International Business Analysis. Financial Crisis of 2007-2010. Bankruptcy of Lehman Brothers - Essay Example

?International Business Analysis Table of Contents International Business Analysis Table of Contents 2 Part A 3 Overview 3 The Crisis 5 Causes of the Financial Crisis of 2007-2010 7 Part B 15 The Reasons Behind the Bankruptcy of Lehman Brothers 15 How the Reasons Behind the Collapse of Lehman Brothers Could Have Been Avoided 21 23 References 24 Bibliography 29 Part A Overview In the year 2007, numerous important and prominent banks both in Europe and in the United States (US) witnessed a sharp decline with regard to their respective securities which were mortgage-backed in nature. The banks themselves were supposed to be in charge for packaging the specified category of securities. These particular securities which were considered as poisonous resulted in making up a substantial fraction of their individual final asset base. The non-payments related to such securities promoted a significant credit crisis as every individual financial institution accumulated cash and called for the requirement for increasingly enlarged payments prior to lending it to others. The investment brokerages along with the banks situated in Wall Street rapidly lost capital of amounting to around US$175 billion between the time periods ranging from the year 2007 to the year 2008. Many large and sound financial institutions had to be rescued with the aid of huge amount of guarantees that were obtained from Federal Reserve. Numerous of the remaining ones ensured their continued existence with the help of selling large portions of their preferred stock along with assured best return rates, towards a sequence ‘sovereign funds’ that were believed to be possessed by the respective governments of Singapore, China, Abu Dhabi and South Korea among the rest (Blackburn, 2008). The financial institutions especially the banks suffered grave financial crisis owing to the apparent deeply faulty management in relation to the systematic risk. A quite significant part related to this particular issue was identified to be the fact that the central as well as a few of the prominent financial institutions made use of a obscure secondary form of banking system in order to conceal a great deal of their respective exposure. Renowned institutions such as Merrill Lynch, Barclays Capital, Citigroup, Deutsche Bank along with Hong Kong and Shanghai Banking Corporation (HSBC) were known to get engaged in huge amount of debt or due balances and as a result provided loans by employing the funds of other individuals in opposition to inadequately poor kind of collateral (The Chancellor of the Exchequer, 2009). The triggering factor behind the credit crisis was measured to be the growing payment failures among the people of the US who were believed to be in possession of the subprime mortgages during the previous quarter of the year 2006 and in the beginning of the year 2007 (Jaffee, 2008). The increasing rate of failure to make payments against the held mortgages by the individuals was identified to be the rise made with respect to the interest rates for the reason of defending the declining value of dollar. This particular scenario or condition resulted in the breakdown of numerous big and sound mortgage brokers between the months of February to March in the year 2007, however the real possibility of the issue only started to get recorded in the later periods. Fascinatingly, the initial bank that registered an issue in this regard was the Deutsche Bank who was learnt to be compelled to provide guarantee for two funds in the month of July’ 2007 that were supposed to be property-based (The Chancellor of the Exchequer, 2009). To sum up, the essential aspect that was realised regarding the financial crunch relates to the comprehension that across the globe, certain issues failed to be adequately well understood. The international standards pertaining to regulation along with the international agreement with regard to risk remained unsuccessful to carry on with the notion of financial innovation as well as globalisation. This definite mentioned aspect did not just relate to the institutional composition related to regulation but rather raised queries regarding making decisions and verdicts on the basis of credible knowledge, experience along with strong investigation or assessments. It has been further stated in this context that numerous diverse institutional structures are known to prevail in various countries worldwide. However, no definite model pertaining to regulation has been found to be triumphant in completely protecting a particular country from the pangs of the present crisis (The Chancellor of the Exchequer, 2009). The Crisis The notion related to a crisis has been stated to be the product that is created by a ‘perfect storm’ and is known to collectively accumulate together a certain quantity of macroeconomic as well as microeconomic pathologies (Buiter, 2008). The global economy was witnessed to have suffered owing to a brutal financial crisis which ended up in the most awful international economic slump in a time frame of above 60 years. The crisis was stated to have been prompted by the complexities related to the housing market of the US which interpreted the way in which the banks as well as the various lenders continued undervaluing the actual risks for quite an extended time period. The crisis was observed to