The Bankruptcy of Lehman Brothers Changed the Business World - Research Paper Example

?Bankruptcy of Lehman Brothers Changed the Business World Table of Contents 0 Introduction 3 1 Thesis ment 3 2 Main Themes 3 2.0 Arguments4 3.0 Conclusion 8 4.0 References 9 1.0 Introduction 1.1 Thesis Statement The bankruptcy of Lehman Brothers has brought drastic changes in the entire business activities throughout the world. 1.2 Main Themes The main purpose of the paper is to explain about the bankruptcy of Lehman Brothers and its impact on the entire global business and economy. It also seeks to discuss regarding the loss faced by financial market due to the bankruptcy. The money market has been greatly affected by the bankruptcy and this factor has also been highlighted in the study. The study also discusses about the business scenario and stock market of the year 2008 after the breakdown of Lehman Brothers. 2.0 Arguments The following arguments relate to the effect of bankruptcy of Lehman Brothers in various market segments. These arguments are true facts as it has taken from the reliable sources based on the topic. In the US, Lehman Brothers was considered as the fourth biggest investment bank and also a well-known brokerage firm (Hoffman & Et. Al., 2009). The fall down of Lehman Brothers in the year 2008 with no rescue from the government has brought appalling conditions to a number of people around the world. This occurrence was considered as a watershed event for everyone as it has played a significant role in the collapse of the global finance which brought dreadful situations and constricted the worldwide liquidity (Wei & Tong, 2009). The bankruptcy of Lehman Brothers led to disastrous results on the ‘prime broker clients’, ‘stock lending funds’ and ‘money market funds’. This type of bankruptcy generated wider range of trading as well as immense exposure for several of the company’s counterparties. The collapsing of one of the largest banks has led to failure of trust between brokers and banks. The investment banks as well as their prime brokers have not been trusted by hedge funds. The hedge funds, investment banks or prime brokers were not preferred to expose to any other parties. The leverage of hedge funds was decreased considerably and there was a continuation of ‘deleveraging cycle’ of investment banks along with other companies. The lending of investment bank has been decreased and borrowing and lending leverage that were accessible to clients and banks has been stopped (Aikman, 2010). After such occurrence, prime brokers demanded more money for securities. In the year 2008, liquidator Price Waterhouse Coopers (PwC) made apparent that a few assets that have been offered to Lehman Brothers International Europe (LBIE) were considered as ‘rehypothecated’. It was not apprehended for the clients on the basis of segregation and for that reason clients failed to obtain any proprietary interest in assets. Moreover, the investors of LBIE had fallen within unsecured creditors (Singh & Aitken, 2009). In the year 2008, the bankruptcy which had taken place in Lehman Brothers has strained the market to re-evaluate the risk that may possibly be raised. The price of junk bonds before the crisis was $2.50 and in 2007 the price increased to $4. Throughout the crisis the price raised to $6 to return to about $4.50 in the month of June 2008 and after the crisis it has increased to considerably higher point. There was a rigorous collision in money market finance due to the bankruptcy of Lehman Brothers. On September 16, 2008, ‘Primary Fund’ which was a $62 billion fund declared that it had experienced a loss on the $785 million worth of Lehman Brothers’ debt (Zingales, 2008). The fall in money market has led to an effect on borrowers. The funds of money market are the largest purchaser of commercial paper but because of more concern towards redemption risk they preferred safe and liquid investment (Krishnamurthy, (2008). The money market was a significant basis of liquidity for the worldwide market mainly for broker-dealers. The run on mutual funds that is related to money market has brought huge contraction in liquidity since redemptions and was intimidated so as to swallow up the cash that were available (Aikman, 2010). Thus, it can be revealed that the money market was greatly affected by the bankruptcy of Lehman Brothers. The global financial market has altered drastically after the fall down of Lehman Brothers. The failure has led to decline of trade. This crisis was due to Great Depression that had endangered to have large repercussion