The Lehman Brothers Bankruptcy H: The Global Contagion

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

26 Pages Posted: 12 Apr 2015

See all articles by Rosalind Wiggins

Rosalind Wiggins

Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: April 8, 2015

Abstract

When Lehman Brothers filed for bankruptcy on September 15, 2008, it was the largest such filing in U.S. history and a huge shock to the world’s financial markets, which were already stressed from the deflated housing bubble and questions about subprime mortgages. Lehman was the fourth-largest U.S. investment bank with assets of $639 billion and its operations spread across the globe. Lehman’s clients and counterparties began to disclose millions of dollars of potential losses as they accounted for their exposures. But the impact of Lehman’s demise was felt well beyond its counterparties. Concern regarding its real estate assets, its large derivative book, and its significant involvement with collateralized debt obligations (CDOs) — a new type of security that incorporated subprime mortgages — soon “infected” the shadow banking system, contributing to a retraction of wholesale funding and a severe liquidity crisis for many firms, including many with no direct links to Lehman. In this module, we explore the concept of “financial contagion” and how a sudden shock to one firm, such as Lehman, can lead to other firms and markets experiencing similar impacts that are not totally explained by direct linkages.  

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Wiggins, Rosalind and Metrick, Andrew, The Lehman Brothers Bankruptcy H: The Global Contagion (April 8, 2015). Yale Program on Financial Stability Case Study 2014-3H-V1. Available at SSRN: https://ssrn.com/abstract=2593081 or http://dx.doi.org/10.2139/ssrn.2593081

Rosalind Wiggins

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

Yale University - Yale Program on Financial Stability

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

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