Lehman Brothers Financial Case Study

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The Lehman Brothers company had a long history of perseverance from the railroad bankruptcies of the 1800s, to the Great Depression of the 1930s, two world wars, and the Russian debt default in 1998 (Investopedia, 2015). Their century long history of endurance started to erode during the U.S. housing market collapse of 2008 with Lehman’s extensive investment in the subprime mortgage market. With $619 billion in debt and $639 billion in assets, Lehman Brothers filed for bankruptcy on September 15, 2008, making it the largest in history (USLegal, 2010). The Lehman Brothers collapse contributed to the October 2008 erosion of $10 trillion from the global equity markets. American International Group, Inc. (AIG) had substantial investments
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Lehman attempted to change the direction of their stock by issuing preferred stock to raise $4 billion but the stock continued to decline as hedge fund managers questioned the value of the Lehman mortgage portfolio (Investopedia, 2015). On June 9, the firm announced their first loss since going public in1994 of $2.8 billion in the second quarter, made additional efforts to raise capital, and reduced their exposure to mortgages by 20% (Ellis, 2008). After unsuccessful attempts over the summer of partnering with other companies to help with recovery, the Lehman stock plunged 77% during the first week of September 2008 as the global equity markets continued to decline. The firm’s stock declined another 45% after the rescue attempt by the Korean Development Bank was put on hold (Investopedia, 2015). Then on September 10, Lehman Brothers reported a $3.93 billion third-quarter loss after a write down of $5.6 billion in toxic mortgages and restructuring of its business. With only $1 billion in cash remaining and unsuccessful take over bids by Barclays and Bank of America, on September 15, Lehman filed for bankruptcy with their stock closing at less than $1 (Investopedia, …show more content…
In less than seven months, following the bankruptcy of Lehman Brothers, AIG was talking to other companies for help despite the $20 billion help from the New York State Governor (Quinn, 2008a). “Meltdown Monday”, September 15, 2008, included the plunge of AIG shares by 72 points, Bank of America takeover of Merrill Lynch to avoid collapse, and hundreds of billions in assets wiped off the stock markets around the world (Quinn, 2008a). The Federal Reserve made $50 billion available to maintain liquidity in the market while JP Morgan Chase and Citigroup contributed $70 billion to a liquidity fund (Quinn, 2008). AIG was the largest insurer with a balance sheet of $1 trillion but the rating agencies were considering downgrading their debt and such a rating cut would trigger collateral calls from debt investor who bought credit-default swaps. Over the weekend talks to discuss fundraising with investors including Warren Buffett, JC Flowers, KKR, and TPG ended without a decision (Quinn,

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