Collapse of Lehman Brothers Essay

3177 Words Nov 14th, 2010 13 Pages
Collapse of Lehman Brothers

Lehman Brothers was an investment bank that went back to the 1850s, surviving the Civil War, two World Wars, the Great Depression and any other great misfortune that this 160 year old company’s history had gone bankrupt. Lehman brothers were an important part in the financial and commercial industries in the United States. People may have thought that leverage was a bad thing; they should have realized that a dry-goods store turned into a huge investment bank then years later bringing attention to the whole world. Lehman brothers began when an immigrate by the name Henry Lehman came from Germany and settled in Montgomery, Alabama where he started a small shop selling groceries, dry-food and utensils to
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investment bank at that time of its collapse. Lehman's collapse greatly intensified in the 2008 crisis and contributed to the wearing down of the $10 trillion in market capitalization.
The main cause of the collapse was the boom of the housing market in 2004. Lehman obtained mortgage lenders and subprime lenders BNC Mortgage and Aurora Loan Services. Lehman real estate recorded revenues in the capital markets which increase 56% from 2004 to 2006 which grew faster than any other investment bank. Every year Lehman recorded profits which they reported net income of $4.2 billion on revenue of $19.3 billion.
In 2007 the housing market begins to show signs of slowing down with the defaults of the subprime mortgages which at the time was at a seven year high. After the stocks had the biggest drop in March 14, 2007 Lehman chief financial officer made a comment on the increase concerns of defaults that can affect their profits, he said” that the risks posted by rising home delinquencies were well contained and would have little impact on the firm’s earnings” and as well he said, “he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S economy”. When the credit crisis burst with the failure of hedge funds in Lehman’s stock dramatically dropped. They had to shut down the BNC unit and unemployed about 2,000 people. Lehman publicizes a second-quarter loss of $2.8 billion which was the first loss since they merged with

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