The Collapse of Lehman Brothers - Research Paper Example

The Collapse of Lehman Brothers Lehman Brothers was declared bankrupt in the 2008 after many years of financial survival and success. The company was formed way back in the 1840’s by three Lehman brothers. The company managed to prosper for many decades as it grew from a small firm into an internationally recognized entity. Although the firm survived the financial depressions that occurred in the 1930’s, it was not able to survive the collapse of the housing market in the U.S. The company’s stock started to fall by August 2009 when two bear funds failed sharply.

This forced the company to close down some of its offices in an effort to contain the situation. The firm, however, failed to take some necessary actions in relation to its big mortgage portfolio, and consequently suffered the effects of the company’s rebounding stock. When the situation got worse, the company’s fund clients started to pull out from their association with the company because of the high decrease in the percentage stock value and debt value (Ciro, 40). The financial recessions that kept reoccurring in the 2000’s had a huge impact on many companies not only in the United States, but also in other countries all over the world.

These consistent economic hurdles proved to be too much of a challenge for Lehman Brothers. At the time that it filed for bankruptcy, the company had assets totaling up to 639 billion U.S dollars. The company’s debt, on the other hand, was 619 billions dollars. By 2007, the company had a market capitalization of about $60 billion. This is after the company made a record stock of about $86 billion. During this year, the company made record profits and revenues, especially on the fiscal first quarter of the year.

In the first quarter of the following year, 2008, problems started to set in. Shares of the company fell by 48%, and hence setting speculation that the company would likely fail. On June of the same year, the company experienced losses amounting to $2.8 billion. The firm continued in its efforts to remove itself from the financial problems. This time it raised $6 billion from investors and increased its liquidity funds to around $45 billion. Assets were reduced by a staggering $147 billion whereas the commercial mortgages were reduced by a 20% rate.

Leverage factor was also cut down from 32 to 25 (Ciro, 42). The main reason why Lehman Brothers Company failed is because it took a lot of risks in a booming market. The company also moved from corporate finance as well as mergers and acquisitions. These are considered as safer financial sides as compared to the move that the company made. It moved to proprietary trading, a financial world considered to be risky. The company basically failed because of the massive investments it made in the mortgage backed securities which at the time were wrongly rated as secure.

The fail of this company could have been prevented. Lehman Brothers should not have ignored the risk thresholds of the company like it did. The bank used approaches that were no longer common in the banking industry. For example, the liquidity pool of the bank did not include assets that had been used as deposits with clearing banks. The actual liquidity pool of the company was at an alarmingly low amount point but statements released quoted billions of dollars. Had these quotations been right, maybe the company would have been saved from bankruptcy.

The case of the company’s collapse could happen again to another company, especially one which takes too much financial risks in a booming market. Work Cited Ciro, Tony. The Global Financial Crisis: Triggers, Responses and Aftermath. Farnham, Surrey: Ashgate Pub, 2012. Print.