Summarize the reasons for the failure of Lehman Brothers - Essay Example

hat the problems of the Lehman Brothers were well published over the media which gave time to the derivatives market to prepare for the worst (The Economist, 2008). The statement was pretty correct as the credit-default swaps market had not been broken but buckled up (The Economist, 2008). The bank was unable to assess the risk of the borrower or trading partner which resulted in defaults paralyzing the cash flows of the bank. According to The Economist, a senior bank executive quotes this mistake of deregulated leasing “the mistake of a lifetime” (The Economist, 2008).

The Lehman Brothers was caught up amidst US$ 613 billion of debt of which US$ 160 billion was held by international investors as unsecured bonds. The European pension funds and the individuals in Asian markets had believed in the high rating of the Lehman Brothers and put their investments in this unsecured bonds. The price of this unsecured bonds collapsed quickly destroying the share price of the company to half overnight. The shareholders had already witnessed downfall of the prices of shares in the past few months.

These losses caused a spiral in the money market. International investors pulled off US$ 400 billion from the money market funds which was supposed to be a safer investment. This action was taken when a fund suffered losses which were loaded on Lehman’s debts (The Economist, 2008). Dick Fuld was the CEO of the Lehman Brothers at the time of the collapse of the bank. The Lehman Brothers has been the 4th largest investment bank in the US since 1994. Mr. Fuld has been partly blamed for the collapse of the bank and the losses made by the investors.

The CEO enforced many policies and precautions to avoid any financial storm, but still the bank revealed US$ 2.8 billion losses in the next quarter. On the 15th of September, 2008, the share price of the bank went down 94% as compared to the previous year. The redundancy of 24,000 employees caused a great human cost. All these factors