Lehman Brothers: The Great Recession

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Lehman Brothers Case Study
The failure of Lehman Brothers was the catalyst of what is now referred to as the Great Recession. Lehman Brothers filed for bankruptcy in September of 2008 following the collapse of the housing market boom of the 1990s to mid-2000s. Lehman’s acquisition of subprime mortgage loans led to record profits during the housing bubble; however, these risky investments proved to be the major cause of their failure. (Investopedia, 2017)
Subprime mortgage loans are described as mortgages issued to people who could not qualify for a conventional mortgage due to low credit ratings, and thus charge a higher than prime interest rate. During the housing boom, subprime mortgages were popular and often issued to people without documentation
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In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the Obama Administration. The act, named after sponsors U.S. Senator Chris Dodd and U.S. Representative Barney Frank, is intended to decrease risks in the U.S. financial system.. The act established a new regulatory agency, the Consumer Financial Protection Bureau, with the responsibility of overseeing the banking industry to protect consumers, and tasked existing regulatory agencies with more stringent requirements for oversight of financial institutions. (Maxfield, …show more content…
Critics of the Dodd-Frank Act claim that it inhibits banks’ ability to make a profit, discourages small business, and stagnates the economy. During his campaign, Donald Trump vowed to repeal this legislation. In June of 2017 the U.S. House of Representatives approved the Financial Choice Act introduced by the Trump Administration. This act will eliminate or reduce the regulations on the banking industry imposed by the Dodd-Frank Act. Republicans are optimistic that the bill will pass through the Senate with only minor modifications. (Rappeport, 2017)
Conclusion
It cannot be said with any degree of certainty that more government regulation would have prevented the financial crisis of 2008. The yearly stress tests mandated by the Dodd-Frank Act may have alerted the Federal Reserve of the impending crisis if they had even been able to recognize it as a threat. Dr. Michael Burry, hedge fund manager for Scion Capital, claims the Federal Reserve should have seen it coming. Burry not only predicted the mortgage default crisis as early as 2005, he bet on it, and made millions for himself and his investors. (Burry,

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