Literature Review for Lehman Brothers Bankruptcy Paper

Lehman Brothers Bankruptcy

Student name

Institution Lehman Brothers Bankruptcy

Introduction

The Lehman Brothers originated from a humble background discovered to have started operating as a general store in Alabama, 1844 and owned by an immigrant from Germany called Henry Lehman. Henry Lehman and his brothers later founded a firm called Lehman Brothers in 1850. As the economy in the United States of America grew and gained international strength, Lehman Brothers firm was prospering as well. The Lehman Brothers however survived so many challenges such as the railroad bankruptcy, World War one and two, the Russian debt and the Great Depression. (Makin, 2013)

However, (Makin, 2013) shares that despite Lehman Brothers surviving the previous challenges, it couldn’t survive the fall of the United States housing market in 2008. They had made it to being among the largest investment bank in the United States. They filed for bankruptcy after they realized that they made a mistake in investing in the United States subprime mortgage. They had assets worth $639 billion and $619 billion as debt. The bankruptcy of Lehman Brothers created an impact on unemployment and financial troubles that it made it hard for the firm operates.

Literature Review

Makin, V. (2013). Lehman Brothers: The Fall from Grace. doi: 10.4135/9781473964174

Financial markets

According to (Makin, 2013), Lehman Brothers firm had made strides and were among the top key players in finance in the United States, thus its bankruptcy had a huge impact on the world’s financial markets. Despite affecting the financial markets in the United States, (Makin, 2013) shares that it also affected other major finance market indexes like the European stock market where the FTSE in London experienced a fall by 3.92% and Paris CAC 40 fell by 3.78%. The New York Dow Jones Industrial also experienced a fall of 4.4% and NASDAC composite also experienced a fall of 3.6%. Globally, Lehman Brothers bankruptcy also affected the financial markets in Asia which included companies like Taiwan’s benchmark that dropped by 4.1%, India’s Sensex that fell by 5.4% and Singapore’s STI that fell by 2.9%.

As shared by (Makin,2013),the bankruptcy of Lehman Brothers also led to unemployment. Approximately 25,000 people around the world lost their jobs. The employees however had made some investment in the firm in form of stocks. Thus the employees went through a greater dire loss when the firm experienced an unexpected fall in their stock prices. The investors or creditors also experienced a tearing loss. After the Lehman Brothers announced their bankruptcy, their stock prices fell as well as their shares value. Thus the creditors or investors couldn’t profit from the firm. (Warren, Bussel, steel & Jordan 2012)

Ratner, I., Stein, G., & Weitmauer, J. (2010). Business valuation and bankruptcy. Hoboken, NJ: Wiley.

Business Management

The bankruptcy of Lehman Brothers was the management’s fault. As shared by (Ratner, Stein & Weitmauer, 2010), the management in Lehman Brothers were blamed because they had displayed a behavior in financial misconduct. The management board participated in manipulating documents and financial transactions because they were involved in looting the company’s money thus leading the firm to bankruptcy. The executives in the company like the Chief Executive Officer, Mr. Richard Fuld was also caught participating in financial misconduct. He made the firm file a transaction that would lay him off of the assets worth $50 billion dollars. Thus bankruptcy of Lehman Brothers had an effect on management such that it made the executives manipulate financial transactions in order to get investments from the public.

However, (Ratner, Stein & Weitmauer, 2010) also shares that bankruptcy in Lehman Brothers proved that risk management is very essential. When the management realized that they were making poor financial decisions they failed to follow the accounting rules and regulations that governed the firm from crisis. Some continued with looting the firm’s money and manipulating transactions to cover their mistakes. Despite the changes in accounting rules and regulations, they were able to come up with risky accounting techniques with risky business models. This led to the company experiencing a crisis they could no longer have a control over. The management also made poor decisions that only benefited them instead of seeking professional help.

Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill.

Credit crisis

According to (Khan & Jain, 2007), Lehman Brothers bankruptcy had an effect on credit such that the capital that was allocated to the firm was reallocated scarcely but in order to fit in the new markets that needed inventories. The inventories of the new markets were neglected because of the bankruptcy crisis. Thus the reallocation of capital was done so fast and there is no clarity in whether they were done in the right magnitude or direction. However, in cases where capital reallocation is done last minute, they are usually done or taken to the wrong place leaving the firm financially vulnerable.

Reallocation of labor is also another effect on Lehman Brothers bankruptcy. When the firm disclosed its quarterly misfortune, they were declined by the suppliers of the storage organizations and merchants. When the Lehman Brothers appealed for liquidation, the creditors declined the results because they were disappointed. They were affected because they had placed good major inputs in the firm and were not getting any in return. Thus this chased away the current and future creditor. The current creditors wanted to be paid for their damages and those who looked into investing were discouraged. (Khan & Jain, 2007)

Auletta, K. (2009). Power, greed and glory on Wall Street: The fall of Lehman Brothers. ​New York: New York Times.

Individual wealth

As shared by Auletta (2009), individual wealth of clients were affected by the bankruptcy in Lehman Brothers bankruptcy. The management and executives of the firm had acquired wealth through looting the firm’s money and manipulating transcripts to cover their tracks. The regular workers however did not benefit from this. According to Auletta (2009), they lost their employment as well as their investment in the stocks of the firm. The unethical considerations of the management and executives by being selfish, greedy and making bad decisions led to the downfall of the firm.

The creditors and investors also faced a financial crisis. The firm was not able to reward them with profits because they were facing bankruptcy. The labor left was only directed to new markets that were meant to cover the bankruptcy crisis. The share prices of the firm had also depreciated and meant that the creditors or investors could not make money from selling their shares. The only thing left for the stakeholders to benefit from was the Lehman Brothers assets. The assets were meant to be divided among the stakeholders. That solution was however not a guarantee that it would pay off the money they invested in the firm because most likely the assets would have been auctioned and sold off at a very low price or value. Auletta (2009)

Ventura, J. (2008). The bankruptcy handbook: everything you need to know to avoid bankruptcy, get rid of debt, and rebuild your credit. New York: Kaplan Pub.

Market complacency and poor regulation

The Lehman Brothers bankruptcy affected the economy such that it made the company become market complacent. The income that was being received from the housing company was no longer enough for the company. This thus led to an increase in the sale of mortgage in the housing company. The customers suffered by having to pay more for mortgage because of the market complacency. The housing company suffered a loss when they lost their future customers because of the hiked prices. (Ventura, 2008)

The Lehman Brothers bankruptcy lead to poor regulations. The restrictions that were set for regulations led to inflation of the company’s products. The company thus permitted certain companies to invest in the security. According to (Ventura, 2008), the funds acquired from the market made it possible for the company to boost their yields thus holding on to high rated securities. The managers who had invested in these securities were able to gamble with the funds and acquire benefits too. The managers also knew that a failure in their gamble would affect the whole market, thus their reputation would be covered because the government would interfere and provide support for the suffering companies. As shared by (Ventura,2008), the government would support the companies by lowering taxes or giving them incentives.

References

Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill.

Ratner, I., Stein, G., & Weitmauer, J. (2010). Business valuation and bankruptcy. Hoboken, NJ: Wiley.

Warren, W. D., Bussel, D. J., Skeel, D. A., & Jordan, R. L. (2012). Bankruptcy. New York, NY: Foundation Press Thomson/West.

Auletta, K. (2009). Power, greed and glory on Wall Street: The fall of Lehman Brothers. ​New York: New York Times.

Makin, V. (2013). Lehman Brothers: The Fall from Grace. doi: 10.4135/9781473964174