|The Lingering Impact of Lehman Brothers’ Bankruptcy||FIN 540: Advanced Corporate Finance Professor:|
The Business Landscape Forever Changed!
With the financial crisis of 2008 and the fall of the once towering financial institution Lehman Brothers’, the business and financial landscape was forever change around the world. Countries like Turkey, Ukraine, Hungary, Iceland and even Pakistan found themselves in dire situations following the fall of Lehman Brothers. Countries like Pakistan were in an interesting situation, requiring them to seek funding from England to help themselves remain in good standing with the U.S. by staying current with their international loans. Staying afloat was on the minds of dozens of countries, but for Pakistan, a default of their loans could result in a lack of support for the country by the U.S. who is in support of their then President Asif Ali Zardari (The Lehman Brothers Collapse: The Global Fallout, 2009).
Success Following Lehman Brothers’ Departure
Generally, there are no winners or losers when it comes to the fall of a financial titan like Lehman Brothers. However, the industry that thrived from their collapse is the very same industry that facilitated close ties… the financial industry. Financial institutions like JP Morgan Chase, the Japanese Nomura Holdings Inc., Barclay PLC and Bank of America came to the aid of the failing company, purchasing various divisions of the conglomerate in effort to stay off financial ruin (Harress, C. & Caulderwood, K. 2013). Amidst all the restructuring and federal government involvement, the financial industry bounced back to the point where banks were posting record profits; as highlighted in the chart below:
(Salisbury, I. & Lim, P. (2014).
With the passing of the Financial Choice Act in June 2017, now more than ever, the restrictions imposed on financial institutions have been lifted in a way these institutions can continue practices of old with little to know consequences from the government.
Managerial Thoughts Restricting Business
The start of the demise of Lehman Brothers was evident when Washington voted to repeal the Glass-Steagall Act back in 1999. This measure separated the interests of commercial and investment banks, preventing them from competing against each other for potential business. This gave rise to the Lehman Brothers becoming a key player in the housing boom that took place in the U.S. Over the course of the next few years, Lehman Brothers saw record growth of profits, driving the stock to all-time highs. The surrounding climate was astonished by this business feet that was taking place; given the industry known as the housing market was showing signs of imploding on itself. (Montgomery, A., 2013).
A huge ethical lapse, which was planned and essentially wrong, was Erin Callan’s approval of siphoning assets from various Lehman Brothers accounts and into a phantom subsidiary known as Hudson Castle. This subsidiary was created primarily for the benefit of Lehman Brothers’ balance sheet. This deliberate misrepresentation Lehman Brothers’ health, committed through the employment of Repo 105, was done to manipulate the bank’s many stakeholders. Even more telling is the fact that this technique was used in two consecutive quarters (Montgomery, A., 2013).
Lehman Brothers: Round 2?
The fall of Lehman Brothers was and is to this day, the greatest financial upset of the 21st century. Countless strides have been made to ensure the U.S. and world’s financial infrastructure is healthier in today’s climate, however there are still signs that a potential Lehman Brothers: Round 2 could happen again. Following a swift moved by the federal government to quell the storm through a federal takeover of Fannie Mae and Freddie Mac, the Troubled Asset Relief Program (TARP) was put into place in order to restore faith in U.S. banks through purchases of equity securities within hundreds of banks and restructuring the financial system (USA Today, 2013). With the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, swift change was finally going to happen within the financial sector. Chief among this reform was the Volcker Rule, which would prevent U.S. banks from making certain kinds of hypothetical investments that were not in the benefit their customers (SEC, 2010). The upswing brought about by this piece of legislation would not last as in June 2017, House voted to approved a bill dubbed the Financial Choice Act, which would repeal and/or eliminate many of the post-crisis banking rules. This includes scaling back the authority of the Consumer Financial Protection Bureau, which was created under Dodd-Frank to regulate large banks and payday lenders against any scrupulous activities that were in the benefit of the consumer and economy as a whole (Bennett, G., 2017).
America: Better or Worse Following Collapse?
