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The Collapse of Lehman Brothers

The Collapse of Lehman Brothers

We all know the 2007-2008 financial crisis was a worldwide financial and economic crisis after the great depression in the 1930s. It began in 2007 with depreciation in mortgage value and later collapse of investment bank of Lehman bank in 2008. It started in the United States and then the whole world suffered. We all know the main reason was that high mortgage rated were approved which drove up the housing prices.          

But today we will know more about Lehman brothers who were equally responsible for the crisis.

Lehman brothers holding Inc was the 4th largest investment bank in the US before it got bankrupt. It was in operation for almost 158 years. The market collapsed after they filed bankruptcy. So basically they lost because they held a large position in subprime and other low related mortgage tranches. Lehman Brothers bet big on increasing home rates in the USA, they had acquired 4 mortgage lending firms in 2007. At the start, their acquisitions made enormous profits, but in 2008 the cracks in the USA housing bubble was very obvious.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages. Many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities, in a process known as securitization. These bundles could be sold as low-risk securities partly because they were often backed by credit default swaps insurance.

For many years Lehman Brothers dominated the market but eventually collapsed in 2008.

They filed bankruptcy under Chapter 11 bankruptcy protection citing bank debt of $619 billion, $155 billion in bond debt, and assets worth $639 billion.

What we can learn from Lehmann Brothers Losses. Never put all your eggs in a single basket even if the returns are gigantic because with every reward comes with a risk. So with huge rewards comes huge risk as well. Even if the investment in any sector is outperforming but there is always a possibility of collapse. That’s why we always say one must learn before investing.

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Vrutti Jakharia

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