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The Lehman Brothers Bankruptcy E: The Effect on Lehman's U.S. Broker-Dealer

Yale Program on Financial Stability Case Study 2014-3E-V1

12 Pages Posted: 7 Apr 2015  

Rosalind Z. Wiggins

Yale University - Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: October 1, 2014

Abstract

Lehman’s U.S. broker-dealer, Lehman Brothers Inc. (LBI), was excluded from the parent company’s bankruptcy filing on September 15, 2008, because it was thought that the solvent subsidiary might be able to wind down its affairs in a normal fashion. However, the force of the parent’s demise proved too strong, and within days, LBI and dozens of Lehman subsidiaries around the world were also in liquidation. As a regulated broker-dealer, LBI was required to comply with the Securities and Exchange Commission financial responsibility rules for broker-dealers, including maintaining customer assets separate. However, the corporate complexity and enterprise integration that characterized the Lehman group conflicted with this mandate. Omnibus cash accounts and wide-flung assets complicated the liquidation. It became clear in the course of the liquidation that the broker-dealer rules did not adequately address these issues or others raised by the infrastructure complexity and global reach of the companies to which they applied. This led some observers to question whether the rules should be revised and whether the broker-dealer should be excluded from all but minimal integration into the holding company’s non-regulated businesses.  

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Wiggins, Rosalind Z. and Metrick, Andrew, The Lehman Brothers Bankruptcy E: The Effect on Lehman's U.S. Broker-Dealer (October 1, 2014). Yale Program on Financial Stability Case Study 2014-3E-V1. Available at SSRN: https://ssrn.com/abstract=2588556 or http://dx.doi.org/10.2139/ssrn.2588556

Rosalind Z. Wiggins

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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