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Failure of Lehman Brothers: Jitendra Soni

Lehman Brothers filed for bankruptcy on September 15, 2008, with $639 billion in assets and $619 billion in debt, making it the largest bankruptcy filing in US history. Lehman was heavily invested in subprime mortgages, and the collapse of the US housing market led to billions in losses and irrecoverable loans. This caused Lehman's demise and greatly intensified the 2008 financial crisis.

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92 views

Failure of Lehman Brothers: Jitendra Soni

Lehman Brothers filed for bankruptcy on September 15, 2008, with $639 billion in assets and $619 billion in debt, making it the largest bankruptcy filing in US history. Lehman was heavily invested in subprime mortgages, and the collapse of the US housing market led to billions in losses and irrecoverable loans. This caused Lehman's demise and greatly intensified the 2008 financial crisis.

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jitu222soni3386
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as DOCX, PDF, TXT or read online on Scribd
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FAILURE OF LEHMAN

BROTHERS

Jitendra Soni
INTRODUCTION

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. Lehman's demise also made it the largest victim, of
the U.S. subprime mortgage-induced financial crisis that swept through global financial
markets in 2008. Lehman's collapse was a seminal event that greatly intensified the
2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization
from global equity markets in October 2008, the biggest monthly decline on record at
the time.

THE HISTORY OF LEHMAN BROTHERS

Lehman Brothers had humble origins, tracing its roots back to a small general store that
was founded by German immigrant Henry Lehman in Montgomery, Alabama, in
1844. In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman
Brothers.

While the firm prospered over the following decades as the U.S. economy grew into an
international powerhouse, Lehman had to contend with plenty of challenges over the
years. Lehman survived them all – the railroad bankruptcies of the 1800s, the Great
Depression of the 1930s, two world wars, a capital shortage when it was spun off by
American Express in 1994, and the Long Term Capital Management collapse and
Russian debt default of 1998. However, despite its ability to survive past disasters, the
collapse of the U.S. housing market ultimately brought Lehman Brothers to its knees, as
its headlong rush into the subprime mortgage market proved to be a disastrous step.
REASON FOR FAILURE OF LEHMAN BROTHER

Lehman Brothers became bankrupt as a large part of their loan portfolio comprised
of loans for buying real estate. With the meltdown in the property market in US the
values of properties became lesser than the the value of loan outstanding.
Due to this most of the loans became irrecoverable leading to bankruptcy of Lehman
Brothers

Reason given in Lehman brothers file:

"Lehman had incurred losses of billions of dollars in the US mortgage market."

THE PRIME CULPRIT

In 2003 and 2004, with the U.S. housing boom . well under way, Lehman acquired five
mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services,
which specialized in Alt-A loans (made to borrowers without full documentation).
Lehman's acquisitions at first seemed prescient; record revenues from Lehman's real
estate businesses enabled revenues in the capital markets unit to surge 56% from 2004
to 2006, a faster rate of growth than other businesses in investment banking or asset
management. The firm securitized $146 billion of mortgages in 2006, a 10% increase
from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the
firm reported net income of a record $4.2 billion on revenue of $19.3 billion.

THE BEGINNING OF THE END

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge
funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500
mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of
Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market
gained momentum, Lehman continued to be a major player in the mortgage market. In
2007, Lehman underwrote more mortgage-backed securities than any other firm,
accumulating an $85-billion portfolio, or four times its shareholders' equity. In the fourth
quarter of 2007, Lehman's stock rebounded, as global equity markets reached new
highs and prices for fixed-income assets staged a temporary rebound.
HURTLING TOWARD FAILURE

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 vulnerable
to deteriorating market conditions. On March 17, 2008, following the near-collapse of
Bear Stearns - the second-largest underwriter of mortgage-backed securities - Lehman
shares fell as much as 48% on concern it would be the next Wall Street firm to fail.
Confidence in the company returned to some extent in April, after it raised $4 billion
through an issue of preferred stock that was convertible into Lehman shares at a 32%
premium 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.  

On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss since
being spun off by American Express, and reported that it had raised another $6 billion
from investors. The firm also said that it had boosted its liquidity pool to an estimated
$45 billion, decreased gross assets by $147 billion, reduced its exposure to residential
and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about
25.

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