The Collapse of Lehman Brothers


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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

Case Details:

Price:
Case Code : FINC051 For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges

Themes

Sources of Finance, Capital Structure, Capital Budgeting
Case Length : 17 Pages
Period : 2006-2008
Pub. Date : 2009
Teaching Note : Available
Organization : Lehman Brothers
Industry : Banking & Financial Services
Countries : US

Abstract:

The case discusses the rise and fall of Lehman Brothers Inc (Lehman Brothers) from a small dry goods store to one of the leading investment banks in the US. It examines in detail the reasons that led to the subprime crisis since the year 2007 in the US and how it led to the collapse of 158 year old Lehman Brothers. The case highlights the role of several stake holders in the mortgage business that contributed to the crisis. It examines the various factors that contributed to the fall of Lehman Brothers including leadership issues, excessive leverage, failure of risk measures employed like 'Value at Risk' and poor regulation of the investment banking industry. It also explains the role of certain OTC derivative instruments that led to the collapse of the company.

Issues:

» Understand the reasons that led to the subprime crisis in the US and its impact on financial institutions.

» Analyze the aggressive strategies that Lehman Brothers followed in the mortgage business.

» Study the role of leadership at Lehman Brothers behind the company's rise and subsequent collapse.

» Appreciate the significance of risk management and the drawbacks of excessive leverage.

» Examine the innovations in financial instruments primarily derivatives.

» Analyze the consequences of lack of supervision on OTC derivatives and mortgage lending mechanism in the US.

» Debate on the role played by the US policy makers for adopting liberal credit driven economic growth policy that eventually led to the subprime crisis.

Contents:

  Page No.
Introduction 1
The Subprime Crisis 2
The Fall of Lehman 5
Fuld - Victim or Culprit? 10
What Went Wrong? 11
The Fed's Decision? 13
Exhibits 14

Keywords:

Lehman Brothers, US Subprime Crisis, Risk Management, Investment Banking, Chapter 11 Bankruptcy, Fed Funds Rate, Home loans, Adjustable Rate Mortgages, Subprime borrowers, Mortgage backed securities, Mortgage Lending Mechanism, Credit Default Swap, US Federal Reserve, Aurora Loan Services, BNC Mortgage Inc, Richard Fuld, Alan Greenspan, Bear Sterns, Korea Development Bank, Value at Risk, Leverage Ratio

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