Abstract
In this report, we will study the financial crisis experienced by the Lehman Brothers and its subsequent collapse in 2008. Lehman Brothers Holdings Inc. was a global financial-services firm, and one of the most important primary dealers in the U.S. with respect to treasury securities and services. The exclusive position once enjoyed by this firm in the American market throws up questions regarding the consequences of this bankruptcy and how it affected the global economy.
This opening section of this document examines the organizational structure of this bank followed by a critical report on how, why and what went wrong with it. The second part analyzes the consequences of the developments in the financial market and the global economy. Subsequently, we compare how the European and the Asian countries reacted to this crisis and the effects of globalization during such a crisis.
In the last part, we will study in detail suggestions put forward to settle the financial crisis and the manner in which the international economic system must be reformed. This will be followed by our personal conclusion regarding this situation.
A study of the timeline of the bank affords a better outlook regarding the situation of the years leading up to the financial crisis. We will analyze the background to deduce the main reasons behind the fall of Lehman Brothers. Two points are going to be highlighted: the crisis of the cash assets due to the JPMorgan Chase's actions, and the refusal of the FED (Federal Reserve System) to modify the credit rules. Then, we will examine the internal structure of the bank which will allow us to understand the internal reasons for this bankruptcy. Finally, we will examine the external causes: the house prices, and the credit rating agencies.
It is interesting to note that Lehman Brothers Holdings were known for their amazing growth, “between 1994 and 2004, its benefits have grown from 113 million to 4.2 billion dollars”, (Chalmet, 2009). To understand the collapse of this investment bank, it is necessary to have a closer look of what happened in the year 2005. This year symbolized a turning point in the internal policy and the modus operandi of this financial titan. . It started to “make the wrong use of the leverage effect (it is the difference between return on equity and return on capital employed) and the administration made unnecessary changes in the balance sheet which showed 780 billion dollars and they were exposed to the mortgage loan of more than 70 billion” (Chalmet, 2009). The year 2007 saw a lot of interesting events – it was the beginning of the subprime crisis. Also, the relation between the bankruptcies filed by Lehman Brothers bankruptcy and Bear Stearns turned out to be significant.
Extract
[...] And it is the beginning of new ones. So it becomes more necessary than ever before to have a look on what possible new ways there are to go. Bibliography: A - Asian Financial Forum 2009 http://www.asianfinancialforum.com/pdf/aff2009_opening_press_release_eng.pdf B - David Bain: Europe edges out North America as Richest Region, The Wall Street Journal Europe, September 2009. http://online.wsj.com/article/SB125305487958413775.html - Alison Benjamin: Sifting through the ashes, The Guardian, 24-09-2008. http://www.guardian.co.uk/society/2008/sep/24/banking.crisis.charities - Angeline Benoit and Jade Gilles: La crise financière en six questions, 19.09.2008. [...]
[...] And this alliance is valid for the good and the bad things. So how is it possible to accentuate the relation between those two worlds? How is it possible to show that those are not abstract theories but facts which influence the daily-life? It is necessary to draught a clear picture of how the international, financial system works with all its possibilities, dependencies and limits. During the first days of the crisis, financial experts needed to realise that the traditional instruments of monetary police had failed. [...]
[...] The last few months of Lehman Brothers were very animated. "In June, Lehman announces a loss of 2.8 billion dollars, and an increasing number of investors played with the shares. Richard Fuld0 has to recognize how dangerous the situation is. The Lehman's share fall down and its equity portfolio continued to deteriorate dangerously. During the summer, the president knocks at the door of Bank of America, General Electric, HSBC, CITIC, KDB?but the conditions of the market and the Lehman's balance sheet do not prompt the investors to do it fast." (Chalmet 2009) The 2nd of September: strong with its 138 billion dollars of assets, KDB confirm their wish to help Lehman. [...]
[...] Nowadays a few seconds can decide whether people win or lose thousands of dollars at the stock markets. In minutes people have to decide whether to spend millions to save a company or to let it go down with hundreds of people loosing their jobs. And who has the ability to bear the social responsibility therefore? Are people really aware of the long-term consequences of their actions?0 Some must have noticed that several things were too easy, too facile, and too good for everybody. [...]
[...] We can say that this was a 'western' phenomenon because the Asian countries did not have much involvement in the collapse of the western financial system. Their banks had more conservative lending activities and stronger balance sheets and so were not so heavily affected by the crisis at first. However this crisis has shown that in an increasingly inter-connected world means there always knock-on effects and as a result(see figure Asia is feeling their drop in exports and productions that hits them also very hard. [...]