extend and broaden at a rapid pace across the international financial markets which resulted in sternly weakening the foundations of the banking structures throughout the globe. As a consequence, the effects were found to spread widely surpassing the financial structures, unfavourably disturbing the economic expansion, opulence and the job market throughout the globe (Wade, 2008). Although the reasons that went ahead in triggering such a severe crisis are still found to be argued, however, numerous consequences in this regard appear to be evident and entail the collapse of chief corporations, great turndowns in terms of asset values, considerable government interferences worldwide and a noteworthy turndown with regard to the economic activity. Both the regulatory as well as the market supported solutions were projected or carried out as an endeavour towards contesting against the reasons and consequences related to the crisis. It becomes crucial to state in this regard that the financial bubbles were measured to be a key subject while interpreting the reasons behind the present global financial as well as economic crisis (Davar, 2011). The breakdown of an international housing bubble that had hit the highest point in the year 2006 in the US resulted in sinking the prices of those securities the worth of which were connected to the pricing related to the real estate. This dip in the prices went ahead in causing grave adverse consequences for the financial institutions internationally (Swagel, 2009). The aspects concerning the degree of solvency of the banks, the turndowns in the accessibility of credit and the lower degree of confidence in relation to the various investors posed a great influence on the international stock markets. The securities with regard to the stock markets were observed to sternly put up with huge amount of losses incurred during the end period of 2008 and in the beginning of 2009. A sharp and significant obstruction with regard to the development and progress of the economies across the globe was recorded during this specific period as the credit factor had remained constricted and a turndown was observed in the global trade (Saleh, 2010). It should be stated with regard to this context that the instantaneous reason found to have prompted the crisis was gauged to be the rupture in the housing fizz in the US. With regard to the global level, the prices of properties recorded a significant dip in the US by approximately 40 percent. Soaring degree of non-payment rates on the mortgaged securities along with the adjustable rate mortgages (ARM) were observed to rise speedily thereafter. An augmentation in the loan related packaging, inducements and marketing for instance trouble-free primary terms along with a long-term tendency connected with the escalating property prices were learnt to promote the borrowers to take for granted the complicated and tricky mortgages with the perception that it would be possible for them to promptly access the advantage of refinance at further positive conditions as well as terms. Conversely, it was observed that with the increase in the interest rates, the prices of the properties or rather the houses started going down reasonably in quite a number of regions of the US in the period of 2006-2007 which made the option of refinancing increasingly complex. Activities related to defaults along with foreclosure recorded a dramatic rise as the simple primary terms as well as conditions ran out, the prices of the properties remained unsuccessful to record a rise as was predicted and the interest rates related to ARM was rearranged and made higher (Avery & Brevoort, 2011). Causes of the Financial Crisis of 2007-2010 The occurrence that was believed to have triggered and accelerated the crisis was found to be the overestimation of the housing market with regard to the US in the year 2006 along with the succeeding crash. The prices of the properties and the houses were observed to be directed in an upward trend with the assistance of simple availability of credit accompanied with over assumption on the conviction underlying the false maxim that the prices of properties always tend to increase. Less primary rates with regard to the ARM along with lesser requirements in terms of amount related to down payments supported or rather backed the assumptions in the short run with the belief of refinancing as well as selling at increasingly positive and easy conditions. After a comprehensive period of escalating housing prices, the year 2006 marked the beginning of turndown in the property prices with the rise in the increase rates which gave rise to an unfortunate refinancing environment (Rosenberg, 2010). Simple credit was found to be accessible with regard to the US for quite a few years which headed the development of this particular crisis as noteworthy inflows in the shape of foreign funds facilitated the Federal Reserve in maintaining the interest rates at lower levels. Majority of the inflow or rather contribution of foreign funds was noted to be sourced from the flourishing economies of Asia as well as the nations which were oil rich. The decreased rates were found to be worsened by the contemporary financial instruments for instance the collateralised debt obligations (CDOs) and the mortgage-backed security (MBS) which were believed to provide the lenders with additional inducements to make diverse kind of loan forms accessible by