The Caused and Effects of Lehman Brothers Bankruptcy

Topics: Lehman Brothers, Subprime mortgage crisis, Bear Stearns Pages: 6 (1985 words) Published: November 25, 2012
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. 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 economic 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...
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