Question

Lehman company, a firm that has either failed or came close to collapsing during the Financial Crisis of 2007-2009,

1. Describe in some detail the events that led to the failure of the firm. What went wrong?
2. Describe the interconnectedness of the firm, and how that may have played a role in the US government’s response to its pending failure.

Answer 1

Lehman brothers was a company that was regarded as 'too big too fail'. Yet it did. Some of the major causes of this were:

• Upon later introspection, it was found that it used to regularly manipulate accounts or misappropriate them so as to make the financial statements and its prospects look very bright.
• The company had started resorting to short buying and selling on the stock market to rally its stock prices or to suit the top management of the company.
• In the early part of 2008, Lehman brothers started losing credibility in the credit market due to the subprime mortgage crisis it was facing. It had a number of low rated credit bonds which it was forced to sell for heavy discounts and made the company lose almost 70% of its market value.

The failure of the Federal Reserve to provide loans to the company for its survival( just like Bear Stearns and AIG) was not for the lack of collateral but a part of a major politically motivated decision because the rescue of lehman brothers from the clutches of liquidity would have caused huge public dissent and the government would come under severe criticism. Since the US presidential elections were scheduled closely 2 months later, that would have called for a major loss thus making the sinking of this company seem like a better option to concerned parties.