The Failure of Lehman Brother

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Should Lehman Brothers Investment Bank

Have Been Allowed to Fail?

Name: Ran Linyan

Table of Contents


2Corporate profile of Lehman Brothers Bank3

2.1 Corporate Profile and Business4

2.1.1History of Lehman Brothers4

2.1.2Lehman Brothers Investment Bank4

2.2 Forces of Change and Competition in Lehman Brothers4

2.2.1Change in Lehman Brother’s Business Strategy4

2.2.2Financial Competiveness in Lehman Brothers5

2.3 Financial System and Bank Management Attitudes5

2.3.1Deregulation of United States Financial System5

2.3.2Bank’s Lending Policies6

2.3.3Bank’s Risk Management Attitude6

3Causes of Lehman Brothers Bank Failure6

3.1.Background, causes, consequences of subprime mortgage lending6

3.1.1 Background : The Boom of Housing Bubble7

3.2High Leverage Ratio9

3.2.1 The Greed for Profit9

3.2.2Over-reliance on Short-term Funding Markets11

3.3Deterioration of Balance Sheet12

3.3.1. Balance Sheet Pressure12

3.3.2 Repo 10512

4Impact of Lehman Brother’s Failure to United States and World Economy14

4.1Consequences of Defective Bank Management of Financial Markets14


4.1.2Loss of Savings15


4.1.4Market Crash16

4.2No Federal Bailout16

4.2.1Too Big To Fail16

4.2.2No Bailout for Lehman Brothers16

4.2.3The Troubled Asset Relief Program17

5Recommendation and Conclusion17

5.1Proposed Recommendation18

5.1.1Regular Review of the Ratings by Credit Rating Agencies18

5.1.2Control of Equity Pay Structure for Employees18

5.1.3Re-education on the Code of Ethics18



Should Lehman Brothers Investment Bank Have Been Allowed to Fail?


The fact that Lehman Brothers, the fourth-largest United States (US) investment bank, had filed for bankruptcy protection on 15 September 2008 was a blow to the fragile global financial system. The financial market turmoil had led the most severe financial crisis since the Great Depression and threatened to have large repercussions on the real economy.

Lehman Brothers was a global financial services firm, closely following behind Goldman Sachs, Morgan Stanley, and Merrill Lynch, and a primary dealer in the US which participated in business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. With its offices situated worldwide, Lehman Brothers housed its worldwide headquarter in New York City and its regional headquarters in London and Tokyo.

This paper will reveal the largest bankruptcy in US history focusing on the causes and consequences of the Lehman Brothers collapse and the reasons the bank failed to qualify for a government bailout. In addition, several recommendations will be proposed to prevent future financial disasters of this nature.

2Corporate profile of Lehman Brothers Bank

2.1 Corporate Profile and Business

2.1.1History of Lehman Brothers

Lehman Brothers was founded as a dry-goods store in Montgomery, Alabama by Henry Lehman, Emanuel Lehman and Mayer Lehman in 1850, which focused on commodities trading and brokerage operations in the beginning. After its movement to New York, the company became a member of New York Stock Exchange, where it dealt in the emerging market for railroad bonds and entered the financial advisory business after the Civil War. The company evolved from a family only partnership model to become the country's fourth-largest investment bank for five consecutive years with record profits along with one of the highest return on equity in the investment-banking industry.

2.1.2Lehman Brothers Investment Bank

Lehman Brothers aggressively re-entered the asset management business, acquired the private-client services (PCS), Crossroads...
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