Fall of Lehman Brothers

Fall of Lehman Brothers

Lehman Brothers Holdings Inc. submitted a bankruptcy petition to the United States Bankruptcy Court on September 15, 2008, at 1:45 a.m. The bankruptcy proceeding was the biggest in American history. The bankruptcy of the 164-year-old company, the fourth-largest U.S. investment bank, sparked a worldwide financial crisis.

Lehman’s high-leverage business strategy necessitated that the company raises billions of dollars daily to stay in business. In addition, it made significant investments in subprime mortgages and high-risk real estate in 2006. As a result, Lehman could not raise enough money to stay afloat when these markets started to decline.

How The Government Save Lehman Brothers

In March 2008, American Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke began to worry about a possible Lehman Brothers collapse. That came after Bear Stearns; an investment bank, was saved by the Fed. Lehman was supposed to be the next company in need of assistance.

Paulson personally encouraged the only two interested banks: Bank of America and British Barclays. Paulson pressed Dick Fuld, Lehman’s president, to find a buyer like Bear Stearns had done. He forewarned them that the Treasury and the Fed couldn’t assist with government monies.

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Lehman Brothers was an investment bank. Therefore, the Government could not nationalize it as it did with Fannie Mae and Freddie Mac, two other government-owned companies. No federal regulator, such as the FDIC, could assume control for the same reason.

Furthermore, unlike Bear Stearns, the Fed could not guarantee a loan. This is because Lehman Brothers lacked the resources necessary to obtain one.

Anyhow, Bank of America wasn’t interested in a loan. Instead, it requested that the Government pay for estimated losses of $65 to $70 billion. Paulson replied, “no.” So instead, he and Tim Geithner, President of the Federal Reserve of New York, organized a weekend retreat with the top bankers in the country to secure capital for Lehman Brothers.

The following two days were devoted to finding a solution by the bankers. However, Bank of America withdrew from the agreement before they could. In addition, Barclays revealed that its British regulators had rejected a Lehman Brothers transaction the following day.

Housing Market Collapse

By 2007 and 2008, the market was flooded with bundles of highly hazardous and hastily designed subprime loans. The crash started in earnest as early as 2006. All it took for the number of home loan defaults to increase was a slowdown in the housing market. As a result, the enormous volume of subprime mortgages could not continue.

Lehman Brothers, however, proceeded to expand their mortgage and housing market investments, acquiring a sizable portion of the real estate market in 2007 with a receipt for more than $100 billion in assets and mortgage-backed securities.

Rivalry And Failure

The main rival of Lehman Brothers, Bear Stearns, was the first to collapse. Then, in 2008, J.P. Morgan Chase purchased the business due to a deal that the Federal Reserve endorsed. However, the agreement cast uncertainty on Lehman’s future.

After relying on repos for daily funding, Lehman was already weak. So in the early summer of 2008, the company conducted an equity fundraising effort to increase market confidence. The decision, however, was less comforting when Lehman revealed an estimated third-quarter loss of up to $4 billion in September. Additionally, it disclosed a $5.6 billion loss from the write-down of hazardous assets.

Currently, How Does Bankruptcy Affect You?

With Lehman Brothers’ failure in 2008, a financial crisis and subsequent recession were officially underway. In addition, the millennial generation was starting their careers, so they were most severely affected.

Millennials were the most affected by the skyrocketing unemployment rates, which increased from 9.9 percent in May 2007 to 19.5 percent by April 2010. The unemployment rate was 8.8% for people aged 25 to 54 and 7.0% for people aged 55 and above. Although millennial unemployment had decreased to 8.9 percent by December 2017, the harm had already been done.

The only benefit is that millennials have higher levels of education than earlier generations. Due to a lack of employment opportunities, Millennials attended college, which has paid off for those who have earned a college degree. Compared to people with merely a high school diploma, their median household income is twice as high.

The Dodd-Frank Wall Street Reform Act was also made possible by the bankruptcy of Lehman Brothers. Since the Glass-Steagall Act, it was the most extensive financial reform. After the 1929 stock market crisis, Glass-Steagall regulated banks, but it was eliminated in 1999. Consequently, banks were once more able to use depositor money to purchase unregulated derivatives like mortgage-backed securities.

The FSOC will hand over a company to the Federal Reserve for greater oversight if it grows too large. By increasing a bank’s reserve requirement, for instance, the Fed can ensure that it has enough cash on hand to avoid bankruptcy.

Lehman Brothers’ Demise

Over 77 percent of Lehman’s shares were lost in the first week of September 2008. The CEO at the time, Richard Fuld, tried several strategies, including a spin-off of the business’s commercial real estate assets, to maintain the company’s credibility with investors and keep the doors open.

Investors perceived Lehman as a ship that was sinking. The increase in credit default swaps on Lehman’s debt and the retreat of significant hedge fund investors clearly indicated that investors were fleeing.

By September 15, after failed buyout rescue attempts by both Bank of America and Barclays, that was the last straw. Lehman Brothers were forced to declare bankruptcy, which caused a final 93 percent decline in the value of the company’s equity. Lehman Brothers eventually filed for bankruptcy, making its $619 billion debt the most significant business bankruptcy in American history.

Barclays and Nomura Holdings subsequently bought most of Lehman’s investment banking and trading operations after the company filed for bankruptcy. Barclays also purchased the Lehman headquarters building in New York.

Lehman’s demise had a significant role in the chain reaction of other financial catastrophes that eventually led to the Global Financial Crisis. However, many in the sector are still perplexed as to why the American federal Government didn’t save Lehman like so many other banks were but instead was allowed to fail. One frequently argues that Lehman’s debt is too large for its assets to begin paying off.