Lehman Brothers Bankruptcy

Lehman Brothers Bankruptcy

Lehman Brothers Bankruptcy

Introduction

In 2008 Lehman Brothers filed for bankruptcy. At this time it was the fourth largest investment bank in the United States. The firm had been able to weather all the storms of economic crisis all the year but could not stand any chance to survive the effects that came with the collapse of the US housing market. The firm realized that it had made quite a big mistake to invest in the subprime mortgage market. It became the largest victim of the financial crisis induced by the subprime mortgage. The bankruptcy led to over assets worth $46 billion being wiped out.

These bankruptcies have impacts affected work markets, principally through the capital designation channel yet in addition on the grounds that budgetary emergencies are bigger adaptations of normal financial downturns. Accessible exact proof proposes that work showcase results amid money related emergencies are more regrettable than in normal downturns, even toward the back controlling for the extent of the retreat

Literature review

Capital misallocation

Claessens, S., Dell’Ariccia, G., Igan, D., & Laeven, L. (2010). Cross-country experiences and policy implications from the global financial crisis. Economic Policy, 25(62), 267-293.

According to Dell’Ariccia et al. (2009), one major effect of the bankruptcy of Lehman is capital misallocations. The article states that after the crisis it called for a reallocation of scarcer capital in order to reflect the new markets. They started that in time of financial crisis of the banks it led to the effect on major emerging markets that require having inventories for long period of times. It was also stated that during the crisis we have experienced a lot of corporate spreads.

The article looked at the major reallocation and concluded that during the crisis it is not clear whether the reallocation is neither in the right magnitude nor in the right direction. A study conducted state that most of the fiancés will be directed in the wrong direction leaving the highly productive firms underfinanced.

Labour reallocation

Johnson, M. A., & Mamun, A. (2012). The failure of Lehman Brothers and its impact on other financial institutions. Applied Financial Economics, 22(5), 375-385.

Another major defect that resulted out of the crisis a the bankruptcy of Lehman brothers was labor reallocation. The article state that At one of the principal indications of inconvenience for the 158-year-old speculation bank, we find that when Lehman Brothers declared their first quarterly misfortune, the supplies of storehouse organizations and essential merchants declined. At last, on 15 September 2008 when Lehman Brothers petitioned for liquidation, the supplies of banks and essential merchants declined by −2.90% and −6.00%, individually, and were the greatest washouts that day. They likewise think about how the extent of the storehouse foundations may have assumed a part in the unfavorable impacts they encountered encompassing Lehman’s inconveniences. They show to prove that it was fundamentally huge banks, reserve funds and credits and financier firms who were affected the most.

According to Johnson, M. A., & Mamun, A. (2012), whenever there is any crisis the first are usually reluctant to hire since the labor would expect to have the wage bill paid in advance. When the cost of finance goes up the firms become reluctant to hire making and creating a temporary labor short in the market. This allocation problem usually spill over to the labor market making the high forms not to be able to get the best laborer in the market. According to World Economic Outlook, there is high unemployment rate during the crisis. Additionally, Elsby et al. (2010), state that in crisis old jobs are usually kept without an equal creation of similar jobs. This leads to a serious adjustment in the labor markets including long unemployment period which becomes very difficult to foil when the individual get back to business.

Mio, C., & Fasan, M. (2012). Does corporate social performance yield any tangible financial benefit during a crisis? An event study of Lehman Brothers’ bankruptcy. Corporate reputation review, 15(4), 263-284.

