Sample Case Study on Lehman Brothers’ Bankruptcy

 Lehman Brothers’ Bankruptcy

Lehman brothers’ bankruptcy was considered as the largest in the history of economics. This is because the company’s assets were more than those of the previous giant firms to file for bankruptcy such as Enron and WorldCom. The company was also the fourth-largest investment bank in the U.S.

Why filing for bankruptcy was necessary

The move to file for bankruptcy is attributed to subprime mortgage.  From 2003 to 2004, there was a housing boom in the U.S. At this time, this investment bank acquired five major mortgage lenders that included subprime lender and Aurora Loan. At first, the acquisition seemed lucrative. The bank reported profits from 2005 to 2007 with net income rising to $4.2 billion.

Colossal miscalculation

The stock of this bank reached $86.18 as of February 2007. This gave the company market capitalization of almost $60. Unfortunately, the housing market in the U.S already had cracks by almost the same time. Subprime mortgages had defaults that rose to even 7-year high.

On 14th March 2007, one day after its stock recorded the biggest drop in a day for five years, Lehman’s brothers recorded profit and revenues for the first financial quarter. The chief financial officer of the company stated that the company was containing home delinquencies and their impact on the earnings of the firm would be minimal. The officer also said that there were no foreseeable problems posed by subprime market to the U.S housing market and that this would not affect the U.S economy negatively.

The end

The credit crisis that started in August of 2007 caused a sharp fall of the Lehman’s stock. During this month, Lehman’s brothers got rid of 2,500 jobs related to mortgages. It also shut the BNC unit down. Three Alt-A Aurora lender offices were also closed.

However, the company continued to be among the major players. For instance, in 2007 the firm accumulated an $85 billion portfolio by underwriting mortgage backed securities. With the new highs of the worldwide equity markets and fixed income assets prices, the stock of this company rebounded. Nevertheless, this firm failed to take advantage of this to trim the mortgage portfolio which was its last chance.

The huge mortgage securities portfolio of this company made it more vulnerable to the deteriorating conditions in the market. Its shares fell to a low of 48% on 17th March 2008 when Bear Sterns, the second-largest mortgage-backed securities underwriter was near-collapse. This forced the firm to issue preferred stock convertible to Lehman shares but the stock continued to decline.

This trend continued and in September 2008 the stock plunged to 77% with the company reporting losses worth $3.9 billion. On 13th September, Lehman, Bank of America and Barclays PLC made the last efforts to facilitate the firm’s takeover but they were unsuccessful.

On 15th September, the stock of this company plunged to 93% forcing it to be declared bankruptcy.

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