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Case Study- Fall of Lehman Brothers

Case Study- Fall of Lehman Brothers

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Published by kisan_comp
Case study on fall of lehman brothers
Case study on fall of lehman brothers

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Published by: kisan_comp on Sep 22, 2009
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05/16/2013

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The fall of Lehman Brothers
 
Lehman Brothers Inc (Lehman Brothers) once the 4
th
largest Investment bank in the worldfiled for chapter 11 of bankruptcy on September 15
th
2008.It started its journey as a small dry goods store to one of the leading investment banks in theUS.
Refer Annexure 1 for the history of Lehman Brothers.
 Lehman had a particularly strong history in fixed-income products, later it diversified intoother areas of finance such as investment banking and investment and asset management.
Refer Annexure 2 for the business overview.
Until the 2007, Lehman generated a significant portion of its revenue through the issuance ofmortgage-backed and asset-backed securities. When the collapse of the U.S. subprimemortgage industry started resulting credit crisis & the mortgage default rates began to riseand the demand for these securities began to disappear, Lehman was left with billions ofdollars of rapidly depreciating securities on its balance sheet, forcing it to take large writedowns and write-offs. Eventually, the company's efforts to shed risky assets provedunsuccessful, and investors sold off shares of Lehman in the fear that it wouldn't have enoughcapital to continue business as usual.
Refer Annexure 3 for Lehman’s failure
.On September 2
nd
2008, the state-owned Korean Development Bank confirmed that it was intalks to buy up to a 25% stake in Lehman, though the deal eventually fell through. Thefollowing weekend, Lehman put itself up for sale, and the U.S. Federal Reserve called anemergency meeting of Wall Street executives to aide in the sale. The two main bidders, Bankof America (BAC) and Barclays (BCS), dropped out on Sunday after the federal governmentrefused to absorb Lehman's future losses with taxpayer dollars. Left with no potential buyers,Lehman's board of directors decided to file for Chapter 11 bankruptcy protection on themorning of Monday, September 15, ending the firm's 158-year history and claiming the title ofthe largest bankruptcy filing on record
. Refer Annexure 4 for Lehman Brothers BusinessUpdate Call Transcript
So what led to the failure of the organization which was considered as too big to fall?The case study examines in detail the reasons that led to the subprime crisis since the year2007 in the US and how it led to the collapse of 158 year old Lehman Brothers. The casehighlights the role of several stake holders in the mortgage business that contributed to thecrisis. It examines the various factors that contributed to the fall of Lehman Brothers
 
including leadership issues, excessive leverage, failure of risk measures employed like ‘Valueat Risk' and poor regulation of the investment banking industry. It also explains the role ofcertain OTC derivative instruments that led to the collapse of the company.
Following issues to be discussed in this case study’s context:
Understand the reasons that led to the subprime crisis in the US and its impact onfinancial institutions.
Analyze the aggressive strategies that Lehman Brothers followed in the mortgagebusiness.
Study the role of leadership at Lehman Brothers behind the company's rise andsubsequent collapse.
Appreciate the significance of risk management and the drawbacks of excessiveleverage.
Examine the innovations in financial instruments primarily derivatives.
Analyze the consequences of lack of supervision on OTC derivatives and mortgagelending mechanism in the US.
Debate on the role played by the US policy makers for adopting liberal credit driveneconomic growth policy that eventually led to the subprime crisis.

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