What Caused the Failure of Lehman Brothers? Could It Have Been Prevented? How?

Abstract

The collapse of Lehman Brothers Holding Inc. (LBHI) shuddered the whole banking and financial industry, and the world economy as well. The reasons for this failure have aroused academic interest and debate, and abundant research on the root causes of this “too big to fail” investment bank. While it is clear from the Examiners report that “actionable balance sheet manipulation” and “error of judgment” are the main grounds of the collapse of Lehman Brothers, this paper aims to investigate these reasons from the perspective of unfavorable business cycle analysis for speculative decision making, shift from the investment banking model that distorted decision making, weaknesses of financial innovation as a consequence of the repeal of the repeal of the Glass-Steagall Act of 1934, and the failure to abide by accounting disclosure rules.

Keywords: Investment Banking Model, Business Cycle, Speculative Decision Making, Accounting Disclosure

JEL Classification: G21