the consumers. As the scale of risk in relation to loan reimbursement such as the auto loans, mortgages along with credit cards were distributed amongst the investors holding such instruments, it turned out to be more simple for the consumers or rather individuals to avail loans for the reason of which the extent of arrears rose to extraordinary levels. The development of such instruments in the related markets also provided the investors throughout the world with the advantage of putting in their funds in such instruments and thus resulted in attaining exposure associated with the housing market of the US (Diclemente & Schoenholtz, 2008). In the first place, the crisis was measured to have been prompted owing to the collapse or breakdown across the globe of numerous in relation to the banking industry entailing investors as well as boards, in order to comprehend the accurate and factual risks formed as a reason of innovation along with speedy development of the interrelated, international markets focused on financial services during the current years. The companies that were observed to have ceased working permitted their respective businesses to overextend with the help of over-dependence on the aspect of wholesale funding, poor or lack of sound decisions by the management with regard to acquisitions, unnecessary leverage as well as risk taking and unnecessary conviction on specifically risky product flows, for instance derivatives or buy-to-let mortgages. These mentioned collapses pertaining to commercial judgment were observed to have let the global financial structure fall down on its knees during the year 2008 in the month of October (Bianco, 2008). As a consequence, there rose a necessity for the Government of the United Kingdom (UK) to interfere in exceptional conduct for the reason of guarding the depositors with regard to the banks in the United Kingdom (UK) and developing societies with the intention to facilitate banks for the reason of keeping up the activities related to lending concerning the economy of the UK at the time of recession along with reinstating financial steadiness. During the budget in the year 2009, predictions were made by the Treasury that the expenses associated with the Government activities entailed possibilities of eventually soaring higher to ?50 billion. However, the expenses related to the functioning of the Government was actually presumed to be additionally high owing to the actuality that it was considered to be quite impracticable and unfeasible for the contemporary economy to carry out its activities in the absence of a steady banking structure (Bianco, 2008). During the last two decades, an extraordinary development was encountered with regard to the aspect and notion of innovation related to the financial industry as investors called for the requirement of fresh products as well as increased returns in the period when decreased or lesser interest rates prevailed. Although this definite situation and circumstance aided in supporting and underlining the development with regard to the economy, it was also observed in this context that the banks even entailed certain extent of responsibility in comprehending the degree of risks that they were indulging in and also to the extent to which the banks were involving others. The intricacies related to few of these fresh kinds of instruments along with the growth of the interrelated national markets made it tough for quite a few banks, their respective investors, boards and regulators along with the central banks to competently comprehend the risks engaged (Bianco, 2008). In other words, it can be stated that the risk models in relation to the various banks proved to be defective that were found to be reliant on partial and imperfect implementation with regard to the finance principles. The conviction relating to the extensive allocation or spread out of risk all through the entire financial structure with the aid of methods for instance securitisation proved to be incorrect. This definite condition further implied that the risks caused due to the global rise with regard to leverage were undervalued. The remuneration guidelines in relation to the various banks contributed towards the soaring degree of risk in terms of the financial structure as they were considered to lay their maximum amount of focus on the profits in the short-run. Controlling the market appeared to be quite an unproductive limitation on the factor of risk-taking with regard to the financial markets (Bianco, 2008). Grave level of insufficiencies in the facet associated with corporate governance of numerous banking institutions was also observed. The boards in relation to the functioning of the banks even remained unsuccessful in comprehending and exploring the procedures of risk management of their respective firms. The senior level of management failed to appropriately intervene regarding gaining a lucid comprehension concerning the nature as well as extent of sustainability in relation to the attainment of the increased returns. In turn, numerous institutional shareholders remained incompetent in keeping a watch on the efficacy of the senior management of the related banks or even to assess the decisions taken by the bank boards. It was being noticed that usually the banks as well as the investors remained excessively dependent on the evaluation made by the agencies of credit rating. Both the banks along with the investors