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Failure Story of Lehman Brothers
SUBMITTED BY:
ALI ASGHAR
JAWAD ALI
UMER SHAEES
SUBMITTED TO
Ma,am Amna Saleh
NATIONAL UNIVERSITY OF MODREN LANGUAGES
ISLAMABAD
DECEMBER 22, 2022
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Failure Story: Lehman Brothers' Collapse in 2008
Lehman Brothers is a bank that ranked the fourth investment house in the U.S. It filed
for bankruptcy on September 15, 2008. The firm has made significant contributions to
the present financial crisis around the globe.
Why it failed:
⦁ Excessive risk: The firm specialized heavily in lending and securitization for subprime
mortgage packages by taking high-risk loans to MBS.
⦁ Over-Leverage Lehman traded with an over-optimistic high leverage ratio:
It was borrowing much higher than its ability to be sustained.
⦁ Lacking in Liquidity:
When the market turned the other way, it had no ease of meeting some obligations, and
therefore started running short of liquidity
⦁ Inadequate Risk Management:
Lehman underestimate risks from investments by it and no good steps have been taken
to help mitigate that.
⦁ Unchecked Regulation:
Absence of regulatory controls and checks on Lehman activities allowed unsafe
practice with minimum intermedial intervention.
⦁ Aftermath:
Liquation of assets to the tune of $600 billion. Severe loss of jobs and investors.
This gave birth to recession because it completely wiped off the public confidence in
the financial system.
Learning Outcomes:
⦁ Risk Management Implementation:
Institutions should implement good risk assessment frameworks that may better
identify and mitigate threats from potential risks.
⦁ No Over-leverage:
Healthy debt levels should be maintained to avoid the likelihood of insolvency in a
market downturn.
⦁ Transparency and Reporting:
Full reporting of financial activity as well as risks to infuse stakeholder confidence as
well as oversight.
⦁ Regulatory Oversight:
Stronger regulations and enforcement are necessary to avoid unchecked risky behavior.
5. Liquidity Management: Institutions must maintain adequate liquidity buffers to handle
sudden financial stress.
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Recommendations:
1. Strengthen Risk Governance:
Create a dedicated risk management committee within the bank's board.
2. Stress Testing:
Conduct regular stress tests to assess resilience under various economic scenarios.
3. Transparency Improvement:
Enhance disclosure requirements about sophisticated financial products.
4. Capital Adequacy:
Adhere to Basel III capital reserve requirements.
5. Regulatory Reforms:
Strengthen supervisory controls and impose stiffer penalties on violators thereof.
6. Emergency Preparedness:
Design contingency plans in case of liquidity crises and other systemic risks.
The collapse of Lehman Brothers represents the dangers of uncontrolled risk-taking as
well as the need for strong governance and oversight of the banking industry.
