LEHMAN BROTHERS BANKRUPTCY
Henry Lehman, an immigrant from Germany, opens a small goods store in
Montgomery, Alabama in 1844. In 1850 Henry is joined by brothers Emanuel
and Mayer and named the business Lehman brothers.
The costly nature of Lehman bankruptcy, the largest financial bankruptcy in
U.S history contributed to the massive financial disruption of late 2008, as its
assets far surpassed those of previous bankrupt giants such as WorldCom and
Enron. On September 15, 2008, Lehman Brothers Holdings filed for
bankruptcy. It filed for protection under chapter 11 of U.S. bankruptcy code
with the United bankruptcy court for the southern district of New York. It filed
with $639 billion in assets and $619 billion in debts. Lehman was the fourth
largest U.S investment bank at the time of its collapse with 25000 employees.
The collapse of Lehman Brothers holdings had a crippling effect on the global
economy with the financial crisis spreading to other parts of the world.
REASON BEHIND COLLAPSE OF LEHMAN BROTHERS
There was no buyer: The first and probably most major problem was the
lack of buyers, so Lehman Brothers Holdings was declared bankrupt.
Its balance sheet was a disaster as there wasn’t any buyer, the next option
for Lehman Brothers Holdings is to come up with an emergency loan,
they didn’t get the loan because they are not having any collateral to back
up the loan
Losses: Lehman Brothers was heavily exposed to the U.S real-estate
market, having been the largest underwriter of property loans in 2007, by
the end of that year Lehman had over $60 billion invested in commercial
real estate and was very big subprime mortgages (loans to risky buyers).
As property prices crashed, Lehman was declared with a loss of $6.5
billion.
IMPACT OF COLLAPSE OF LEHMAN BROTHERS
The Dow Jones closed down just over 500 points on September 15,
2008, at the time the largest drop by points in a single day.
Several money funds and institutional cash fund run by The Bank of
New York Mellon and Primary Reserve Fund, both falling below $1 per
share, called ‘breaking the buck’, following losses on their holdings of
Lehman assets.
In Japan, Banks and insurers announced a combined 249 billion Yen
($2.4 billion) in potential losses tied to collapse of Lehman
Mizuho Trust and Banking Co. cut its profit forecast by more than half,
citing 11.8 billion yen in losses on bonds and loans linked to Lehman.
CONCLUSION
Lehman’s bankruptcy led to more than $46 billion of its market value
being wiped out.
Its collapse also served as a catalyst for the purchase of Merrill Lynch
by Bank of America in an emergency deal that was also announced on
September 15.
-Md Nazeeruddin
