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Lehman Brothers & Subprime Crisis

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Lehman Brothers & Subprime Crisis
Introduction The global financial crisis that erupted in September 2008 has thrown economies around the world into a recession. The root cause were sown in the credit boom that peaked in mid-2007, followed by the meltdown of sub-prime mortgages and securitized products. Fannie Mae and Freddie Mac were both taken over by the government and on September 24, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer. The fall of Lehman Brothers rattled the global market and led to a great drop in the United States (U.S.) stock market the day after the announcement. The sudden failure of Lehman Brothers is widely viewed as a watershed moment in the global financial crisis of 2007 – 2009. With over $639 billion in assets and $613 billion in liabilities, it is one of the largest bankruptcies in the history of U.S. (Mamudi, 2008).

Lehman Brothers was founded in 1850 by three cotton brokers in Montgomery, Alabama. The firm moved to New York City after the Civil War and grew into one of Wall Street’s investment giants. Lehman Brothers is a global financial services firm; the fourth largest investment bank in the U.S. Lehman Brothers’ clients is big institutions, not small individuals. It is an innovator in global finance, serving the financial needs of corporations, governments, municipalities, institutional clients and high-net-worth individuals worldwide. Lehman Brothers investment banking operations accounted for just 20 per cent of the company’s 2007 revenue while most of its net revenue comes from fixed income sales and trading; about 40 per cent. Some of the different fixed income investments that Lehman Brothers deals with include derivatives and swaps, mortgage-backed securities and futures (Callan, n.d.). However, the investment management business still provides the stable earning base because of its fee-based structure.

This term paper will further look into the how Lehman Brothers started off as an investment bank began getting


References: Allen, C. (2009). Lesson learned: one year after Lehman. Global Investor, 15 – 19. Anderson, J Evanson, D. (2010, April 12). Lessons from the collapse of Lehman Brothers. TheStar Online. Retrieved from http://biz.thestar.com.my/news/story.asp?file=/2010/4/12/business/6017192&sec=business Investopedia Kirk, E. (n.d.). The “subprime mortgage crisis”: An overview of the crisis and potential exposure. Retrieved May 3, 2011, from www.rli-epg.com/articles/Subprime-Mortgage-Crisis.pdf Knutsen, S Krinsman, A. (2007). Subprime mortgage meltdown: How did it happen and how will it end? The Journal of Structured Finance, 13(2), 1 – 9. Mamudi, S Mortgage Info. (2007). BNC Mortgage Inc. Retrieved May 3, 2011, from http://www.mortgage-info.us/lender_bnc_mortgage.htm Onaran, Y Snowdon, C., Steinberg, D., & Lippman, M. (2009). Managing the bankruptcy of Lehman Brothers. International Tax Review, (49), 3 – 6. Stowell, D Zingales, L. (2008). Causes and effects of the Lehman Brothers bankruptcy. Retrieved from http://www.scribd.com/doc/11096014/Causes-and-Effects-of-the-Lehman-Brothers-Bankruptcy
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