This Case is about INTERNATIONAL BUSINESS
PUBLICATION DATE: March 06, 2009 PRODUCT #: KEL380-HCB-ENG
Recently among the five biggest investment banks in America, Lehman Brothers, had grown increasingly reliant on its fixed income trading and underwriting section, which functioned as the main engine for its strong profit increase. As leverage improved, the continuing erosion of the mortgage-backed sector started to affect Lehman considerably and its stock price plummeted. Sadly, public outcry over citizen premise of $29 billion in possible Bear losses made replicating this kind of move untenable. Â The Fed’s desperate efforts to organize its second saving of a leading U.S. investment bank in six months failed when it refused to backstop losses from Lehman’s hazardous mortgage holdings.
Complicating matters was Lehman’s reliance on short term repo loans to fund its balance sheet. Sadly, continuous renewal was needed by such loans by counterparties, who had grown increasingly nervous that Lehman would lose the skill to make good on its trades. With this thought swirling around Wall Street, Lehman was compelled to declare the biggest Chapter 11 filing in U.S. history, listing assets of $639 billion and obligations of $768 billion. The second domino had dropped. It wouldn’t be the last.