The point of this article is to experimentally test – through the occasion ponder approach – whether Corporate Social Performance (CSP) had any effect on Corporate Financial Performance (CFP) with regards to the emergency because of Lehman Brothers’ chapter 11. Drawing on past examinations having a place with various surges of writing, this article proposes three systems that may have connected CSP to CFP with regards to the emergency. Stock costs of the non-money related organizations incorporated into the S&P 500 securities exchange record are inspected earlier and amid the chapter 11 declaration. Observational discoveries demonstrate that with regards to the emergency because of Lehman Brothers’ liquidation, CSP was emphatically related with here and now CFP (Abnormal Returns), in this way giving a cradle effects

Lehman’s stock cost plunged by 73% of its incentive in the principal half of September alone and by the mid of September 2008, lost $3.9 billion in their endeavor to discard a lion’s share of their offers in one of their backups. To add to the assemblage of learning, this paper examined and assessed the exercises or exchanges that brought about the disappointment of Lehman Brothers. The discoveries uncovered a variety of components running from questionable bookkeeping hones, dishonest administration honest, over interest in dangerous unsecured ventures, laxity with respect to controllers. Outer reviewers additionally played a noteworthy part in this disappointment by not recognizing these money related explanation acts of neglect by the Lehman supervisors

Depreciation of prices

Helleiner, E. (2011). Understanding the 2007–2008 global financial crisis: Lessons for scholars of international political economy. Annual Review of Political Science, 14, 67-87.

According to Helleiner, (2011), the major effect that the bankruptcy had was depreciation prices. The relative prices of domestic as well as foreign goods and the relative price of capital goods relative to consumer goods. The crisis made most of the large firm in the nation get into a state where they borrowed heavily from the foreign institution. When the bankruptcy was realized most of the firms reduced their investments and all they did to attract more investment was to increase e the interest rates. This affected the prices of goods in every sector of the economy. There was massive price falls in almost all area in the economy. Lehman’s bankruptcy turns out to be a piece of a developing history of business disappointments where bookkeeping standards have turned into the core interest. The disappointment of Lehman advises us that money-related announcing must stay straightforward, enabling clients to settle on educated choices with confidence. This insolvency gives an agonizing update that budgetary revealing must enable clients to separate among speculation choices, in light of the relative, an accurate monetary position of the venture. The validity of our detailing model is in question

Chakrabarty, B., & Zhang, G. (2012). Credit contagion channels: Market microstructure evidence from Lehman Brothers’ bankruptcy. Financial Management, 41(2), 320-343.

According to this article, many firms had to disclose their financial exposure. The article tried to look at the credit contagion in which a bankruptcy of a firm could affect the other firms. The authors used the market microstructure in measuring the various effect of the market contagion. It was realized that the firms that were exposed to Lehman’s suffered serious risk like pressure for sale, asymmetry of information, and even higher price impact as compared to the firms that were not related to Lehman’s

The major focus of the article was the two theories of contagion and divides the firms into two groups that are the exposed firms and the unexposed firms. The hypothesis was that those firms that were exposed should suffer serious financial consequences. After the analysis the null hypothesis was not rejected since there was no sufficient evidence to show that only the exposed firms were affected. The financial implications were felt across s the financial sector. It led to the closure of other firms that the prices fluctuation impacted and also closure of firms that could not be able to match the advanced wage conditions set during that time.

References

Chakrabarty, B., & Zhang, G. (2012). Credit contagion channels: Market microstructure evidence from Lehman Brothers’ bankruptcy. Financial Management, 41(2), 320-343.

Claessens, S., Dell’Ariccia, G., Igan, D., & Laeven, L. (2010). Cross-country experiences and policy implications from the global financial crisis. Economic Policy, 25(62), 267-293

Helleiner, E. (2011). Understanding the 2007–2008 global financial crisis: Lessons for scholars of international political economy. Annual Review of Political Science, 14, 67-87.

Johnson, M. A., & Mamun, A. (2012). The failure of Lehman Brothers and its impact on other financial institutions. Applied Financial Economics, 22(5), 375-385.

Mensah, J. M. K. (2015). The failure of Lehman Brothers: causes, preventive measures, and recommendations. Browser Download This Paper.

Mensah, J. M. K. (2015). The failure of Lehman Brothers: causes, preventive measures, and recommendations. Browser Download This Paper.

Zingales, L. (2008). Causes and effects of the Lehman Brothers bankruptcy. Committee on Oversight and Government Reform US House of Representatives.