On September 15, ten years ago, legendary investment bank’s bankruptcy caused panic in The United States and The United Kingdom. With $619 billion in debt and $639 billion in assets, the Collapse of Lehman Brothers was the largest in history, as its assets far surpassed those of previous bankrupt giants such as Worldcom and Enron.
Lehman Brothers was the fourth-largest The United States investment bank (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) at the time of its collapse with 25,000 employees worldwide.
The collapse of Lehman Brothers traced its history back to the 1850s when German Brothers Emanuel, Henry, and Mayer Lehman transform their small store in deep south of Alabama into a bank. From the late 1990s, Lehman Brothers then sought to capitalise on The United States housing boom by acquiring five bid mortgage lenders, including Aurora Loan Services and BNC Mortgage.
Unfortunately, Aurora Loan Services and BNC Mortgage were pioneer in sub-prime lending which selling high-risk mortgage with little documentation. Then, it was a kick that would eventually destroy Lehman Brothers, leave Wall Street teetering above the abyss and help trigger a goal recession.
The History of Lehman Brothers Holding Inc.
Lehman Brothers was a global financial service firm started by a German immigrant in 1844 in Montgomery, Ala as a general and dry-goods store. Founded by Henly Lehman, the firm soon was joined by his brothers, Emanuel and Mayer in 1850, and getting the name the Lehman Brothers.
The firm grew so fast to a place of prominence and power both domestic and international. In 1994, after owning the firm nearly ten years, American Express (AXP) spun off the Lehman Brothers, then created its initial public offering with a $3.3 billion capitalization.
After repeal of the Glass-Steagall Act in 1999, Lehman Brothers then expanded their offerings with the newfound freedom to investment banking activities and combine commercial. With new capacities to deal with proprietary banking, assets management, and security, Lehman Brothers expanded their services which may have been the beginning of the collapse.
Why did Lehman Brothers collapse?
In fact, Fortune Magazine declared Lehman Brothers as the number one Most Admired Securities Firm in 2007, exactly one year before the firm was collapse.
So, why did Lehman Brothers collapse?
During there were several factors contributing to its collapse, many experts seem to agree that it was in over-leveraging, large part due to a lack of trust, poor long-term investments, and shaky funding.
One of the main causes the firm collapse was due to their overzealous lending during the housing bubble in 2003-2004. By obtaining five lending firms focused on primarily in subprime lending, Lehman Brothers was investing in 2007 of around $60 billion. Soon, the firm came crashing down due to a historic high of subprime loan defaults. Despite the firm’s assurances to the contrary, inevitably come back to attack them. The firm was over-leveraged, and the value of itf mortgage portfolio was no longer compelling.
Lehman Brothers had become heavily involved in the mortgage market by owning the subprime mortgage seller BNC Mortgage. The bank held thirty times as much in real estate products as it had capital, and it had been borrowing too much money to fund its mortgage investments by 2008. Unfortunately, when the market turned, Lehman Brothers was stuffed.
As Lehman Brothers held onto or could not sell its product, so many risk low-rated mortgages within. Then, the subprime mortgage crisis affected the bank very badly. As a result, in the first of 2008, Lehman Brothers lost of 73% of its value. Moreover, investor confidence in the bank quickly declined, leading to the crises of early September, 2008.
What is actually a subprime mortgage?
A subprime mortgage is a loan that given to someone who has a poor credit store. The lender is normally compensated with higher interest rates because subprime borrowers are seen as less likely to be able to pay the money back. However, in the 2008, this loan in the United States were given out with artificially low rates for the first couple of years of each mortgage.
But there is possibly go wrong because the near collapse of the global financial system, Lehman Brothers lost the trust and the interconnection. Thanks to technology between bank across border, this crisis could be solved because there was mundane roots by making house-purchasing more accessible.
As a result of increased demand, the bank thought that house prices would rise. When the house prices rose, they would lend greater security to the banks who would then be holding high-valued real estate.
Because banks are lending to people who were less likely to be able to pay mortgages back, after one or two years of lower interest rates has ended, many mortgage payments were defaulted on. Houses poured onto the market and the ability of housing stock increased and prices fell.
Moreover, as the effect of it, not only were many people left homeless but the bank itself had financed these mortgages now faced a problem. The real estate value the houses which the loans were secured against had declined dramatically, the underlying loans could not be repaid, and the value of the investment products built around this market being collapsed.
The big effect as a result of subprime crash that fortunes of the most exposed banks decline so rapidly. Because there was no bank would accept the mortgage-backed bonds as collateral for a loan, the bank refused to lend to each other and the financial system was threatened with collapse.
What happened as a result of the collapse of Lehman Brothers?
The collapse of Lehman Brothers changed a United States subprime mortgage crash into a global economic downturn which lasted until late 2009, one years after the collapse. Bank across the world were gave assurance including the Royal Bank of Scotland by United Kingdom government, stock markets plummet and debt spiralled, and hundreds of thousands people lost their houses.
So, has Wall Street get the lesson from the collapse of Lehman Brothers?
