The Lehman Brothers Bankruptcy Essay

1958 Words8 Pages
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. This later had an impact on the company and as a result made the company declare it self bankrupt. Before we look at the effects that rose from Lehman Brothers declaring it self bankrupt, we have to consider also the things that brought about this. Market complacency As the fig shows, continuous period of low…show more content…
(Sherlund, 2008). As result of these outcomes, the economy was affected that the revenues collected from the housing company fell and the company started increasing its sale. In the past every customer issued a combined of securities had no market place power over the ranking agencies. Bad regulation Regulatory constraints brought about the inflation demand for products thus seeing Fannie Mae and Freddie Mac getting the approval of investing in these securities. (Mian et al, 2008). Another source of captive demand was the money market funds. This boosted their yields since they were required to hold only the high rated securities. The managers that funded these securities knew well what gamble they were playing with these funds but could not resist the temptations and benefit it came with them. The managers also hoped that if any shock arose from these funds, their immediate competitors would also face the same consequences which would result in a reduced reputational cost and this may result in the government interference and may end up supporting these companies through incentives and lowering of taxation. The problem was even strict and severe in the short bond funds. In contrast to the market funds, short bonds fund are not restricted to the types of gadgets they can own. Generally the regulation relies greatly on credit- rating agencies procedures of risks without understanding the incentive created on the
Open Document