failed to complement the made ratings by the agencies with their own inferences that were needed to be derived from their respective assessments or appropriate meticulousness (Dowd, 2009). At the similar time, the central banks along with the regulators accompanied with several other authorities as well as commentators were found to underrate the relevant risks that were piling up in relation to the financial structure. They failed to value the factual amount of related structure-wide risks or rather the complete insinuations of the activities that were conducted outside the perimeters of the regulatory limits. Thus, it can be particularly mentioned in this regard that specifically the accumulation of the huge exposures by the banks related to financing vehicles that were off-balance sheet followed by the dearth of precision that escorted them made it tricky for the banks to decipher the actual worth of the relevant risks (Dowd, 2009). The vital reason that is gauged to trigger a recession can be stated to be a definite decline with respect to the Aggregate Demand. The mentioned factor was measured to be the underlying cause behind the recession or rather the financial crunch. However, the vital reasons that were supposed to have greatly contributed towards the declining or trimming down of the aggregate demand are explained below: Diminishing Prices of Houses: This particular facet is supposed to shrink the consumer affluence along with averting pulling out of equity with the help of re-mortgaging. In the instances of declining housing prices, it has been assumed that the individuals tend to lose their self-reliance with regard to spending owing to the turn down that was witnessed in relation to the worth of their respective key assets (Kirk, 2012; Reinhart & Rogoff, 2008). The Subprime Mortgage Loans: The past credit records of the individuals were not adequately judged and assessed. This resulted in providing or rather making loans available to those individuals who were believed to have an awful credit record in the past (Kirk, 2012; Reinhart & Rogoff, 2008). Subprime Lending: The subprime loans are referred to those that are estimated to entail a larger degree of risk related to default in comparison to the conventional forms of loans. The likelihood of such a situation has been stated to occur owing to an inferior credit rating in relation to the engaged borrower followed by various conditions associated with the loan, for instance the requirement of smaller amount of down payments. The market related to this subprime lending was observed to undergo a noteworthy growth with regard to the entire housing market in the US. This was the time when the Securities and Exchange Commission (SEC) decided to loosen up its regulations related to net capital thus making it increasingly lucrative for the various investment banks in order to augment leverage and spread out their respective formulation of Mortgage Backed Securities (MBS). This craving for MBS encouraged further lending even to the borrowers with poor credit records along with stimulating the Government-sponsored enterprises (GSEs) to chase suit as a result of succumbing to competitive demands. The shoddier loan screening gave rise to high rates of subprime defaults (Kirk, 2012; Reinhart & Rogoff, 2008). Mortgage Defaults: Several homeowners were found to be provided the availability of mortgage products that turned out to be too expensive on the completion of their respective introductory stage and also with the augmentation in the interest rates. This particular element worsened or decreased their individual disposable earnings and compelled numerous individuals to fail to pay their respective mortgage disbursements. Financial Crisis: The circumstances leading to the insolvency of few of the leading banks in the US such as the Bear Sterns and the Northern Rock resulted in making individuals lose their level of assurance regarding spending as well as making investments. The financial crunch forced the US economy to decelerate which implied that the requirement with regard to the foreign commodities had declined along with a turn down in the overall requirement owing to the dip in the value of Dollar (Kirk, 2012; Reinhart & Rogoff, 2008). Credit Crunch or Difficulty of Borrowing Money: Numerous banks in the US were found to have lost their funds owing to the increased rate of mortgage defaults. Therefore, the various financial institutions displayed greater hesitance in lending money further which eventually accelerated the scarcity of finance in relation to money markets. As a consequence the aspect of borrowing turned out to be increasingly costly and even complicated to arrange as well further resulting in lesser investments along with consumer spending (Kirk, 2012; Reinhart & Rogoff, 2008). Credit Default Swaps: Insurance responsibilities were formed for the reason of protecting the investment banks against the grip of loan defaults. This even led the insurance companies to witness difficulty (Kirk, 2012; Reinhart & Rogoff, 2008). Rising Costs: The increasing oil, food and energy prices triggered a rise in the expenses related to production. This as a result makes the entire supply curve move to left implying that it leaves lesser flexible income with respect to the average group or class of consumers (Kirk, 2012; Reinhart & Rogoff, 2008). Therefore, the above discussion provides the complete details of the