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Consequences of Lehman Brothers Bankruptcy - Research Paper Example

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This paper talks about the notion of bankruptcy and explores the main reasons behind the dissolution of Lehman Brothers investment bank and the negative impacts of that collapse on the world economy. Many factors contribute to that bankruptcy including the government actions itself…
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Consequences of Lehman Brothers Bankruptcy
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Download file to see previous pages (Mian et al, 2008). Another source of captive demand was the money market funds. This boosted their yields since they were required to hold only the high rated securities. The managers that funded these securities knew well what gamble they were playing with these funds but could not resist the temptations and benefit it came with them. The managers also hoped that if any shock arose from these funds, their immediate competitors would also face the same consequences which would result in a reduced reputational cost and this may result in the government interference and may end up supporting these companies through incentives and lowering of taxation. The problem was even strict and severe in the short bond funds. In contrast to the market funds, short bonds fund are not restricted to the types of gadgets they can own. Generally the regulation relies greatly on credit- rating agencies procedures of risks without understanding the incentive created on the regulatory game system. As stated, (Morris and Shin, 2002) in circumstances where there are numerous equilibrium, an increase in public information does not necessarily to enhance welfare since it can direct to unproductive bank runs. (Diamond and Dybvig 1983 ). Lack of transparency The other major problem that contributed to the downfall to bankruptcy of the Lehman Brother company was the lack of transparency in big markets. In the last ten years the market for acclaimed default swaps grew uncontrolled from almost zero to 44 trillion, which was more than the of the us stock market in twice the number. Generally the levels of these contracts were very low and did not exist...
This paper aims to summarize economic repercussions of the Lehman Brothers bankruptcy, that essentially marked the beginning of the global financial crisis.
Many companies around the world are affected by bankruptcy at a certain time in their financial year. When a company is declared bankrupt, it can no longer invest in the stock exchange. The government declares the company insolvent. An example of such company is the Lehman Brothers, a housing and real estate company that went into bankruptcy in 2008.
Regulatory constraints brought about the inflation demand for products thus seeing Fannie Mae and Freddie Mac getting the approval of investing in these securities. Another source of captive demand was the money market funds. This boosted their yields since they were required to hold only the high rated securities. The managers that funded these securities knew well what gamble they were playing with these funds but could not resist the temptations. The managers also hoped that if any shock arose from these funds, their immediate competitors would also face the same consequences.
The effect that accrues from a company being declared as bankrupt is huge. Businesses and companies should ensure that they adopt proper measures that will make them stay healthy and avoid being insolvent. They should do this by getting involved and seeking support from the government especially if the business is new in the market. The business should also encourage investors from foreign and local to invest in them.
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