LEHMAN BROTHERS COLLAPSE

Lehman Brothers Collapse



Table Of Content

Abstract3

Introduction4

Background of the study4

Aims and objectives4

Literature review5

Data and methodology6

Quantitative Tests and Results9

Discussion11

Lehman Brothers Unable to Solve its Problems14

Financial Crisis hits the United States and the World15

U.S. Regulatory Reform Recommendations20

Global Reforms22

Recommendation26

Conclusion27

Lehman Brothers collapse

Abstract

This study tests the market efficiency theory by examining the effect of the Lehman Brothers bankruptcy on several brokerage firms, as well as the overall market. It would suggest that these brokerage firms would occur negative stock prices following the announcement of the Lehman Bankruptcy. For this study, I analyzed 15 firms' stock price's risk adjusted rate of return before and after September 15, 2008, some with larger assets in Lehman than others. Results show stock prices dropping approximately 24 days prior to the announcement and continuing to drop for several weeks. This supports the semi-strong market theory; which suggest that the market anticipated the collapse of Lehman.

Introduction

When Lehman Brothers collapsed, they had about $60 billion in toxic bad debts, and had assets of $639 billion against debts of $613 billion; making it the largest investment bank to collapse since the 1990's. With a bankruptcy of this capacity, you would expect the stock market to take some sort of hit. This study examines the market's reaction to this event by analyzing the risk adjusted return of selected brokerage firms' stock prices around the event date of September 15, 2008.

Background of the study

A year ago this week, the US government allowed Lehman Brothers to collapse, creating a crisis of confidence that swept across the world. The UK's biggest mortgage lender HBOS had to be rescued by the Government while the US government was forced to step in to save AIG, the world's biggest insurer. Stock markets across the world tumbled, the FTSE100 fell from 5,400 to 3,500, while the fallout from structured products backed by Lehmans, KSF loM offshore bonds and the AIG enhanced fund asked the industry awkward questions about the way retail financial products had been marketed and the disclosure of investment risk.

Aims and objectives

To addressing this issue this paper attempts to achieve a number of aims.

The primary aim of this study is to find out the cause of collapsed of Lehman Brothers.

Find why Lehman Brothers failed when it invested heavily in the sub prime mortgage market.

To find what was the effect of the collapsed of Lehman Brothers on the global market?

Most people point that the collapse of Lehman Brothers as the beginning of the current financial crisis, prove it.

Literature review

The concern for Lehman Brothers started as early as March, with the collapse of Bear Sterns. The recent collapse of large investment banks are the result of the sub prime mortgage crisis, which actually started about a year ago. That's when the first signs that the soaring U.S. housing market was weakening. Interest rates began to increase, the economy weakened, which turned indebted homeowners into financial turmoil sparking foreclosures and rapid drops in house prices. Lehman Brothers were considered one of Wall Street's biggest ...