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The Causes for the Collapse of Lehman Brothers Holdings Inc

The Causes for the Collapse of Lehman Brothers Holdings Inc.

            On September 15, 2008, a shock wave flowed through homes and business through out the Untied States of America when Lehman Brothers Holdings Inc. declared bankruptcy.  The fall of Lehman Brothers Holdings Inc. rattled the global market and lead to a great drop in the United States stock market the day after the announcement.  The bank was found in 1850 by two cotton brokers in Montgomery, Ala.  After the Civil War ended, Lehman bank headquarters moved to New York City (Lehman Brothers Holdings Inc.).  However, not only does the bank have regional headquarters in Tokyo and London but there is also offices located throughout the world.  For a hundred and fifty eight years, Lehman Holdings Inc. proved services for equity and fixed-income sales, investment, research, management, private banking and private equity.  As the years went by, Lehman grew into a primary dealer in the United States Treasury securities market.  Many primary subsidiaries where created while Lehman Holdings Inc. grew through the years such as Lehman Brothers Inc., Aurora Loan Service, SIB Mortgage Corporation, Lehman Brothers Bank, Crossroads Group, and Eagle Energy Partners (Lehman Brothers Holdings, Inc. Pre Bankruptcy and Delisting).  Consequently, with the combination of the mortgage market crisis, rejection for bailout, and a lack of buyers Lehman Holdings Inc. filed for Chapter 11 bankruptcy.

            Mortgage related investments, consisted of billions of dollars, went bad in fall 2008.  Unfortunately, this crisis stared to grow over a year ago and now it is greatly affecting Wall Street.  The origins are believed to start back in the late 1990’s, also known as the “tech bubble.”  In 2000, the stock market started to spiral into a decline; therefore, the Federal Reserve greatly reduced interest rates hoping to control any economic damage.  Consequently, lower interest rates resulted in home mortgage payments inexpensive, which lead to the large demand for homes.  Homeowners through out the country took advantage of the cheap rate and refinance their present mortgages.  However, while citizens and the industry took advantage of the situation, the actual quality of the mortgages actually decreased.  Even though there was a great rise in home prices during this time, people across the country still bought houses.  In 2006, the rate for delinquency and default started to rise quickly.  Following this interest rate rise, banks conduct financial systems and strategies to divide and resell mortgage backed securities, as a result the amount of lending did not slow down (Lehman Brothers Holdings, Inc. (Pre Bankruptcy and Delisting).  The banks and other investors believe that by doing this financial strategy, there was little or no risk.

            June 2007, Bear Stearns was the first to fall because the “securities they thought were safe were tainted with what came to be called toxic mortgages” (Credit Crisis-The Essentials).  These toxic mortgages were born with the idea of citizens being able to refinance their mortgage at a bargain rate while their payments were cut in half (Nightmare Mortgages).  Consequently, a rise in foreclosures swept through the United States and the rate of default on prime mortgages still increased.  Bear Stearns was saved through a purchase by JPMorgan Chase, a price less then the worth of the corporation’s skyscraper.  Both Fannie Mae and Freddie Mac also suffered great stock price drop due to the housing market but were saved by the Treasury Department (Credit Crisis-The Essentials).  As a result for the mortgage market crisis, Lehman Brothers Holdings Inc. suffered a large decrease in stocks from their original peak of eighty two dollars per share to less then a one dollar per share (Lehman Brothers Holdings).  However, Lehman Brothers Holdings Inc. did not follow the same lucky future as Fannie Mae and Freddie Mac.  

            The major decline throughout the stock market started slow a little when rumors spread about a government bail out.  Henry M. Paulson Jr., Treasury Secretary, announced on September 18, 2008 a proposal for a bailout of $700 billion dollars. The Bush Administration made and introduced the bailout that will consist of the Treasury Department to buy $700 billion in mortgage-related assets from financial corporations and banks.  The Democratic leaders state the administration must remember that their most important role is not buying and owning a large amount of mortgage debt but to help hundreds of thousands United States citizens that are at risk of losing their homes to foreclosure.  Many had concerns about the bailout because it will not only raise the national debt to $11.3 trillion but also how the global markets will react to the bailout.  The bailout also does not require any restrictions on the administration except for semiannual reports to Congress.  This grants the Treasury Secretary the power to not only buy but also resell any mortgage debt (Herszenhorn).  Some Americans are not pleased for the idea of using billions of dollars in taxpayer money to help Wall Street banks.  Other citizens and lawmakers who greatly believe in free markets are against the bailout because they believe the bailout to be socialism (Credit Crisis-The Essentials).  The first proposal was rejected on September 29, 2008, 228 to 205 votes and resulted in stock dropping greatly the next day.  After a tax breaks were introduced and added along with other compromises the bailout was revised and passed on October 1 (Credit Crisis-The Essentials).

