Factors That Contributed to The Financial Failure of the Firm

Investment Risk Management
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Institutional Affiliation

Investment Risk Management
Lehman Brothers Holding was the fourth largest investment bank in the U.S, with a total of 25000 employees across the globe. On mid-September 2008, the bank filed for bankruptcy, with its assets valued at $ 639 billion and its debts amounting to $613 billion (Astapova, 2014). The bankruptcy filing surpassed the previous bankruptcy ever filled in history, such as that of Enron and WorldCom, making it the largest bankruptcy proceed. The collapse of the firm had a large impact on the global economic and financial performance, and resulted in a global slump in 2008. Under the management of the company’s chief executive officer; Richard Fuld, the company was using a high-leverage financing method, which was a highly risky model that required the company to raise billions of dollars on a daily basis to finance its operations. The company employed many risk professionals and accountants to monitor its balance sheet, risks, and key ratios. The company was engaged in questionable and desperate actions to stay in business. However, the company finally collapsed as a result of the inability to finance its operations. The bankruptcy of the company is mainly attributed to inappropriate risk management practices employed by the firm and its advisors.
1. Factors That Contributed to The Financial Failure of the Firm
One of the major causes of the Lehman Brothers Holding collapsing was the exposure to the U.S. real estate markets and subprime mortgage markets. In the year 2006, Lehman Brothers Holding adopted a new business strategy with the aim of increasing the revenues from asset investments, and this exposed the company to more capital risks. When the subprime mortgage markets began to experience a slowdown, they contracted their rate of short term loans provision as a risk management strategy against the unknown exposure on the short-term markets. At the time, Lehman relied on this financing method to raise billions of dollars required to finance its daily operations. The inability of the company to secure the funds led to its downfall (Astapova, 2014). Other factors that contributed to the fall of the company is the high-leveraged and risk-taking financing strategies and limited equity, complicated corporate structures, and products that spread risk across all the department; an excessive risk-taking culture. In addition, regulatory gaps that did not take into account the systemic risks faced by large global firms also contributed to the downfall of the company.
The management contributed to the collapse of the company due to its inability to control the business risks. In the case of high leverage and low equity levels, the management failed to put in place measures that would reduce the rate at which the company depended on short-term loan finances to fund its operations. The management also failed to realize the risk associated with the involvement in the real estate activities, and work towards mitigating the risks. The complicated business practices and structures exposed the firm to financial risks (Aikman, 2010). The management also failed to put in control the excessive risk-taking culture exhibited by the firm, and thi...