business failures in history. Started in 1969 by Angelo Mozilo, and partner David Loeb, Countrywide had become the largest provider of home loans in the United States, with one in every six U.S. loans being created by Countrywide. However, according to Bethel, Countrywide’s entire operation, from its computer systems, incentive pay structure, financing arrangements, was meant to obtain maximum profits out of the mortgage lending programs no matter what the cost. Countrywide’s initial stakeholders consisted of employees, investors, regulators, clients, communities, and as well as shareholders. Furthermore, because of its

This is really asking about what happened during the Financial Crisis when Lehman Brothers and Bear Stearns went under. Governments oftentimes intervene when there is a danger of massive bank failures. Bank failures have dire consequences to the health of an economy. Banks provide capital to businesses in the form of loans to businesses grow. Banks also provide liquidity to businesses and markets. If banks fail, businesses are unable to access capital to grow their businesses. Liquidity tightens and economic growth is stunted. Additionally, banks running into trouble can lead to "runs on the bank" where people get nervous about their ability to access their cash/savings and pull their money out...people pulling their money out of the banking

Many companies around the world are affected by bankruptcy at a certain time in their financial year. When a company is declared bankrupt, it can no longer invest in the stock exchange. The government declares the company insolvent. An example of such company is the Lehman Brothers, a housing and real estate company that went into bankruptcy in 2008. Below is a visual aid of the event that impacted the company to bankruptcy.

could not afford their loans anymore. Thus, they started to sell their houses. The housing prices went down and when the value of the houses were lower than the value of the initial loan, people left the houses to the banks. Instead of owning CDOs consisting with positive cash flows, the banks now owned CDOs consisting of houses with decreasing values (See appendix). The CDOs sold all over the world and combined in both banks and private peoples investments were now almost worthless. Lehman Brothers had an immense amount of investments in CDOs, and as they went bankrupt, one of the world’s worst financial meltdown had thus begun.

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.

Lehman 's high degree of leverage - the ratio of total assets to shareholders equity - was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly susceptible to deteriorating market conditions. On March 17, 2008, following the near-collapse of the second-largest underwriter of mortgage-backed securities (Bear Stearns) - Lehman shares fell as much as 48% on concern it would be the next Wall Street firm to fail. Confidence in the company made a come-back to some extent in April, after raising $4 billion through an issue of preferred stock that was convertible into Lehman shares at a premium of 32% to its price at the time. However, the stock resumed its decline as hedge fund managers began questioning the valuation of Lehman 's mortgage portfolio.

Investment institutions preferred to engage in intricate portfolio investments in subprime markets given the high CDOs’ yields and the absence of regulatory policy. The intricate securitization castle, built on the subprime mortgages market, collapsed when financial institutions started lowering their lending standard in order to sell more debt pools to investment banks. Brokers and traders started to advise their clients against their best interest, in the meantime most bottom-tier credit score mortgage owners stopped paying the lenders and consequently the securities derivatives defaulted. Investors were exposed to huge losses, and the government had to step in to secure the banks operability and prevent a domino effect. Meanwhile top bank

OneTel and Enron were huge technology companies, dominating the competition that they faced although - everything changed. Both of these companies operated in the same era, coincedently both suffering financial collapse. The reasons were mainly because of the failure to follow major accounting principles, lacking morals and lacking strong work ethics. If even a major corporation can fall into this “trap”, then avoiding doesn’t sound easy, although accountants can easily avoid scandals by following a precise set of given rules and ethics. OneTel and Enron are prime examples which demonstrate the danger when a business is faced with an accounting scandal - which in turn could have been avoided.

During 2003 and 2004, as the housing boom was in full throttle, Lehman Brothers entered the field of subprime mortgages by acquired five subprime mortgage and ALT-A lenders. Subprime mortgages are a loan granted to recipients with poor credit, who would not otherwise qualify for a conventional mortgage loan. These subprime mortgage payments included a very high interest to compensate for the high risk of default. This new endeavor proved to be their fatal mistake. Through the years of 2005-2007, the investment bank recorded and increasing profit each year, including an astronomical 56% profit increase from 2004-2006. Statements showed that in 2006, Lehman Brothers securitized $146 billion and in 2007

After the 2008 crisis caused by the collapse of the American investment bank, the Lehman Brothers, the Europe Union faced difficult decisions to both recover the economy in the short term and in improving the economy for the long. ‘With their immediate response to the Banks in Europe giving them €4.5 trillion, the European Union then had to respond to the debt crisis that occurred as they realised a debt fuel economy was not stable. They then came together to form an Economic union where by a fiscal treaty was created, the idea behind the treaty was to limit yearly deficits to 0.5% of a country’s GDP’[1], this is the idea of a Budgetary policy, aiming there deficit, equilibrium or surplus to reduce debt. The policy was to follow the principles, ‘it should be timely; this is to allow for quick support of economic activity during low demand, temporary; to avoid a permanent deterioration in budget positions, the spending when borrowing low should be mix with both revenue and expenditure ideas; there can be impacts on demand in the short term affecting consumption allowing for growth, it should be directed within the stability and growth pact; it provides a common framework and allows for better measures to be take of the cyclical conditions while strengthening long term fiscal discipline, and should be accompanied with structural reforms that support demand.’{2]

158-years-old institution, the Lehman Brothers Holdings, Inc., Sought chapter 11 protections on September 15, 2008, indicating the largest bankruptcy filed in the U.S. history. The Lehman declared $639 billion in assets and $619 billion on debts, which surpassed the previous bankruptcy filed by WorldCom and Enron. The Lehman brother was 4th best-ranked U.S. Investment bank and globally 7th best investment bank before the collapse. An industry that had 25,000 employees worldwide crumbled into almost nothing within a week, which is one of the seminal event in the global financial crisis. The Lehman Brothers’ demise was a result of substantial attention to the U.S. subprime mortgage and the real estate markets that coaxed into global financial crisis, when these markets began to slow-down.

Lehman Brothers Holdings Inc. was a global financial services firm. Henry and Emanuel Lehman founded it in the year of 1850 in the city of Alabama. Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the US, doing business in investment banking, equity and fixed-income sales and trading especially U.S. Treasury securities, research, investment management, private equity, and private banking.

In 1882, a partnership was formed between Marcus Goldman and his son in law Sam Sachs to create the financial services firm Goldman Sachs & Co. Due to the strategic management; Goldman quickly grew to become a major commercial paper dealer and eventually would become the market’s leader. Goldman began experiencing exponential success over the years with over 190 partners, 13,000 employees by 1998. However, although it was experiencing success, skeptical speculations begin to arise about Goldman’s ability to maintain its place as market leader considering its competitors issues IPO’s over a decade ago. Goldman being a partnership