causes that led to the severe financial crisis of 2007 to 2010. The explanation of the causes proves the fact that the financial crunch cropped up owing to the failure of government regulation to a significant extent along with social, cultural and institutional factors as well. The recent disturbance brought to light the fact of grave breakdowns in the international financial regulatory structure. The aspect of lending and providing credit or in other words finance was stated as a factor of social innovation (Froud & et. al., 2009). The turbulence in the market dynamics followed by the relevant unsteadiness is considered to be a social problem which implies that the social factors also contributed towards the crisis (Whalen, 2007). The lack of proper corporate governance along with appropriate risk management with regard to the chain of institutional investment contributed to the crisis as the government regulations failed in lessening the factor of structured risk (The Chancellor of the Exchequer, 2009). Part B The Reasons Behind the Bankruptcy of Lehman Brothers The collapse of the Lehman Brothers was known to not only pose an adverse impact on the United States but also initiated a financial crisis throughout the globe. The reason of collapse behind the well reputed institution in the Wall Street was stated to be just greed and incompetence. However, there were quite a number of reasons which were identified to be the underlying factors that led to the downfall of the company. The primary factors identified in this context were violation of a traditional banking rule, the factor of lending recklessly and securitisation (Connerty, 2010). The reckless lending relates to the fact of sub-prime lending which has been explained to be the chief triggering factor behind the global financial crunch in the previous explanation provided above. The overall notion of sub-prime loans was considered to be quite risky as loans were provided to individuals even with faulty credit history. The worst fears associated with this kind of loans were found to come true when majority of the loan holders started failing to provide payments against such loans. The situation of reckless lending with regard to the particular sub-prime market was worsened when Lehman Brothers were fund to be offering finance with respect to that specific market. The company was learnt to be maintaining the flow of finance in the specific sub-prime market with the help of freshly making use of funds from the money market and not by making use of the funds which were stored in the bank by the depositors (Connerty, 2010). At the point of time when the company collapsed, they were believed to entail a considerable amount of i.e. US$60 billion as just bad debts and included assets of around US$639 billion in opposition to additional debts of about US$613 billion. This made Lehman Brothers to be the biggest and renowned investment bank which experienced such a tragic downfall (Pichardo & Bacon, 2009). The aspect of solvency needs to be treated and regarded as an easy financial notion. It implies that if the values of assets of a particular individual are assessed to exceed the worth related to the liabilities then that individual is competent of being referred to as solvent. In case of an opposite scenario of the individual, it can be inferred that there are risks or possibilities of bankruptcy (The Financial Crisis Inquiry Commission, 2011). Apart from the aspect of solvency, numerous other reasons were also identified in this regard that triggered the collapse of Lehman Brothers. The fall of Lehman Brothers was stated to be an outcome rather than the reason behind a worsening economic climate (Valukas, 2010). Lehman Brothers was termed as being less flexible towards the current crisis as they were believed to have higher equity ‘ratings’. It was stated in this regard that a severe degree of discipline of the market might have aided to enhance the competence with regard to the financial industry (The University of Warwick, 2009). Lehman Brothers were considered to hold the fourth position amongst the largest investment banks that operated in the United States (US) till the year 2008 as it was when it had filed for bankruptcy. In the year 2007, the bank had declared to have made the highest profit ever. The bank was involved with trading securities as well as banking. It has been stated in this regard that contemporary investment banks such as Lehman Brothers are considered to be difficult and intricate institutions entailing sophisticated and unclear structures as these banks are learnt to engage in regular transactions that amounted to several billion Dollars. The chief fields of business on which the bank was believed to remain focused prior to its collapse was archetypal investment banking along with equities, capital markets, investment management and fixed income. The banks business operations related to investment banking was found to offer financial services relating to issuing securities, mergers as well as acquisitions and underwritings. In case of its other business functions, the equity section of the bank concentrated on making equity investments across the globe while the operations related to capital markets, fixed income along with investment management focused on different services as well as wealth management. The chief supply of revenues for the bank was measured to be the fees that were derived in relation