Lehmans

Lehman’s.

The hardest part of this project was trying to get all the information we felt necessary into the presentation to put our point across. The amount of information on the topic is vast. Most of my research was from the chapter 11 case. My initial task in the project was to help find out what the business plan of Lehman’s was before its collapse.

The Lehman model was not unique. It followed the high risk – high leverage - high return model used by the other Wall Street Investment Houses.

The Lehman strategy leveraged shareholders cash with the objective of building a large securities portfolio. So from 2002 onwards, Lehman built a proprietary presence in the mortgage-backed securities market. Increasingly, their profits (and those of their competitors) would depend more on proprietary bond trading and in ever more complex instruments. In the period from 2004 to 2007, Lehman’s Balance Sheet ballooned by over $300 Billion to a level of $700 Billion. At one point, Lehman's were leveraged at a ratio of 44:1. By September 2008 this ratio had improved to 28:1. Even at this lower level, the bond market had only to fall by 3.5% for Lehman’s share capital to be completely burned which unfortunately for Lehman’s it did.

We have attributed the primary causes of Lehman’s failure to 3 main reasons: Leverage, Liquidity and Losses. We all looked at each aspect I personally concentrated on liquidity. From my readings in chapter 11 I found the instability created by their leverage problem was exacerbated by Lehman’s extensive use of short-term financing. As it was not a commercial bank Lehman’s had no stable deposit base. Their daily overnight cash-funding requirement was regularly over $20 Billion. Over time, the quality of their collateral deteriorated as the property / residential mortgage market declined. This was far too risky and eventually lead to there demise.

I also looked at the infamous question “Were they to big to fail” obviously not! Government...