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F2016-529
Lehman Brothers filed for bankruptcy on September 15, 2008. Stock markets went down, a
tragic downfall happened in 2008. One disastrous bankruptcy leads to financial crisis. The
bottom line lies in “Love of Money”. Lehman brother was the fourth largest investment bank of
US. Mission of Lehman brothers was to stand alone in market and swipe out its rivals. Lehman
brothers were aggressive for profits. That’s how the game started and tables turned badly.
Lehman brothers were risk takers and those risks were taken in commercial mortgages.
Aggressions for profits lead Lehman brothers to take more and more risk. The company, along
with many other financial firms, branched into mortgage-backed securities and collateral debt
obligations. At that time, interest rates were low and that was the success of mortgage
investment. Until 2007, Lehman was one of the largest firms, who underwrote highest amount of
real estate loans. These loans were made to borrowers without full documentation. Bank invested
heavily in property and mortgages. Borrowing of bank increases, Leverage of Lehman was
increasing. By the time, Lehman had small amount of capital as compared to the owed amount of
money. It was expected that, if the prices would rise, Lehman would be enjoying aggressive
profits, but the prices fallen and losses multiplied. Rates went up, and people could not pay back.
That is where the downfall started. In February 2007, Lehman's stock price reached a record
$86.18 per share, giving it a market capitalization of nearly $60 billion. But by the first quarter of
2007, cracks in the U.S. housing market were already becoming apparent. Defaults on mortgages
began to rise. Lehman's stock fell sharply in August 2007. By April, after an issue of preferred
stock, yielded $4 billion, confidence in the firm returned somewhat. However, the stock resumed
its decline as hedge fund managers began to question the valuation of Lehman's mortgage
portfolio. By September 11, the stock had suffered another massive plunge. With only $1 billion
left in cash by the end of that week, Lehman was quickly running out of time. Bank expected bail
out from government but government didn’t help. Market gave up on Lehman. Calculated
property crash left massive hole in Lehman’s balance sheet. Balances were overstated and losses
were large. Over the weekend of September 13, Lehman, Barclays, and Bank of America (BAC)
made a last-ditch effort to facilitate a takeover of the former, but they were ultimately