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The Caused and Effects of Lehman Brothers Bankruptcy

The caused and effects of Lehman Brothers bankruptcy. ? Lehman Brothers was founded in 1850 and it is a diversified investment bank provided financial services for global companies, institutions, governments and investors. Lehman Brothers was one of the most powerful stock and bond underwriters and dealers in the world, and it also as the fourth largest investment bank in the United States before.

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Because of widely recognized to Lehman’s operational capacity, the company had many world-renowned companies as its customer base such as Dell, Fujitsu, IBM, Intel, Philip Morris, Shell and Wal-Mart [1].

Lehman Brothers had faced four collapses before it bankruptcy, one was the stock market crash of 1929, second it had interest rate loss of $6. 7 million in 1973, and then because of Lehman’s internal conflict led to be merger and acquisitions by American Express in 1984, and last one was shortage of funds in 1994. Richard Fuld as Lehman’s CEO from 1993, he led to Lehman Brothers grow up and avoid those four collapses. Even Lehman Brothers was turned the corner in these four collapses; it still declared bankruptcy as a result of $613 billion total debt in 2008 [7].

Lehman Brothers went to collapse make lots of impacts on financial markets, the most important reason caused Lehman bankruptcy is under the subprime mortgage crisis and complex financial markets. Before the subprime mortgage crisis of 2007, the U. S. real estate market over the leveraged financing and oil price was increase rapidly, many people in the excessive lending. However, Lehman Brothers had continued business of mortgage bond until the outbreak of subprime mortgage crisis in 2006, Lehman’s asset management, economic services, mergers and securities underwriting business accounted for Lehman’s operating income of 40% [2].

In 2008, because the subprime mortgage crisis spread to Lehman Brothers, the company suffered a serious hit from the financial losses and caused that stock price fell to only a few dollars. In September 2008, the Lehman Brother’s CEO Dick Fuld had experienced the most painful financial crisis in the history of the United States and the company went bankrupt. The Lehman Brothers which had experienced 158 years history toward to end [1]. Also, the collapse of Lehman Brothers brought an unprecedented shock wave for financial market and investment banking. The terrorist attack on 2001, September 11 led to conomic downturn and the stock market depressed, the Federal Reserve decided to continue kept low interest rate to ensure the most of enterprises and publics can achieve loans easier [9]. Due to the public would had more money to be used for mortgages and other spending, Lehman Brother seized the opportunity to develop its business so that Lehman’s profits growth quickly in the second half of 2002. Lehman Brothers’ sales revenue of subprime mortgage raised double of profits in both years 2004 and 2005 [3]. And Lehman’s present value of subprime mortgage CDO (collateralized debt obligations) investment reached up to $80 billion [5].

Lehman Brothers issued two mortgage bonds companies in the United States are BNC and Aurora. These two branches of mortgage bonds and purchased from other companies constituted the CDO package. The worth of CDO could be about hundreds of millions and even billions of dollars to divide for sale to investors around the world. The interest rate of CDO is much higher than the national bonds in the United States and other investments, so Lehman Brother took advantage of sale these bonds to gained large profits. After that, the public began to worried more about future develop of CDOs from Lehman Brothers and other companies.

Then, Lehman Brothers shut down one of the mortgage bonds company BNC because of huge losses and this caused the public’s panic of the credit crunch. The public began to suffer a serious mortgage crisis [7]. As a result, the capital losses and lack of credit to the banking system, so that no banks willing to lend money unless borrower to pay high interest rate. The banks which involved in this business are worried about losing their money. However, Lehman Brother was still announced good quarterly results even had problems and other investment banks (e. g.

JP Morgan Chase, Citibank) had losses. In January of 2008, Lehman Brother reported their earnings shown that highest income up to $4 billion and their capital just $30 billion [2]. At that time their stock price up to $65, but eight months later the price fell to $4 with more than $600 billion debt. Since 2008, Lehman’s stock price had fallen by 60%. Besides, Lehman Brothers had alternative assets about $40 billion such as hedge funds, private equity funds and real estate funds. In May, Lehman Brothers reported that losses in hedge funds but then said they are recovered [11].

Because of Lehman’s total debt $613 billion, and then the negotiation with Barclays Bank and Bank of America about take over Lehman Brothers was failed on September 14. While at the same time the investment banks gave up to help Lehman Brothers, Lehman’s market value dropped dramatically, these fact forced Lehman Brothers to filed for bankruptcy protection from the U. S. Bankruptcy Court in Manhattan on September 15, 2008 [4]. After filed for bankruptcy, Lehman Brothers exchanged trading at the OTC (Over the Counter) market only $0. 05 per share.

Lehman exercised put option to ensure holders could get profit when they buy the stocks as $0. 05 per share and sell for strike price [10]. When the news of the fourth largest bank Lehman Brothers went bankrupt came out, the dollar currency and the U. S. stock index futures was declined at the same time, this indicated that the New York stock market crash in the open market. In order to prevent the open market crash of Lehman Brothers, the U. S. Treasury and the Federal Reserve System made great effort on three days to save markets. The investment bank Barclays and Bank of America exited.

The Britain’s third largest bank Barclays decided to drop out after the government refused to provide financial guarantees to save Lehman Brothers. Then, the bank of America all announced exit the action. Because the government refused to help and no other support, Lehman Brothers final decided to file for bankruptcy protection caused by suffered serious financial crisis[6]. As we can see, there are many factors caused bankruptcy of Lehman Brothers, such as market changes and instability led to systematic risks, the internal problems and risks from Lehman Brothers.

