Lehman Brothers Scandal

Lehman Brothers Scandal:

The collapse of Lehman Brothers Holdings Inc. (LEH) had a crippling effect on the global economy with the financial crisis escalating to other parts of the world. In the aftermath of this event, financial institutions froze lending activities thereby creating liquidity problems in the shadow banking financial system. In 2003 and 2004, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation).The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices. The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy. This collapse was done by Chief Executive Officer Richard Fuld.

Reason behind the scandal:

• ·        Asset-backed securities (ABS) and Collateral debt obligations (CDOs)
• ·        Lehman underwrote mortage-backed securities more than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity
• ·        Leverage levels up to 20-35 percent of their equity capital in order to invest on securitized products using debt capital
• ·        Excessive risk-taking
• ·        Passing the investment risks through unregulated ‘credit default swaps’ (CDS) where they didn’t have any adequate capital behind them.(AIG case)
• ·        Weakness of the FED to recognize the economic catastrophe that Lehman Brothers bankruptcy would cause.