House of Cards – The Collapse of Lehman Brothers

Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), with about 25,000 employees worldwide

The Lehman Brothers collapse was one of the most massive bankruptcies in United States history, and the economy is still feeling the repercussions.

The collapse of Lehman Brothers was caused in large part by the housing crisis in 2008, but it was also one of many factors contributing to the collapse of the banking and housing industries.

Lehman Brothers was started by a German immigrant in 1844 and grew to be a place of prominence and power. In 1994, American Express spun off Lehman Brothers and created its initial public offering with a $3.3 billion capitalization.

Lehman Brothers, like many other firms, became more and more involved in issuing mortgage-backed securities, MBSs, and collateral debt obligations, or CBOs, during the mid-2000s. However, in 2006, the housing market began to crash, and Lehman Brothers’ fate was thrown into question.

Weakened by its reliance on repurchasing agreements (“repos”), Lehman had to bolster the confidence of its investors in a short time – and attempted to do so by raising some $6 billion in equity in June of 2008.

Lehman Brothers’ stock dropped 77% in the first week of September, and by the end of the week it had lost 93% of its value.

Lehman Brothers collapsed due to a lack of trust, over-leveraging, poor long-term investments, and shaky funding. One of the primary causes for the firm’s collapse was due to its overzealous lending during the housing bubble in 2003 to 2004.

Many have wondered at the role of the federal government’s “too big to fail” policy in regard to Lehman Brothers. The Fed explained that Lehman did not have enough collateral to cover the bailout, which made it “illegal” for the Fed to bail Lehman out.

Judge James Peck approved a deal for Barclays to acquire some of Lehman’s investment and capital market business, but made it clear that Lehman was an exception.

Once Lehman went under, judge James Peck approved a deal for Barclays to acquire some of the firm’s investment and capital market business (and, along with it, rescuing some 10,000 jobs). But the judge seemed to make it clear that Lehman was an exception.

“I have to approve this transaction because it is the only available transaction,” Peck said in court. “Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I’ve ever sat through. It can never be deemed precedent for future cases. It’s hard for me to imagine a similar emergency.”

The fallout from Lehman Brothers’ collapse was nothing short of disastrous. Over 6 million jobs were lost, unemployment rose 10%, the Dow Jones Industrial Average dropped an astounding 5,000 points, and the Dodd-Frank Act was implemented to help increase financial regulation.

After Lehman Brothers collapsed, the public became skeptical of the economy and of “too big to fail” firms like Lehman. This caused a shift in the way people viewed financial institutions.

There have long been comparisons drawn between Deutsche Bank and Lehman Brothers, but some suggest that the bank may be more closely related to the Fannie Mae and Freddie Mac crisis than Lehman.

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