In this report, we will study the financial crisis experienced by the Lehman Brothers and its subsequent collapse in 2008. Lehman Brothers Holdings Inc. was a global financial-services firm, and one of the most important primary dealers in the U.S. with respect to treasury securities and services. The exclusive position once enjoyed by this firm in the American market throws up questions regarding the consequences of this bankruptcy and how it affected the global economy.
This opening section of this document examines the organizational structure of this bank followed by a critical report on how, why and what went wrong with it. The second part analyzes the consequences of the developments in the financial market and the global economy. Subsequently, we compare how the European and the Asian countries reacted to this crisis and the effects of globalization during such a crisis.
In the last part, we will study in detail suggestions put forward to settle the financial crisis and the manner in which the international economic system must be reformed. This will be followed by our personal conclusion regarding this situation.
A study of the timeline of the bank affords a better outlook regarding the situation of the years leading up to the financial crisis. We will analyze the background to deduce the main reasons behind the fall of Lehman Brothers. Two points are going to be highlighted: the crisis of the cash assets due to the JPMorgan Chase's actions, and the refusal of the FED (Federal Reserve System) to modify the credit rules. Then, we will examine the internal structure of the bank which will allow us to understand the internal reasons for this bankruptcy. Finally, we will examine the external causes: the house prices, and the credit rating agencies.
It is interesting to note that Lehman Brothers Holdings were known for their amazing growth, “between 1994 and 2004, its benefits have grown from 113 million to 4.2 billion dollars”, (Chalmet, 2009). To understand the collapse of this investment bank, it is necessary to have a closer look of what happened in the year 2005. This year symbolized a turning point in the internal policy and the modus operandi of this financial titan. . It started to “make the wrong use of the leverage effect (it is the difference between return on equity and return on capital employed) and the administration made unnecessary changes in the balance sheet which showed 780 billion dollars and they were exposed to the mortgage loan of more than 70 billion” (Chalmet, 2009). The year 2007 saw a lot of interesting events – it was the beginning of the subprime crisis. Also, the relation between the bankruptcies filed by Lehman Brothers bankruptcy and Bear Stearns turned out to be significant.
[...] Also, the relation between the bankruptcies filed by Lehman Brothers bankruptcy and Bear Stearns turned out to be significant.[1] the middle of May, Bear Sterns announced to their customers that their two hedge funds had been performing considerably worse than initially indicated. On the 18th of July, these Bear Stearns' hedge funds lost all of its value. On the 19th of July, Ben Bernanke[2] (American economist) declared: “Some people estimated these losses anywhere between 50 and 100 billion dollars”. On the 22nd of August, Lehman Brothers announced that it would shut down its subprime lending unit BNC Mortgage LLC. [...]
[...] The main subjects for the 2008 G20 organized in London on the 26th of November were: Financial regulation Crisis ending strategy Reform of Bretton Woods Institution Review of accountancy standards: o CEO pay o Bankruptcy rules o Credit rating agencies and moving credit default swaps to exchange trading (G20 Leaders Summit Communique, 2008). Consequences on the financial market: Because of the Lehman Brothers Holdings Inc. bankruptcy, $700,000,000,000 disappeared from retirement plans, government pension funds and investment portfolios. A group of 10 banks that included J.P. [...]
[...] Table Asia's Sub-prime losses[6] “Banks operating in Asia should come out of the global financial crisis relatively unscathed when compared to their counterparts in the US and Europe, given their more conservative lending activities and stronger balance sheets”, bankers and financial experts said at a recent Bloomberg Leadership Forum held in Singapore. “Asian economies are strong. We have historically high foreign reserves. We have trade surpluses and well-capitalised banks in said Peter Flavel, international head of private banking at the Standard Chartered Bank. [...]
[...] The direction of Lehman Brothers didn't master the complexity of the most innovative financial products. It is worrying to know that one of the most important banks is led by incompetents. And concerning Fuld, Lawrence McDonald was not sympathetic. is a bully and his managerial style is based on intimidation. His arrogance hides his complete incapacities in by-products and securitization of mortgage loans. There was a total disconnection between the market room and the 31th floor where the headquarters (Lawrence McDonald). [...]
[...] It is necessary to draught a clear picture of how the international, financial system works with all its possibilities, dependencies and limits. During the initial days of the crisis, financial experts needed to realise that the traditional instruments of the monetary policies had failed. This led to the question of which of those instruments should be maintained and which should be modernised? One of the most important decisions, made in those days, was to maintain the central bank as the most important institution monitor and protect the stability of the financial system as a whole” (Stephen G. [...]
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