The largest bankruptcy ever seen in US history was fulfilled by Leman Brothers and its furcations were felt throughout derivatives markets. Until the end of Leman Brothers everyone expected that they would survive. Despite the fact that several companies such as Korean Development bank or Barclays Bank expressed interest in buying it, however no one was able to close the deal. Many people expected that the US government will have to bail it out if no one would purchase Lehman Brothers or you could even hear that it is “to big to bankrupt”. However it did not work that way.
What were the reasons of Leman Brothers failure? There were several: risky investments, liquidity problems and high leverages. Lehman Brothers was an investment bank and contrary to commercial banks was not subject to the regulations on the amount of capital they must keep. Leman’s CEO, Dick Fuld, was responsible for aggressive and risky deal making, this caused that by 2007, its leverage level increased to 31:1. So, it means that a decline in assets by 3 – 5% would sweep its capital. He used to incite his employees every day to act as it was a battle and they had to kill the enemy. In 2007, Chief Risk Officer at Lehman Brothers was from the executive committee ignoring the fact that he was competent. Lehman Brothers was taking risks by including large positions in the instruments developed from subprime mortgages. Most of the operations were funded by short - term debts. Bankruptcy was compelled by lenders who refused to overturn their funding, as they saw a lack of confidence in the company.
Lehman Brothers was very functional in the over – the – counter derivatives markets. Around 8000 different counterparties were involved in the trading process with hundreds of thousands of transactions outstanding. Often Lehman’s counterparties were required to give a certain collateral which under many circumstances was used for various purposes. Sorting out who owes what to whom becomes a huge challenge.
