The Caused and Effects of Lehman Brothers Bankruptcy

The caused and do of Lehman Br otherwises loser. ? Lehman Brothers was founded in 1850 and it is a diversified investing patois provided fiscal services for global companies, institutions, governments and investors. Lehman Brothers was adept of the around powerful stock and bond underwriters and dealers in the world, and it also as the fourth bear-sizedst investment bank in the United States before. Because of widely recognized to Lehmans ope balancenal capacity, the telephoner had many world-renowned companies as its customer plate much(prenominal) as Dell, Fujitsu, IBM, Intel, Philip Morris, Shell and Wal-Mart 1.Lehman Brothers had faced four collapses before it nonstarter, one was the stock merchandise smasher of 1929, second it had raise rate loss of $6. 7 million in 1973, and then because of Lehmans inborn conflict lead to be merger and acquisitions by Ameri batch Express in 1984, and farthest one was shortage of cash in hand in 1994. Richard Fuld as Lehmans CE O 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 pecuniary markets, the most important reason caused Lehman bankruptcy is under the subprime mortgage crisis and complex financial markets. earlier the subprime mortgage crisis of 2007, the U. S. existing estate market over the leveraged financing and oil price was increase rapidly, many people in the excessive lending. However, Lehman Brothers had go along business of mortgage bond until the outbreak of subprime mortgage crisis in 2006, Lehmans asset management, economic services, mergers and securities underwriting business accounted for Lehmans operating income of 40% 2.In 2008, because the subprime mortgage crisis spread to Lehman Brothers, the association suffered a serious hit from the financial losses and caused that stock price fell to only a fewer dollars. In September 2008, the Lehman Brothers 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 singular shock wave for financial market and investment banking. The terrorist attack on 2001, September 11 led to conomic haveturn and the stock market depressed, the Federal Reserve decided to continue kept low interest rate to ensure the most of enterprises and frequents 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 Lehmans meshwork harvest quickly in the second half of 2002. Lehman Brothers sales r yetue of subprime mortgage raised double of profits in both years 2004 and 2005 3. And L ehmans 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 represent 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 untold 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 publics panic of the book of facts crunch. The public began to suffer a serious mortgage crisis 7. As a result, the crownwork losses a nd 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 crown just $30 billion 2. At that time their stock price up to $65, but eightsome months later the price fell to $4 with more than $600 billion debt. Since 2008, Lehmans stock price had locomote by 60%. Besides, Lehman Brothers had alternative assets about $40 billion such as hedge funds, confidential 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 Lehmans total debt $613 billion, and then the negotiation with Barclays ti ll and bank building of America about take over Lehman Brothers was failed on September 14. While at the comparable time the investment banks gave up to help Lehman Brothers, Lehmans 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 indeterminate market. In order to prevent the open market crash of Lehman Brothers, the U. S. Treasury and the Federal Reserve clay made great effort o n three days to save markets. The investment bank Barclays and Bank of America exited.The Britains 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 crisis6. As we can see, there are many factors caused bankruptcy of Lehman Brothers, such as market changes and instability led to positive 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 fixe d income products trading, Lehman Brothers strived to thrive 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 escalate from the summer of 2007. In addition, it also considered about the problem of insolvent.Lehman Brother had more than $600 billion bank loans, $ clv 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 non make any financial support or warranty to save Lehman Brothers, and leave the market withdraw 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 Lehmans investment business in the United States, this still not strong enough to save Lehman Bro thers.Furthermore, the financial markets turmoil around the world should be cloak 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 Le hman Brothers baron 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 tone of global recession. At the same time, the risk aversion awareness prompted investors to sell commodities and high risk assets. The U. S. stocks crisply 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. 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