Bankruptcy of Lehman Brothers: A Pointer of Subprime Crisis

Abstract

The US subprime crisis intensified after the housing bubble burst, which ultimately resulted in high default rates on higher risk borrowers, such as subprime and other Adjustable Rate Mortgages (ARM). Once the housing prices started to drop sharply, home loan refinancing became more and more difficult. Defaults and foreclosure activity increased steeply as ARM interest rates reset higher, making it even more difficult for borrowers to repay. One of the major causes of the Lehman Brothers’ default was its exposure to the subprime market. The aftershocks from the subprime crisis caused widespread panic in the global financial and capital markets, encouraging investors to abandon risky mortgage bonds and volatile equities.

Keywords: Sub-Prime Crisis, ARM