TOO BIG TO FAIL

Too big to fail: why was lehman brothers allowed to fail and its impact on global financial market?

Acknowledgement

I wish to express sincere gratitude to ______ for his valuable help on the paper. I accept alll errors as my responsibility.

Abstract

Too Big To Fail: Why was Lehman Brothers allowed to fail and its impact on global financial markets?

Essentially, the financial system is of systemic importance to the economy. The stability of the system is therefore in the public interest. Consequently, the system is subject to regulation and supervision. Today, I intend to dwell on one particular issue, which is founded on a simple question: Why was Lehman Brothers allowed to fail? I wish to start with this question because the collapse of this investment bank on Monday, 15 September 2008 was one of the factors which turned the period of turmoil in the financial markets that started in summer 2007 into a full-blown crisis. Following the failure of Lehman Brothers, panic set in that any bank, irrespective of its size, could go bankrupt. Market participants revised their investment decisions. The banks themselves started to fear that any of their counterparties could fail and stopped lending money to each other, causing the interbank market, which had already been under stress for months, to dry up. In the four weeks following the bankruptcy of Lehman Brothers, the European stock exchanges plunged by around 30%, more than the total fall recorded over the previous 12 months.

Table of Contents

Acknowledgement2

Abstract3

1.Introduction6

2. What triggered the crisis?8

2.1 The international nature of the finance industry9

2.3 Underestimation of risks14

2.4 Opacity of balance sheets15

Chapter 2: Literature Review18

Chapter 2: Literature Review18

3. Financial Crisis18

4. The Decline of the Best19

5.The Fate of Family20

6. Intermediation and risk management knowledge prior to the 2007 financial crisis24

7. Problems of knowledge for banks and bankers during 2007-2009 crisis29

7.1 Bank board, top management31

7.2 Hindsight post crisis34

7.2.1 Problems of knowledge and understanding with bank products34

7.2.3 Problems of knowledge and understanding in markets37

7.3 Banking vulnerabilities revealed by the crisis39

8. Immediate reactions to the crisis of 200841

9. The Big Question: Reasons for Global Recession?44

9.1 Bubble that burst…46

10. What complicated the matter?47

10.1 Mayhem in the banks50

Chapter 3: Methodology52

11. Developing a conceptual frame for knowledge creation and use in banks52

11.1 Case examples of banks54

Chapter 4 : Analysis59

12. Dynamic creation of bank knowledge and capabilities59

12.1 The nature of bank knowledge and its role in intermediation63

12.2 Resource-based view - a theoretical view of the role of knowledge in bank advantage66

Chapter 5: Conclusion71

13. Remarks71

14. The Lessons of Culture and Its Discontents72

15. A Firm with Nine Lives74

16. Proud Underdogs77

17. An Underdog-Eat-Underdog World79

Chapter 5: Recommendations82

18. Long Term Policies82

19. Recommendations87

Bibliography94

Chapter 1: Introduction

Introduction

Like many Lehman Brothers veterans, I spent the weekend before the firm declared bankruptcy glued to Bloomberg News, expecting a miracle. Lehman had bounced back from many near-death experiences in the past. Not this time. From Lehman's spin-off from American Express in 1994 until the collapse in 2008, net revenues climbed from a little under $3 billion to more than $19 billion, and headcount went from 8,500 ...