to the size or rather amounts related to the offered services or transactions (Cassim & et. al., 2009). The Lehman Brothers were predicted to be amongst the most major victims in relation to the financial crisis that was encouraged or triggered by the subprime mortgage in the US. The market related to US housing was found to be towering high during the year 2003 and 2004. This made Lehman Brothers take the decision of obtaining few of the mortgage lending companies entailing BNC Mortgage, a subprime lender who had its base in California, Aurora Loan Services and Irvine. BNC Mortgage and Irvin were companies that provided loans to homeowners who had serious debt loads or even a poor or unreliable credit. The other company that is the Aurora Loan Services was believed to focus on Alt-A loans which were considered to rank above the subprime as it provided loans to even those individuals who failed to provide the complete needed documentations with regard to their assets. The acquisitions made by Lehman Brothers initially seemed to be prophetic as the high revenues earned by it from its businesses in relation to real estate facilitated the revenues associated with the unit of capital markets to rush to 56 percent from the year 2004 to 2006. This particular increase in the growth rate was regarded to be much faster in contrast to the other variety of businesses with respect to asset management or investment banking. The firm was learnt to securitize a substantial amount of US$416 billion in relation to mortgages in the year 2006 which implied an increase of 10 percent in comparison to the previous year. The company recorded huge amount of profits each year from the period of 2005 till the year 2007 and held a potential buffer against any kind of losses (Cassim & et. al., 2009; Helwege, 2009). During the beginning of the year 2007, the stock prices of Lehman Brothers reached to US$86.18 providing the company with a share of market capitalisation that was gauged to be nearly $60 billion. The company was even learnt to indulge in major alterations with regard to its respective business strategy. They modified their brokerage model from lesser risk to an increased risk along with their model of investment banking which was focused on being largely capital intensive. Previously, they concentrated on earning revenues from transactions but gradually they aimed at moving their focus on earning revenues from investments in the long run. The management of the company essentially emphasised on spreading out in three particular fields in relation to principal investment and those were leveraged loans, private equity and commercial way of real estate implying that the real estates’ were put to use for the reason of earning profits such as offices (PwC, 2009). Lehman Brothers was also found to be greatly engaged in various subprime loans as well as mortgages. The degree of financial risk associated with the subprime loans were considered to be quite high as a result of which the interest rates were comparatively higher for these loans. The idea of subprime loans gained huge popularity and became common. These loans were encouraged owing to the increased interest rates charged accompanied with the housing bubble. The government was also known to undertake constant initiatives which supported the banks for providing loans to enable the financially weak individuals to purchase houses. The Lehman Brothers along with the other renowned investment banks successfully generated huge amount of profits with the help of the subprime loans till the time the rate of credit defaults were considered to be normal. The model adopted by the investment banks was to create loans and convert them into the form of security which implied the division of several loans into small pieces and combining them with the intention of balancing the related credit risk. The developed securities which were known as Residential Mortgage Backed Securities were then made available to the investors in order to generate money for the associated banks. In spite of considering these kinds of loans as risky, the developed securities were rated and regarded to be quite safe as the state obligations. This was fundamentally owing to the factor that the individuals availing the loans were thought to be independent and also because of the speedy increase in the prices of the real estate (Cassim & et. al., 2009). The problem arose when the fizz of cheap and easy loans along with the growing prices of the real estate subsided in the year 2006. The increasing interest rates of the loans made significant amount of obligators to fail in making payments implying substantial loss in terms of revenue along with a stern rise with regard to liquidity risk. The risk related to such securities was soon comprehended by the investors which made them stay away from such securities. This implied that the Lehman Brothers were caught with assets that were incompetent of being sold followed by continuously dipping values. The growing interest rates also trimmed down the requirement with regard to the commercial form of real estate accompanied by the pertinent prices. The Lehman Brothers witnessed further problems as they were compelled to set-down their respective commercial form of assets related to real estate which were currently possessed by them (Cassim & et. al., 2009). As several investment banks continued witnessing trouble, the vagueness associated