            However, for Lehman Brothers Holdings Bank this government bailout was too late.  Lehman Brothers Holdings Inc. stock had at least half of its original value before they received unfortunate news by the Treasury.  On September 13, Lehman Brothers Holding Bank Inc. was informed by the Treasury that they will receive no funding or bailout by the government.  Just days before the $700 billion bailout was released to the public, Lehman Brothers Holding Inc. was already inform that for certain reasons they will not receive help from the Treasury.  Instead, the Treasury suggested that they look for buyers.  Lehman Brothers Holdings Inc. was already trying to look for buys when their stocks first started to drop dramatically.  Earlier, critics accused Lehman Brothers Holding for falsifying the companies’ situation.  These critics believe that Lehman Brothers Holding was not telling the public the truth about the amount of their losses.  Shortly after the statement by the critics were announced, Lehman Brothers Holdings loss potential investors because they believed in the statements of the critics (Lehman Brothers Holdings Inc.). 

            As an effort to keep Lehman Brothers Holdings afloat and to attract buyers, the company sold six billion dollars of their assets.  However, days after the company still saw its stock drop seventy three percent of its value because the credit market grew even tighter.  As a result, in August 2008, Lehman Brothers Holdings announced that they would release six percent of their work force, equaling about 1,500 people within the company.  On August 22, 2008 the company received news that Korea Development Bank, a state-controlled bank, was interest in buying the bank.  Unfortunately, a few days after, Lehman Brothers Holdings Inc. was informed that the Korea Development Bank was “facing difficulties pleasing regulators and attracting partners for the deal.”  After the news was release about Lehman Brothers Holdings will not be bought out by Korea Development Bank, shares decreased greatly by forty five percent.

            Desperate, Lehman Brothers Holdings Inc. reported a loss of $3.9 billion and that they will now plan to sell their investment-management business which included Neuberger Berman.  With stock prices still dropping, Lehman Brothers Holdings Inc.’s only hope was to find a buyer.  Lehman Brothers Holdings then conducted talks to both Bank of America and Barclays for possible selling the company to them.  Barclay was the first to turn down Lehman Brothers Holdings for purchase of either the entire company or just parts of the company.  They also ended any possible deals to rescue Lehman Brothers Holdings Bank from liquidation collapse.  Shortly after, Bank of America also ended any deals or possible purchasing of Lehman Brothers Holdings Inc (White).

            With no buyers or Treasury bailout and with stocks on a downward path Lehman Brothers Holdings Inc. had no other decision but to declare bankruptcy.  At the Lehman Brothers Holdings Inc. headquarters on September 15, they announce chapter 11 bankruptcy.  The bank declared a debt of $613 billion, bond debt of $155 billion and $639 billion worth of assets.  However, Lehman Brothers Holdings subsidiaries will not be affected and will continue operation.  Since Drexel Burnham Lambert collapsed, Lehman Brothers Holdings Inc. bankruptcy is considered the largest collapse within eighteen years (Lehman Brothers Holdings, Inc. (Pre Bankruptcy and Delisting).

Works Cited

"Credit Crisis-The Essentials." Business. 18 Nov. 2008. New York Times. <http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html>.

Herszenhorn, David M. "Administration Is Seeking $700 Billion for Wall Street." Business. 20 Sept. 2008. New York Times. <http://www.nytimes.com/2008/09/21/business/21cong.html?pagewanted=1&_r=1>.

"Lehman Brothers Holdings Inc." Business. New York Times. <http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html>.

"Lehman Brothers Holdings, Inc. (Pre Bankruptcy and Delisting)." Scripophily. <http://www.scripophily.net/lebrhoin.html>.

"Lehman Brothers Holdings." Yahoo Finance. <http://finance.yahoo.com/q?s=lehmq.pk>.

"Nightmare Mortgages." 11 Sept. 2008. BusinessWeek. <http://www.businessweek.com/magazine/content/06_37/b4000001.htm>.

White, Ben. "Investigators Said to Take Closer Look at Lehman." Business. 17 Oct. 2008. New York Times. <http://www.nytimes.com/2008/10/18/business/18lehman.html?_r=1&scp=11&sq=lehman%20bankruptcy&st=nyt>.

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