How Did Lehman Brothers Collapse

Lehman Brother Collapse:
History of Lehman Brother:
Lehman Brothers started off with a small general store which was founded by German immigrant Henry Lehman in Montgomery, Alabama in 1844.In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers. Lehman Brothers faced my events that could collapsed this firm such that the railroad bankruptcies of the 1800s Great Depression of 1930s, two world wars, the Long Term Capital Management collapse and Russian debt default of 1998 but despite being successful in the past did not let Lehman Brother surpassed the financial crises of 2008.
What actually happened to Lehman Brothers?
Lehman Brother was the fourth largest investment bank in 2008 with thousands of employees working
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Before getting an understanding regarding the collapse of Lehman Brothers lets first get familiar with the events that leads to the collapse of Lehman Brothers.
Why did it happened?
Mortgages:
When someone need to get a house of its own it borrows money from the bank. In return bank gets a piece of paper called Mortgages. Monthly the homeowner has to pay back a portion of the principal along with interest to whomever holds the piece of paper and if someone stop paying it is called a Default and whomever gets the piece of paper gets the house. The importance of “whomever gets the house” rather than the bank is significant because the bank the original lender often sells that original mortgage to some other third party. The transfer of mortgage happens quite often. If you want to get a mortgage you must have a steady job or good credit then only lender can calculate risk and trust you with the money. Similarly in the 2000s investors in the U.S and abroad looking for a low risk high return
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Borrowers started defaulting which put houses back on the sale but there were no buyer. The supply was up demand was low and housing market started to collapse. As this was happening the financial institution stopped buying subprime mortgages and lenders were stuck with a really bad loan. Giant Lenders were on the verge on bankruptcy. All of this resulted in to a really complicated web of assets, liability and uncalculated risk effects. Lehman's high degree of leverage-the ratio of total assets to shareholders equity – was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to deteriorating market conditions. On June 9, Lehman announced a second-quarter loss of $2.8 billion. The firm also said that it had boosted its liquidity pool to an estimated $45 billion, decreased gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about 25. Effort were there to save Lehman Brother but they were too little to play its part With only $1 billion left in cash by the end of that week, Lehman was quickly running out of time. On September 10, reported a loss of $3.9 billion, on the same day Moody’s credit rating suggested Lehman would have to sell a majority stake to a strategic partner in order to avoid a low ratings. It seems that nothing was going in favor of the Lehman

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