The structure of confidence and the collapse of Lehman Brothers (original) (raw)
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SSRN Electronic Journal, 2015
When Lehman Brothers filed for bankruptcy on September 15, 2008, it was the largest such filing in U.S. history and a huge shock to the world's financial markets, which were already stressed from the deflated housing bubble and questions about subprime mortgages. Lehman was the fourth-largest U.S. investment bank with assets of $639 billion and its operations spread across the globe. Lehman's clients and counterparties began to disclose millions of dollars of potential losses as they accounted for their exposures. But the impact of Lehman's demise was felt well beyond its counterparties. Concern regarding its real estate assets, its large derivative book, and its significant involvement with collateralized debt obligations (CDOs)-a new type of security that incorporated subprime mortgages-soon "infected" the shadow banking system, contributing to a retraction of wholesale funding and a severe liquidity crisis for many firms, including many with no direct links to Lehman. In this case, we explore the concept of "financial contagion" and how a sudden shock to one firm, such as Lehman, can lead to other firms and markets experiencing similar impacts that are not totally explained by direct linkages.
Uncertainty and the Financial Crisis
SSRN Electronic Journal, 2010
The majority of commentators, along with the public opinion, are inclined to identify the causes of the last fi nancial crisis in a combination of traditional market and regulatory failures in the operation and regulation of fi nancial markets. Whatever cannot be explained along these lines is interpreted as evidence of inability of individuals, including market professionals, to make rational choices. Without denying the importance of these factors in explaining the behavior of some of the players involved, this paper argues that the extraordinary proportions of the crisis we have experienced are better understood by looking at the specifi c dynamics of fi nancial innovation through securitization of illiquid assets. Particularly, a perverse combination of Knightian uncertainty and externalities in banking seems to have been one major responsible of the fi nancial crisis. This paper investigates the role of uncertainty and externalities in the unfolding of events that determined the fi nancial crisis. In this perspective, fi nancial regulation has not been just too lax or too lenient. Rather, it has distorted the choices of fi nancial intermediaries ex-ante (inducing them to rely too much and too quickly on liquidity for funding and profi ts) and it has turned out to be too rigid ex-post (failing to provide the banking system with incentive-compatible forms of resilience). The implications of this approach are discussed with regard to the regulation of credit rating agencies, the pro-cyclicality of capital adequacy regulation, and the corporate governance of banks.
The Lehman Brothers Bankruptcy A: Overview
The Journal of Financial Crises, 2019
On September 15, 2008, Lehman Brothers Holdings, Inc., the fourth-largest U.S. investment bank, sought Chapter 11 protection, initiating the largest bankruptcy proceeding in U.S. history. The demise of the 164-year old firm was a seminal event in the global financial crisis. Under the direction of its long-time Chief Executive Officer Richard Fuld, Lehman had been very successful pursuing a high-leverage, high-risk business model that required it to daily raise billions of dollars to fund its operations. Beginning in 2006, Lehman began to invest aggressively in real-estate-related assets and soon had significant exposures to housing and subprime mortgages, just as these markets began to sour. Lehman employed a cadre of accountants and risk professionals to continually monitor its balance sheet, key ratios, and risks. It undertook desperate and questionable actions to stay alive. Nevertheless, Lehman ultimately failed because of an inability to finance itself. This overview case provides background information about Lehman's business and key personnel and also the economic _____________________________________________________________________ 1 This case study is one of eight Yale Program on Financial Stability (YPFS) case modules considering the Lehman Brothers Bankruptcy:
SSRN Electronic Journal, 2022
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Journal of Finance and Investment Analysis, 2021
This study assessed the failure of the Lehman brothers. The aim was to evaluate the causes of Lehman's bankruptcy and determine the strategies that could prevent bankruptcy in the banking sector going forward. Findings indicated a close relationship between regulations and the actions of management. In particular, the failure of Lehman showed that regulation and supervision are critical to the success and continuity of the banking sector. The analysis also showed that the demise of Lehman was a result of complex factors. These included unethical management practices, deregulation, excessive risk-taking, poor corporate governance structure, fraud, and lack of a robust ethics code.
The Failure of Lehman Brothers: Causes, Preventive Measures and Recommendations
The 2008 global financial meltdown witnessed most of the top global financial institutions crumble into liquidation and bankruptcy. The incident culminated in most of these firms either liquidated or experienced plummetion in returns. The failure of Lehman Brothers in the midst of the global financial crisis was the largest catastrophe to hit the financial industry in the United States. Notably, the leading US investment bank suffered huge losses within the month of September. Lehman's stock price plummeted by 73% of its value in the first half of September alone and by the mid of September 2008, lost $3.9 billion in their attempt to dispose of a majority of their shares in one of their subsidiaries. To contribute to the body of knowledge, this paper investigated and reviewed the activities or transactions that resulted in the failure of Lehman Brothers. The findings revealed multiplicity of factors ranging from dubious accounting practices, unethical management practices, over investment in risky unsecured investments, laxity on the part of regulators. External auditors also played a major part in this failure by not detecting these financial statement malpractices by the Lehman managers. Policy makers such as the International Financial Reporting Standards (IFRS), Security and Exchange Commission (SEC), the Basel Accord etc, ought to initiate stringent policies to address Lehman failure to avert any future occurrence.
Four myths and a financial crisis
Thunderbird International Business Review, 2011
The main driving force of the financial crisis of 2007-2009 was a rapid deterioration of the trust of private agents in the quality of financial institutions. In turn, this loss of confidence entailed the collapse of several key asset markets and a sharp decline in the other asset prices. This paper surveys the critical moments of the crisis, puts forward some of the shock amplifying mechanisms and comments on the effectiveness of various policy measures. The conclusion opens the debate on what structural changes in the existing financial architecture are required to contain such crises in the future.