The Analysis of the Collapse of Lehman Brothers

Abstract

The causes of the failure of Lehman Brothers, preventive measures, and recommendations for going forward constitute the subject for discussion in this paper. The bankruptcy of Lehman Brothers in 2008 sent shock waves through the entire global banking and financial system across numerous and unexpected transmission channels when the price bubble in the US housing market tied to the subprime mortgage market suddenly burst. Actions, which largely relate to the risk return relationship, bad accounting treatment of financial transactions, and loose risk management policies and strategies at Lehman, led the financial conglomerate to its eventual collapse. Global stock markets, individual and corporate investors, and staff of the Firm and its other related businesses bore the brunt of the financial disaster in the form of huge losses, liquidations, job losses, reduction in asset prices and a subsequent global financial crises which could have been prevented. Strong corporate governance structures, robust risk management policies, and constant, effective monitoring and supervision of financial institutions, especially the larger ones by regulatory bodies are therefore highly recommended to ensure against failure of financial institutions.

Keywords: Bankruptcy; Global Financial Crisis; Subprime Mortgage Market; Lehman Brothers; Risk Management Policies

JEL Classification: F34; G21; G24; G33