The Reason Behind the Collapse of the Lehman Brothers and Recommendation for the Firm

Lehman Brothers
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Abstract
The paper addresses the collapse of the Lehman Brothers. It illustrates the reason for the firm’s failure, why it was allowed to fall, the consequences, and what could have been done to save the situation. The main focus of the study is to analyze the causes of Lehman Brothers’ collapse and why it wasn’t easy to help the firm continue its operations. Multiple factors such as poor management practices, the firm’s financial well-being when it filed for bankruptcy, political intervention, lack of private enterprises to help in the rescues operations, and policymakers’ decision are discussed in the context. Also, the study provides recommendations for robust organization governance techniques, risk management methods, and continuous and correct monitoring and supervision of financial bodies.
Keywords: Lehman Brothers, Management, Finance, Bankruptcy.
Introduction
Lehman Brothers Holdings Inc. was a worldwide financial service organization formed in 1847. The firm was the fourth-largest investment bank in the United States before filing for bankruptcy in 2008. It had approximately 28,000 employees across the globe, and its operations included investment banking, private equity, research, treasury security trading, to mention a few. On 15th September 2008, after the Lehman Brothers filed for bankruptcy, many employees vacated the premises, holding boxes in their hands. The firm asset value was $639 billion and $613 for liabilities (AMADEO & RASURE, 2020). The 2007-2008 financial crises and the subprime meltdown that affected financial markets resulting in an estimated loss of $10 trillion worth of economic output, played a significant role in the bank’s downfall. The stock price for the Lehman Brothers was $86.18 per share in February 2007, placing its market capitalization at approximately $60 billion (Lioudis, 2021). The organization reported its revenue and profits for the first fiscal quarter on 14th March 2007. After the earnings report, Lehman deduced that the risks present due to the rising home delinquencies would not affect the firm’s income.
During the credit crisis in 2007, Lehman’s stock was reduced at an alarming rate. Similarly, the firm eradicated 1,200 mortgage-related positions and closed its BNC branch. The firm underwrote additional mortgage-backed securities than any other organization in 2007, accumulating a portfolio of $85 billion (Lioudis, 2021). The firm failed to take the opportunity to trim its colossal mortgage portfolio, which in reconsideration would be its last chance. On 17th March 2008, Lehman’s share dropped approximately 48% due to concerns that the firm would fall after Bear Stearns’ near-collapse. However, confidence in the firm returned in April 2008 after the preferred stock issue that was convertible into Lehman shares but later declined after hedge fund managers started questioning the valuation of the firm’s mortgage portfolio. The firm announced a second-quarter loss of $2.8 billion on 7th June 2008 (Lioudis, 2021). It was its first loss since the American express spun off. This pa...