The downfall of Lehman Brothers and its relation to the current financial crisis

Résumé du document

In this report, we will study the financial crisis experienced by the Lehman Brothers and its subsequent collapse in 2008. Lehman Brothers Holdings Inc. was a global financial-services firm, and one of the most important primary dealers in the U.S. with respect to treasury securities and services. The exclusive position once enjoyed by this firm in the American market throws up questions regarding the consequences of this bankruptcy and how it affected the global economy.

This opening section of this document examines the organizational structure of this bank followed by a critical report on how, why and what went wrong with it. The second part analyzes the consequences of the developments in the financial market and the global economy. Subsequently, we compare how the European and the Asian countries reacted to this crisis and the effects of globalization during such a crisis.

In the last part, we will study in detail suggestions put forward to settle the financial crisis and the manner in which the international economic system must be reformed. This will be followed by our personal conclusion regarding this situation.

A study of the timeline of the bank affords a better outlook regarding the situation of the years leading up to the financial crisis. We will analyze the background to deduce the main reasons behind the fall of Lehman Brothers. Two points are going to be highlighted: the crisis of the cash assets due to the JPMorgan Chase's actions, and the refusal of the FED (Federal Reserve System) to modify the credit rules. Then, we will examine the internal structure of the bank which will allow us to understand the internal reasons for this bankruptcy. Finally, we will examine the external causes: the house prices, and the credit rating agencies.

It is interesting to note that Lehman Brothers Holdings were known for their amazing growth, “between 1994 and 2004, its benefits have grown from 113 million to 4.2 billion dollars”, (Chalmet, 2009). To understand the collapse of this investment bank, it is necessary to have a closer look of what happened in the year 2005. This year symbolized a turning point in the internal policy and the modus operandi of this financial titan. . It started to “make the wrong use of the leverage effect (it is the difference between return on equity and return on capital employed) and the administration made unnecessary changes in the balance sheet which showed 780 billion dollars and they were exposed to the mortgage loan of more than 70 billion” (Chalmet, 2009). The year 2007 saw a lot of interesting events – it was the beginning of the subprime crisis. Also, the relation between the bankruptcies filed by Lehman Brothers bankruptcy and Bear Stearns turned out to be significant.