on actual economy. There was decline of it in excess of two times in the ‘stock market capitalization’ of chief banks. The banks were enforced by the exploding of housing to mark hundred billion Dollars in poor loans that has been the reason of mortgage delinquencies (Brunnermeier, n.d.). The ‘risk premium’ had increased to 5% and may be near about zero of the borrowing of interbank. The risk premium of corporate bonds has moved upto 6%. The project related to ‘CAPEX’ had discontinued and there was less borrowing from corporate sectors. The trade credit of generally investment goods was difficult to receive and manufacturing of cars did ultimately fall down. The developed economies of major countries were under recession in the year 2009. Due to such bankruptcy in the year 2008, OECD predicted that there was 13% minimization in global trade volume in the year 2009 as compared to 2008. The global trade in terms of volume and patterns has changed considerably (McKibbin & Stoeckel, 2009). The bankruptcy of Lehman Brothers had undulation outcome on the stock market. Several countries were under great dilemma. There was a loss of stock indices of Japan as well as China by about 5%. The index of Australia had fallen by 6.4% and the stock market of India, Moscow, Brazil had dropped considerably. There was a reduction of about 2% of the indices of France and Germany and the FTSE index of United Kingdom had lowered down by 3.7%. The global economies as well as markets were closely linked to the bankruptcy of Lehman Brothers (Hoffman & Et. Al, 2009). Hence, the fall down of Lehman Brothers had severe impact on business throughout the world for a long phase of time. The above mentioned facts are true on the basis of each aspects related to the bankruptcy in the year 2008. The money market, global financial market, investment banks and stock markets among others have been under huge threat after the break down. The business growth had lowered down tremendously and the recession had firmly hit the entire market. 3.0 Conclusion From the entire discussion regarding the bankruptcy which occurred in Lehman Brothers, it has been observed that the various segments have been widely affected by the bankruptcy of Lehman Brothers. It can be revealed that the thesis statement that has been mentioned is completely true. Hence, it can be argued that there was drastic change in the entire global market. The slowdown of economy has a negative impact on the trade. The financial market was greatly affected and resulted in severe crisis and this was due to ‘Great Depression’. This has changed the worldwide business dramatically. The manufacturing process of several businesses had turned down as there were no corporate borrowers. The collapsing of money market has distressed borrowers as well. The stock indices of Asian countries suffered significantly. Lehman Brothers was related to each segments of the worldwide market and for that reason a number of segments throughout the world faced the crisis situation. The situation was panic for all the individuals and as a result everyone has lost trust on the investment banks. The year 2008 was a challenging year for entire world as it had the greatest bankruptcy in the history. 4.0 References Aikman, J, S., (2010). When Prime Brokers Fail: The Unheeded Risk to Hedge Funds, Banks, and the Financial Industry. John Wiley and Sons. Brunnermeier, M. K., (2009). Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspectives. Retrieved Online on June 11, 2011 from http://dss.ucsd.edu/~grondina/pdfs/week4_brunnermeir_decipheringliquidity.pdf Hoffman, W. H. & Et. Al., (2009). South-western Federal Taxation 2010: Corporations, Partnerships, Estates and Trusts. Cengage Learning. Krishnamurthy, A., (2008). Money Markets and Maturity Shortening. The Financial Meltdown: Data and Diagnoses. Retrieved Online on June 11, 2011 from http://www.kellogg.northwestern.edu/faculty/krisharvind/papers/diagnosis.pdf McKibbin, W. J. & Stoeckel, A., (2009). Introduction. Modeling Global Finance. Retrieved Online on June 11, 2011 from http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4632.1999.tb00983.x/abstract Singh, M. & Aitken, J., (2009). Deleveraging after Lehman. International Monetary Fund. Wei, S. J. & Tong, H., (2009). The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis. International Monetary Fund. Zingales, L., (2008). Consequences of Lehman Default. Causes and Effects of the Lehman Brothers Bankruptcy. Retrieved Online on June 11, 2011 from http://research.chicagobooth.edu/igm/docs/Zingales-Testimonies.pdf Read More