An argument can be made for the state of the American economy following the collapse of Lehman Brothers. Despite countless corporations filing bankruptcy protection, the U.S. economy is the healthiest it’s been since before the collapse of Lehman Brothers. According to the most recent forecast from the IMF World Economic Outlook, U.S. growth is holding steady at just over 2% in 2017, which has the country third right behind India and China.
(Chafuen, A., 2017).
My Life Mirrors the World’s Reaction
The fall of Lehman Brothers’ affected millions of people in the U.S., and affects were felt in other parts of the world. People were losing their homes, thousands upon thousands of dollars and all hope was lost. While a huge majority of people were wondering when and if the financial bleeding would stop, there was another group of people that didn’t feel the impact of defining moment in the 21st century. The local news was highlighting the affect the collapse of Lehman Brothers and other financial institutions were having on the U.S. economy and the world as a whole, however there were millions of people who woke up day after day, week of week without feeling any effects of what this moment in time was having on the world. Why is that you ask, well it’s quite simple really. The average person(s) does not work for a large financial institution, doesn’t invest within the stock market and doesn’t concern themselves with the turmoil of the world. Call it being desensitized or not caring, but as the barrier between the rich and the poor continue to widen, more and more people are not suffering at the hands of key moment sin history that cater more so to the rich and well off.
Bennett, G. (2017). House Passes Bill Aimed at Reversing Dodd-Frank Financial Regulations. Retrieved on August 25, 2017 from, http://www.npr.org/2017/06/08/532036374/house-passes-bill-aimed-at-reversing-dodd-frank-financial-regulationsChafuen, A. (2017). The U.S. Economy In 2017: Welcome Higher Growth. Retrieved on August 25, 2017 from, https://www.forbes.com/sites/alejandrochafuen/2017/01/03/the-u-s-economy-in-2017-welcome-higher-growth/#75c989b238fbhttps://www.forbes.com/sites/alejandrochafuen/2017/01/03/the-u-s-economy-in-2017-welcome-higher-growth/#75c989b238fb
Elliot, L. (2013). Lehman Brothers Collapse: Five Years On, We’re Still Feeling the Shockwaves. Retrieved on August 24, 2017 from, https://www.theguardian.com/business/2013/sep/13/lehman-brothers-collapse
The Federal Reserve (2017). Troubled Asset Relief Program (TARP) Information. Retrieved August 25, 2017 from, https://www.federalreserve.gov/supervisionreg/tarpinfo.htm
Harress, C. & Caulderwood, K. (2013). The Death of Lehman Brothers: What Went Wrong, Who Paid the Price and Who Remained Unscathed Through the Eyes of Former Vice-President. Retrieved on August 25, 2017 from, http://www.ibtimes.com/death-lehman-brothers-what-went-wrong-who-paid-price-who-remained-unscathed-through-1405728
McCoy, K. (2013). 2008 Financial Crisis: Could It Happen Again. Retrieved on August 25, 2017 from, https://www.usatoday.com/story/money/business/2013/09/08/legacy-2008-financial-crisis-lehman/2723733/
Montgomery, A. (2013). The Dearth of Ethics and The Death of Lehman Brothers. Retrieved on July 20, 2017 from, http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers
Palia, D. (2012). Collapse of Lehman Brothers Proves a Bank’s Size Isn’t All That Matters. Retrieved on August 25, 2017 from, http://www.business.rutgers.edu/business-insights/collapse-lehman-brothers-proves-banks-size-isnt-all-mattersPWC (2009). Lehman Brothers’ Bankruptcy: Lessons Learned for the Survivors. Retrieved on August 25, 2017 from, http://www.pwc.com/jg/en/events/lessons-learned-for-the-survivors.pdf
Salisbury, I. & Lim, P. (2014). 6 Years Later, 7 Lessons from Lehman’s Collapse. Retrieved on August 25, 2017 from, http://time.com/money/3330793/lessons-from-lehman-brothers-collapse/
SEC (2010). Dodd-Frank Financial Reform Package. Retrieved on August 24, 2017 from, https://www.sec.gov/about/laws/wallstreetreform-cpa.pdfThe Guardian (2009). The Lehman Brothers Collapse: The Global Fallout. Retrieved on July 21, 2017 from, https://www.theguardian.com/business/2009/sep/04/lehman-collapse-global-impact
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