Impact of the credit crisis on investment banks

Topics: Subprime mortgage crisis, Debt, Morgan Stanley Pages: 7 (1815 words) Published: September 21, 2013

Cause of Problems for Financial Institutions during the Credit Crisis: Select a financial institution that had serious financial problems as a result of the credit crisis. Determine the main underlying causes of the problems experienced by that financial institution. Explain how these problems might have been avoided.


Table of Contents
I- Credit crisis .................................................................................................... 2 II- Impact of the credit crisis on investment banks ................................. 2 1) Definition of Investment bank ................................................................... 2 2) Impact of the credit crisis on investment bank ..................................... 2 III- Lehman Brothers .......................................................................................... 4 1) Introduction ..................................................................................... 4 2) Reasons lead to bankruptcy ............................................................ 5 3) How these problems might have been avoided. .............................. 7 IV- References .................................................................................................... 10

Page 1

FINANCIAL MARKETS & INSTITUTIONS

I-

Credit crisis

The credit crisis began in the United States in 2007credit that refers to a sudden shortage of funds for lending, leading to a resulting decline in loans available. A Credit Crunch can occur for various reasons:

 Interest rate increases suddenly
 Money is controlled directly by the government.
 A Drying up of funds in the capital markets
The recent credit crunch was driven by a sharp rise in defaults on subprime mortgages. These mortgages were mainly in America but the resulting shortage of funds spread throughout the rest of the world.

II-

Impact of the credit crisis on investment banks
1) Definition of Investment bank

An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). 2) Impact of the credit crisis on investment bank

Credit crisis has greatly affected the investment banks around the world. Many investment banks faced hard time and especially went bankrupt.
According to The Observer-a newspaper in New York, until 9 September 2007, the world's top investment banks face a $25bn profits plunge because of credit crisis’s impact. Credit crunch hit Goldman Sachs – the world’s most successful investment bank that warned of huge pay cuts. They said: “Market conditions are clearly very difficult. Most Goldman Sachs Page 2

FINANCIAL MARKETS & INSTITUTIONS

employees will probably count themselves lucky to still be in a job, at a time when the investment banking industry is reeling from the collapse of Bear Stearns. So putting up with a reduced package of £200,000 instead of an average of £300,000, won't seem too much of a hardship.” After that, Goldman Sachs chosen to convert to bank holding companies, ending its existence as stand-alone investment banks.

Moreover, some investment banks are no longer present. For example:  Dresdner Kleinwort - German investment bank taken over by Commerzbank AG. 31 August.
 Merrill Lynch was taken over by Bank of America, ending 90 years of independence.  Bear Stearns: One of the first to appeal to the US government for help, Bear Stearns was propped up by the US government and eventually sold to JP Morgan.  Lehman Brothers: Up to the credit crunch, Lehman was the fourth largest investment bank in the US, but it fell victim to the crisis and filed for bankruptcy...
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