Summary of bankruptcy of Lehman brothers

The bankruptcy of Lehman Brothers on September 15, 2008, is considered to this day the largest in the
United States and this event is considered the turning point in the financial crisis. The events surrounding
Lehman’s bankruptcy and the developments in the markets which followed evoked a lot of interest in
understanding why it failed the consequences of such a failure and if it could have been avoided. This
review of the demise of the investment bank Lehman Brothers’ focuses mainly on the causes such as
fraudulent accounting, involvement in the subprime mortgage crisis, lax regulation and its impact on the
economy as a whole.

Cause of Lehman collapse:

Several aspects led to the collapse of Lehman Brothers in 2008. The subprime mortgage business of
Operating in these risky products was an important factor. High risk sub-prime mortgages inherent to this
mortgage style were provided to low-grade borrowers. These loans would be packaged into instruments
such as CDOs and MBS which were peddled to their investors. The onset of the housing crisis in 2007
slowly began to trigger defaults on subprime lending mortgages which was a huge loss for the likes of
Lehman who had invested heavily in such products. They also shorted the mortgage bond market thus
helping to destroy more value of the mortgage bonds hence worsening the crisis.

Another concern that made the catastrophe worse was the widespread use in such financial institutions
of Credit Default Swaps (CDS) which were designed as a protection against the default of financial
products which included products offered by Lehman Brothers. These swaps formed a huge chain of
financial liabilities that might be transferred from one institution to another thereby causing a domino
effect after Lehmans collapse. The subprime market was already looking shaky however Lehmans
bankruptcy which was quite embedded in the risky undertakings sped the market collapse.

Even more a feature of Lehman that played a major role in the company demise was its pursuit of growth
at all costs without considering risks. When approaching to the mid-2000s the nature of Lehman’s
business has changed having given up the brokerage model with low risk and taking on the lion’s share of
illiquid assets focusing mostly on real estate. By 2007 Lehman was over adopted keeping $700 billion in
assets with only $25 billion of equity capitalizing its vulnerabilities towards asset values. Such level of
leverage against risky assets created a scenario where Lehman was borrowing short-term continuously
to repay long-term payables which brought up enormous pressure towards the firm’s liquidity
management.

Dishonest Accounting Behavior:

Among the many controversial issues surrounding the demise of Lehman Brothers was their usage of
obfuscative accounting standards and especially the reversal of the balance sheet, particularly via the
so-called use of Repo 105. Countersigned bonds agreeing to repurchase. It was a nasty little trick of
Lehman about $50 billion of assets temporarily lying off balance sheet to project a better overall financial
status. Commonly such repos are considered to be short-term depository loans with the assets forming
the idea of collateral. Nevertheless instead of loans Lehman referred to the same transactions as sales
and it consequently was able to reduce its debt levels and enhance its leverage ratio.
The employment of Repo 105 which was legal within the confines of U.S. accounting norms was
misplaced as it was intended to conceal a companies true financial standing which in most cases is an
unethical and illegal practice. Manipulation of financial statements went as far as put them in the calls
minutes when even this calls documentation was supposed to be external.

Regulatory failure and deregulation:

The fall of Lehman The brothers also highlighted the failure of regulatory oversight in the US financial
system. Financial market deregulation in the 1980s and 1990s led investment banks like Lehman to take
on too much risk without adequate oversight. Repeal of law The Glass-Steagall Act of 1999 previously
separated commercial and investment banking. Make companies Can adequately cover losses that may
occur able to carry out more risky activities without having to reserve funds.

Credit rating agencies play an important role in assessing the risk of financial products. It has also
contributed to the crisis by misassessing the risks associated with mortgage backed securities. This is
because these inflated credit ratings give investors a false sense of security. As a result companies like
Lehman can Continue trading risky products with no immediate impact Lehman liquidity problem earlier

Lehman’s collapse also exposed weaknesses in the predictive techniques used by analysts to estimate
financial distress. There were several early warning signs such as Lehman’s deteriorating cash flow
position and increased reliance on outside financing. All are neglected by analysts who focus more on a
companies balance sheet and income statement.

The Aftermath and Broader Implications:

Lehman Brothers’ financial disaster had some distance accomplishing consequences for the worldwide
financial system. The on the spot impact became a pointy decline in inventory markets with the Dow
Jones Industrial Average dropping over 500 points at the day of the bankruptcy. Lehman’s failure also
brought about a much wider crisis of confidence in the banking zone main to a freeze in credit markets
and inflicting several other monetary institutions to either disintegrate or require authorities bailouts.

The U.S. Government responded by using imposing emergency measures together with the $700 billion
Troubled Asset Relief Program to stabilize the banking zone. The Federal Reserve also took extraordinary
steps to provide liquidity to monetary establishments whilst central banks round the arena coordinated
efforts to prevent a worldwide monetary fall apart. Despite these interventions, the monetary crisis
brought about a deep recession with millions of jobs lost and trillions of greenbacks in wealth wiped out.

The fall apart of Lehman Brothers also brought on a reevaluation of the regulatory framework governing
monetary establishments. In the years following the disaster new guidelines including the Dodd-Frank
Wall Street Reform and Consumer Protection Act had been added to strengthen oversight of the
economic sector and prevent a comparable fall apart in the future. These reforms included stricter
capital requirements for banks progressed transparency inside the trading of complicated economic
merchandise and the creation of the Consumer Financial Protection Bureau to guard purchasers towards
predatory financial practice
Lessons and Recommendations Lehman:

Brothers burst offers single key lessons for the future. First it underscores the grandness of right fiscal
practices and enhancer in accounting

The use of corrupt techniques like Rep 105 to ready fiscal statements should have served as a dissuasive
tale for other institutions about the dangers of prioritizing short gains over semipermanent stability.
Second, the bankruptcy highlights the need for stronger regulative oversight.

The deregulating of the fiscal markets allowed firms like Lehman to take on exuberant risks without easy
safeguards. Going forward as well as maintaining stricter regulative controls included more strict
superintendence of fiscal institutions and rating agencies is base to preserve a like crisis.

Finally as well as Lehman’s burst demonstrated the grandness of risk direction and collective
governance. Firms must brace growing strategies with heady risk direction practices to check
semipermanent stability.

Lehman’s competitor interestingness of profits without adequately managing the risks associated with its
investments as well as eventually led to its downfall. Financial institutions should have learned from this
bankruptcy and adopted more buttoned down strategies that prioritized property growing and risk
mitigation.

Conclusion :

In conclusion as well as the failure of Lehman Brothers was the provide of a compounding of factors
including poor risk management wrong accounting practices and regulative failures. The firm’s burst had
a deep touch on the rounded fiscal system prompting far flung reforms and reshaping the landscapist of
modern day banking.

It stiff a right exemplar of the dangers of unchecked fiscal risk and the important grandness of
maintaining transparency right behavior and iron principle in the fiscal sector.