with regard to credit market began to rise which indicated augmented expenses of the loans in terms of the entire market along with experiencing a credit crunch. This particular state of the market made it tough for the assets of leveraged loans to be sold. The Lehman Brothers mainly operated three kinds of businesses and owing to this condition they were caught in a situation possessing assets which they were unable to sell with regard to their respective business fields that is leveraged loans, subprime loans and the commercial form of real estate. Matters started worsening more for the Lehman Brothers as the market worth of the possessed assets were found to be experiencing a dip sharply (Cassim & et. al., 2009). During the early period of the year 2008, the company was found to suffer a periodical loss of above US$2.5 billion which were primarily focused on their chief business areas. The reputation of the bank got gravely affected along with devastating results as they were not only losing huge amount of funds but also experienced soaring debts involving their individual balance sheet to be packed with illiquid as well as weak form of assets. Lenders followed by various independent parties gradually lost their assurance with regard to the particular bank which further resulted in elevating the capital expenses and even involved obscurities in availing funding in the short run in order to keep up with liquidity (Cassim & et. al., 2009). The Lehman Brothers was found to declare a loss amounting to US$3.9 billion in the year 2008 in the month of September. However, the company made it possible to sell few of their respective assets in that year for the reason of lessening the risk factor and obtaining liquidity but the market failed in further resting their trust on the company. This made it tough for the company to avail or borrow adequate funds for supporting their regular business operations. This led the bank to make an approach towards filing a bankruptcy. The other significant contributing factor that further led to the bankruptcy of the company was stated to be their engagement in short selling which worsened the distraught markets as well as the stocks (Summe, 2010; Matsumoto, 2009). How the Reasons Behind the Collapse of Lehman Brothers Could Have Been Avoided From the above discussion, it could be comprehended that the involvement of Lehman Brothers in subprime loans augmented their risks which ultimately led to their downfall. Over dependence and focus on the subprime loans made the company incur huge amount of losses or rather damages in terms of liquidity, reputation, credit and operations. It has been assessed in this regard that the bonus structure or the heavy inducements provided by the bank to their respective employees supported the company’s management to undertake increased risks. The prevention of such heavy bonuses could have prevented the management to surpass the specified risks limits along with excessively leveraging its balance sheet. A major extent of the suffered market risk was competent of being circumvented if much investment were not made by the bank in the correlated assets. The crisis related to the subprime issue gravely affected the mentioned chief business areas of Lehman Brothers that is the assets of leveraged loans and the commercial form of real estate. The interrelation of the assets made the company suffer huge losses on several fronts. The bank could have prevented the degree of the effect caused to it owing to the subprime crisis had it been engaged in the operations of a widely diverse product portfolio. The appropriate ascertainment of the risk by the management of the bank could have facilitated and triggered damage control at an early stage by getting rid of the troubled assets instead of doubling down on those assets. The alteration made in the Lehman Brothers’ strategy focusing on investments in the long run made it exposed to higher amount of liquidity risks. They turned out to be reliant on the funding in the short run to support long-term investments making it a fatal fault of the bank. This proved to be critical as the existing credit market shrunk which made the bank stuck with assets that were illiquid (Summe, 2010). The change in their respective strategy also increasingly exposed them to higher degree of credit risk owing to the subprime loans. The management evidently undervalued the possibility of enormous rate of defaults along with the related consequences. The bank in order to avoid this situation should have not over indulged itself towards lending so heavily and irresponsibly. It should have also prevented itself from initiation to securitisation. The outcome related to the increased leverage ratio made the effects of the various other related risks to appear much deeper. An additionally flexible form of leverage ratio would have been able to aid the bank in bringing down their risks. The government guideline which altered the utmost leverage ratio has also been perceived to be great error as it facilitated the probability and chances of sky-high leverage. Therefore, the company’s involvement in unnecessary undertaking risks in different areas ultimately hampered its reputation. A descending spiral was believed to be created as reputational as well as liquidity risks were found to be connected with each other which finally resulted in its collapse. 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