LEHMAN

BROTHERS
Case Study

Submitted To :
Wasimakram Binnal

Submitted By :
Kanad Bapat
18020343015
 Lehman Brothers Collapse
Problem definition -an abstract overview of the case study

Lehman’s inability to finance itself- They had become heavily involved in the mortgage market,
owning the subprime mortgage seller BNC Mortgage, and borrowed too much money to fund its
mortgage investments which they couldn’t sell.

Top three solutions proposed for the problem

Solution1

The turmoil that followed Lehman’s failure was a direct result of the government’s failure to
clearly explain why the Fed had bailed out Bear Stearns in March of 2008. Thus, the Secretary of
the Treasury should state the reasons for bailing and write a report on the costs and benefits of
the bailout.

Solution 2 : Spinning off “toxic” assets/ Increasing Equity

Lehman began casting around for a long-term strategy that would secure the firm’s future and
allay the market’s fears. Lehman continued to desperately seek a partner after Moody’s
announcement to lower their debt rating, but it failed to secure a firm commitment.
Solution 3: Decrease in gross asset
Having invested in assets such as subprime mortgages & commercial real-estate despite the
concern expressed by rating agencies and investors, Lehman has to cut down their gross asset by
$147 billion, also reduced exposure to commercial & residential mortgage by 20%.

Conclusion and Recommendation

 Reduce/Improve Leverage ratio

A company with a high debt-to-capital ratio would be taking a big risk if they leveraged
existing equipment or real estate as collateral for a new venture. A value of 0.5 or less is
considered good, while value greater than 1 shows a company as being technically insolvent.

 Measure, monitor and manage liquidity risk

Management needs an accurate and complete daily view of gross and net positions, values,

and marks. Analysis of data on daily basis would help in great measure to manage the

unperceived risk to the firm.