Lehman Brothers case study

Lehman Brothers Holding Inc.
• Lehman Brothers Holding Inc.
• Founded in 1850
• Worldwide company (HQ in Manhattan)
• Services provided:
◦ Cash management.
◦ Financial services.
◦ Investment banking.
◦ Investment management.
• US$59.003 Billion (2007) – revenue
• US$6.013 Billion (2007) – op. income
• 26,200 (2008) – number. of employee
1. Banks lent money;
• 1. Banks lent money;
• 2. Companies like “New Century” issued Subprime mortgages;
• 3. People have high risk of default;
• 4. Interest rates rose
• Federal Reserve lowered interest rate in ’04 thus creating a real estate market bubble.
6. Banks have lots of bad loans in their portfolio.
• 6. Banks have lots of bad loans in their portfolio.
• 5. Issuers were not able to buy back loans triggers sell off in their stocks;
• 4. Interest rates rose;
• When P of house↑ - get a new loan;
• Many changed to variable interest rate;
• Is good till prices of houses increase;
• But even higher debts for households;
• When prices ↓- people can not sell their house, foreclosures.
Mistakes in Credit Rating Agencies
• Mistakes in Credit Rating Agencies
• Deregulation of Financial Markets & Institutions in US.
Closed subprime lender in ’07.
• Closed subprime lender in ’07.
• $2.8bln. losses in 2nd quarter ‘08
• Stocks lost 73% of its value.
FBI fraud investigations.
• FBI fraud investigations.
• Housing and Economic Recovery Act of 2008
• Bailouts.
Injecting capital into a business in order to save it from collapse or bankruptcy
• Injecting capital into a business in order to save it from collapse or bankruptcy
• Why bail-outs for financial enterprises?
◦ By providing loans to companies in the “real economy”, banks and related institutes are vital stakeholders in national and global economy
◦ No loans  no investment  no growth  no utility
Fed and Treasury Dpt. believed that:
• Fed and Treasury Dpt. believed that:
◦ LB had sufficient time to respond to emerging difficulties, but failed to do so
◦ Bailing...

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