MUST BE 100% ORIGINAL!!!!

Literature Review for Lehman Brothers’ Bankruptcy Paper

April Owens

FIN 540

22 July 2018

Lehman Brothers were founded in 1950; it was an investment company which diversified in various areas regarding investments and provided funding for different international companies across the world. It was one of the most competitive and dominant stock dealers. According to the financial markets (2007), it was the largest fourth investment banks in the United States of America (Stephen 2008).

Lehman brothers faced four collapses before its final bankruptcy (Jaydin et al. 2007). The first crush was the stock market crash which happened in 2009. The cause of this crash was however not identified. The second crush was in 1973. Lehman had an interest loss of6.7$ million with internal conflicts the American express acquired it in 1984. The last crush was in 1994 due to a shortage of funds. In 1993, Richard d Fuld Took the initiative to be the CEO of Lehman Brothers, he led the organization to grow over that collapse, but later in 2008, Lehman brothers collapse due to a debt of$ 613 billion. This led to an impact on many financial markets

The demise of the Lehman brothers had various effects on the financial crisis. This was the most significant financial crisis that was recorded during the great depression. The reason for this crisis was as a result of inadequate regulation. Lack of openness and transparency. Market complacency. How did it contribute to its demise?

First and foremost, according to the New York times (2008), the first factor was Market compliance. This one was during the upcoming of the real estate’s business. More organizations were concentrating on the building of real estates and castles. Tom the year between 1996 and 2006, the prices of most real estates increased in every month. During the same period, the average prices of real estates increased by12.4% annually. This was furthered pushed by low-interest rates. According to the surveys done by the San Francisco home buyers (2007), the expected percentage on the increase of the real estate prices will be at an approximate of 14%. Therefore, during the rise in the costs of the real estate, and it is evidence that the rates dropped with a significant number.

The other cause was terrible regulations

Due to poor rules, there was an increased demand for these products Fannie Mae were advised to invest their money on other ventures such as the securities (Mianne et al. 2008). The federal housing enterprise financial soundness act required that. Finnie and Mae to operate, according to the charter and regulations that they had agreed on. This act mandated that they should carry out various responsibilities such as, setting, the prices of the houses year in and year out and also to provide financial home ownership to multiple families. Even though there were no any penalties, there were a lot of political pressures. These bad regulations were some of the reasons that resulted in the crisis in the financial market (Giovanni 2008)

Lack of transparency.

The other reason that contributed to this crisis was a lack of transparency in various big markets. During the last ten years, the demand for the credit valued swaps rose with no regulation from 0 to approximately 144 trillion. It was significant than the size of the American stock markets. In addition to that. The price of collateral that was attached to these was too low, therefore proofed a systemic failure, with the lack of transparency on how the funds were generated and the states of the current market, it led to the crisis

Due to these factors, financial created machine crushed, but various effects came along. After its enormous loss in the year 2008, most of the banking organizations made many profits in the next years according to Sir Howard Davis (2009), he attributed to the significant benefits of the financial banks as a result of low activities in year 2008., but later said that in the next coming years things would be difficult (Davis 2008

In addition to that, the crisis led to a little change in the financial market. According to Philip Auger (2015) a former investment banker and an author, he stated that he believes, the sizes of the banks and various activities give them a very competitive advantage edge in the financial market. As a significant player I the financial markets m they have lots of information compared to other financial institutions. With this information advantages over other financial institution, he believed that investment banking would be a very printable business compared to other financial organizations

Change in risk management.

After the fall and collapse of Lehman’s. risk management has been taken seriously compared to the other years (Audrey 2008). Large bonuses paid in shares, compared to the other years which investors and shareholders were settled in the form of cash. There also been a provision that one can be able to claw back, f the business, goes into deep waters. However, there are no restrictions on the amount that is to be paid to the individuals. The structure and regulation have also been changed with the bank of England, will be in charge of t banking supervisions, from various financial authorities (Peter 2015).

Last but least the Lehman collapse led to unprecedented shock wave for financial markets and financial crisis. In 2001 due to a terrorist attack, there was an economic, and there was a depression in the stock market. Therefore, the federal market decided to keep low-interest rates so that the public can be able to achieve loans and financial assistance easily. Accordingly, Lehman Brother sized the opportunity in front of them to develop its business so that they could generate more profits by the second half 0f 2002 (Demyanyk, 2008). With the increase in sales and profits decided to issue two Mortgage bonds in the United States which are BNC and Aurora. Then later chose to shut down one of the Mortgage bonds company BNC because of colossal loss. This led to the public to panic so much due to the credit crunch., therefore, started to suffer from the various mortgage crisis. Thus, the result was a capital loss and no credits in the banking system (Dell’Ariccia 2008)

References

Peter, Adam B. and Till Schuermann, 2015, “Understanding the Securitization of Subprime Mortgage Credit”, Wharton Financial Institutions Center Working Paper No. 07-43.

Jaydin, Efraim and Jennifer Dlugoszb, 2008, “The Alchemy of CDO Credit Ratings”, Harvard University Working Paper.

Dell'Ariccia, Giovanni, Deniz Igan and Luc A. Laeven, 2008, “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market”, CEPR Discussion Paper No. DP6683.

Demyanyk, Yuliya and Otto Van Hemert, 2008, “Understanding the Subprime Mortgage Crisis”, Working Paper.

Labaton, Stephen, 2008, “Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk”, New York Times, 10-3-2008