Lehman brothers: the beginning of the fall Essay

Lehman brothers: the beginning of the fall

            After the initial waves of the global credit crisis, many stood in disbelief in the ferocity of the crisis as it slowly rode the maelstrom of the credit crisis, with many with baited breath on the next financial colossus that would be swallowed up in the rage of the financial storm. Headlines and news reports slowly unraveled companies being swept under the rush of the global contagion, countries and governments forced into drastic financial moves designed to resuscitate their dying economies. But in all events, there are players who either instigated the crisis or contributed to the emergence of the elements in the present financial crisis. In this paper, we would look at the contribution of one of these financial giants, Lehman Brothers, and how did the collapse of the financial giant gave more impetus to the financial crisis prevailing in the global economy.

            Valued at more than $600 billion, the collapse of American financial giant Lehman Brothers is considered as the single largest financial insolvency in corporate history. Secretary Henry Paulson, having just engineered an earlier massive corporate bailout less than half a year ago, bailing out distressed investment banking entity Bear Stearns, Paulson seemed hesitant at conducting another bailout in such a short time. Earlier in the week, Paulson had to usher mortgage financiers Fannie Mae and Freddie Mac into conservator-ship. To Paulson, the actions of bailing out these financial giants, collapsing one at a time but with increasing frequency, created the impression that the Federal government would be ready to provide a financial lifeline to the distressed financial and banking industry, tolerating their actions of irresponsibility with regards to risks that turned toxic for them. [1]

            It is stated that the day that one of the largest financial icons filed for bankruptcy was the beginning of the worst financial malaise that has buffeted the global economy since the Great Depression in the 1930’s. Before the collapse of Lehman, there was a foreboding that an event of earthshaking proportions would take effect. After the collapse, talk was rife of the effects, then unknown at the time, but was buttressed by the actions of then American President George W. Bush, calling for a financial lifeline to be thrown to the distressed and in near collapse banking and financial industry. [2]Lehman headed to bankruptcy court for Chapter 11 protection at the United States Bankruptcy Court in the Southern District of New York. Lehman, though under bankruptcy proceedings, will continue to service the accounts of the company and their subsidiaries, including Neuberger Berman Holdings LLC. [3]

            Lehman, one of the largest traders in fixed interest markets and invested heavily in the sub prime mortgages that were later on adduced to be the trigger of the prevailing global crisis. With the collapse of Bear Stearns earlier in the year, it was inevitable that the public will lose confidence in the sub prime mortgage equities being marketed by Lehman. When Bear collapsed, the Treasury Department crafted favorable terms for rival JP Morgan to acquire the company; when Lehman collapsed, American finance officials made it harder for a potential buyer, UK-based Barclays Bank, to acquire Lehman by not issuing a guarantee on the trading activities of the company, saying the taxpayers had put too much already in the rescue of Bear, Merill Lynch and Fannie Mae and Freddie Mac.[4] The trading of the company in what are termed as credit derivatives, which offered banks higher returns on the risks they acquired, was not the sole entity that drove the global market over the cliff, but contributed to the panic of the financial managers as they made trading less clearer to get the bottom of the problem, a loss of confidence in the market that could not get a firm grip on the problem besetting the industry [5]

            In the opinion of Lawrence MacDonald, author of the book A Colossal Failure of Common Sense (2009), he states that the financial condition of the bank was no worse than any of the other banks on Wall Street affected by the global crisis. What happened was that Lehman Brothers became the benchmark of the era that defined which banks could be allowed to go under and which banks were to risky or important that they could never be allowed to sink, or the doctrine of “too big to fail”.  The same question was posed by Davis Wessel, author of the book In Fed We Trust (2009), in which he questions the logic in rescuing one bank, Bear Stearns, and letting another, Lehman Brothers, sink. But the bomb that ultimately destroyed the more than 150 year old company were the rumors and the short selling activities, with Lehman shares taking the brunt of the rumors, the rumors led to investigations, further dampening the confidence of the public with the firm[6]

            Lehman’s board of directors allowed the company to file for bankruptcy in an effort to safeguard the assets of the company and to optimize the value. Along with the bankruptcy motion that the company filed, they also stated that they will be initiating several first day legal motions designed to keep company operations running at a normal level. [7]Along with Paulson, Fed Chair Ben Bernanke and New York Fed President, the three argued that Lehman chief, Richard Fuld, could have done more to save his company. When Fuld could not find a   “white knight” to save the company, he filed for bankruptcy.[8]

[1]    Weiner, J. (2009). Biggest Mistake of the Financial Crisis: Lehman Brothers Bankruptcy. http://www.politicsdaily.com/2009/09/15/biggest-mistake-of-the-financial-crisis-lehman-bros-bankruptcy/
[2]    Ferndale, N. (2008). Lehman Brothers Collapse: how the worst economic crisis in living memeory began. The Daily Telegraph.
[3]    Mollenkamp, Craig, S., Ng, S., Luchetti, A. (2008). Lehman Files for Bankruptcy, Merill Sold, AIG Seeks Cash. Wall Street Journal
[4]    BBC News. (2008, 16 September). Q and A: Lehman Brothers bank collapse.
[5]    Eisinger, J. (2008).The $58 trillion eelephant in the room. Portfolio Journal
[6]    Brown, E. (2009). Economc 9-11: Dis Lehman Brothers fall or was it pushed?
[7]    Mollenkamp, Ibid.
[8]    Weiner, Ibid.