The Collapse of Lehman Brothers

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Case Details:

Case Code : FINC051
Case Length : 17 Pages
Period : 2006-2008
Pub. Date : 2009
Teaching Note : Available
Organization : Lehman Brothers
Industry : Banking & Financial Services
Countries : US

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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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Introduction Contd...

The Korea Development Bank (KDB)⁵ which had earlier evinced an interest in purchasing a 25% equity stake in Lehman announced that it had withdrawn this offer. KDB backed off stating that the price Lehman quoted was too high and hence it was not interested in purchasing the stake because of bad market conditions.

Lehman's shares plunged by almost 45% from US$ 14.15 to US$ 7.79 after KDB's announcement.⁶ Lehman could not manage to restore confidence in the markets and raise capital by selling a part of its equity stake and eventually had to file for Chapter 11 bankruptcy.

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While many analysts attributed different reasons for the collapse of Lehman, most of them agreed that the then ongoing subprime crisis was a root cause. Analysts claimed that the move by JP Morgan Chase (JP Morgan)⁷ to freeze Lehman's assets days before the bank filed for bankruptcy was one of the factors responsible for Lehman's collapse.

They claimed that the bankruptcy could have been avoided if JP Morgan had not frozen Lehman's assets, which had led to a liquidity crisis.

The Subprime Crisis

In order to overcome the crisis caused by the dot com burst⁸ and 9/11 attacks⁹, the US government adopted a policy of credit driven consumption led growth for its economy. To stimulate consumption, American policy makers started slashing interest rates to ease the liquidity in the system from late 2001.

Excerpts >>

5] Korea Development Bank is a state-owned bank in Korea which was founded in the year 1954.

6] "Lehman to Report Results Early after Stock Dives," www.business.theage.com.au, September 10, 2008.

7] JP Morgan Chase is an American bank founded in the year 1799. It recorded revenue of US$ 116.35 billion for the year 2007.

8] The dot-com crash generally refers to the period from March 11, 2000, to October 09, 2002. The technology heavy NASDAQ composite index lost nearly 78 percent of its value during this period.

9] On September 11, 2001, there was a series of terrorist attacks in the US. Hijackers, who took control of four US domestic commercial airliners, crashed two planes into the World Trade Center in Manhattan; the third aircraft crashed into the US Department of Defense headquarters at the Pentagon, and the fourth into a field in Somerset County, Pennsylvania. The attacks resulted in 2,973 fatalities and property owners and insurers incurred losses running into billions of dollars.

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