The internal problem is one of the most important factors to cause it collapse. As the fourth largest investment bank in the United States, Lehman Brothers more focused on the traditional investment business such as underwriting securities, mergers and acquisitions for a long term. With the rapid development of financial derivatives and fixed income products trading, Lehman Brothers strived to expand these businesses and achieved great success. The real estate and credit business develop rapidly after 2000, Lehman Brothers began to involve in these business as other banks [6].

However, Lehman Brothers expanded too fast and even in the decline of real estate market in 2007, the commercial real estate bonds of Lehman Brothers still grown quickly. Thus, the rapid growth created more systematic risks for Lehman Brothers. In addition, Lehman Brothers was different from other investment banks like JP Morgan Chase, Bank of America because Lehman had less own capital and its capital adequacy ratio is too low [6]. In order to collected funds to expand business, Lehman had to rely on the bond market and bank lending market.

The greater is the leverage ratio when the company borrowing more money from banks, but it has less equity capital. The profit is amplified by the leverage ratio when it makes money, but the loss is enlarging with the leverage ratio when the company has loss. The lack of funds would be increase the risks for the company when it loss. Moreover, to analyzed the problem of Lehman Brothers’ collapse, it also should be related with the U. S. subprime mortgage crisis and recent financial turmoil intensified from the summer of 2007. In addition, it also considered about the problem of insolvent.

Lehman Brother had more than $600 billion bank loans, $155 billion debt securities, and only $639 billion net assets [8]. Besides, the U. S. government took non-interventionism accelerated collapse of Lehman Brothers. As the U. S. government did not make any financial support or warranty to save Lehman Brothers, and leave the market accept the news of the Lehman bankruptcy. The government refused to guarantee Lehman Brothers directly caused many investors to exited, while the Barclays preferred to acquire part of Lehman’s investment business in the United States, this still not strong enough to save Lehman Brothers.

Furthermore, the financial markets turmoil around the world should be affect Lehman Brothers, and it also one of a reason affect many companies to left Lehman stocks and bonds whether the U. S. financial institutions or foreign enterprises. Since the market got the news of Lehman Brothers bankruptcy, the Dow Jones Index has dropped nearly 800 points [7]. In short, Lehman Brothers bankruptcy caused the devaluation of investment, cash flow problems and additional losses. Also Lehman financial crisis had a great influence on investors’ directions.

Many investors worried about Lehman crisis would be exacerbated the financial crisis and the market prospect is gloomy. Therefore, the Wall Street investment bank Lehman Brothers was collapse in the financial tsunami of 2008. Then on March, 2012, it completed the bankruptcy reorganization and will be to repay debts to creditors. After that, the fourth largest investment bank of the United States has become a historical. The bankruptcy of Lehman Brothers might impact the entire financial market, the investors worried about the outlook of the U. S. economic and the international oil rices continued to decline. And the investors also concerned that the demand of crude oil and other commodities is likely to fall under the shadow of global recession. At the same time, the risk aversion awareness prompted investors to sell commodities and high risk assets. The U. S. stocks sharply down and European stock markets also had a significant decline. The event of Lehman Brothers gave to the world economic recovery to cast more dark shadows in 2008. References [1] Lehman Brothers Collection. Harvard Business School. Baker Library. Retrieved from http://www. ibrary. hbs. edu/hc/lehman/history. html [2] Sean Hinton. Lehman Brothers (LEHMQ). Wikinvest. Retrieved from http://www. wikinvest. com/stock/Lehman_Brothers_%28LEHMQ%29 [3] Landon Thomas Jr. (July 23, 2003). Market Place; Lehman to Buy Neuberger Berman For $2. 6 Billion. The New York Times. Retrieved from http://www. nytimes. com/2003/07/23/business/market-place-lehman-to-buy-neuberger-berman-for-2. 6-billion. html [4] Lehman Bros files for bankruptcy. (September 16, 2008). Retrieved from http://news. bbc. co. uk/2/hi/business/7615931. stm [5] Lehman Brothers Holdings, Inc.

Spector Roseman Kodroff & Willis. Retrieved from http://www. srkw-law. com/areas-of-practice/international/lehman-brothers. html [6] Luigi Zingales. (October 2008). Causes and Effects of the Lehman Brothers Bankruptcy. Retrieved from http://www. scribd. com/doc/11096014/Causes-and-Effects-of-the-Lehman-Brothers-Bankruptcy [7] Lehman Brother. Retrieved from http://en. wikipedia. org/wiki/Lehman_Brothers [8] Kim Sarro & Justin Pak. (November 29, 2008). The Causes for the Collapse of Lehman Brothers Holdings Inc. Retrieved from http://www. articlesbase. om/business-articles/the-causes-for-the-collapse-of-lehman-brothers-holdings-inc-664202. html [9] Lehman Brothers: The last empire of wealth. (December 6, 2011). Retrieved from http://www. stockmarkettoday. cc/lehman-brothers-the-last-empire-of-wealth. html [10] What Happens To Options During Bankruptcy. Option Trading Pedia. Retrieved from http://www. optiontradingpedia. com/what_happens_to_options_during_bankruptcy. htm [11] Hedge funds post biggest losses since Lehman. (June 2010). Retrieved from http://connection. ebscohost. com/c/articles/52970726/hedge-funds-post-biggest-losses-since-lehman