The Collapse of Lehman Brothers
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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.
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Abstract:
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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.
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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:
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
The Collapse of Lehman Brothers
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