Lehman Brothers Subprime Crisis free essay sample

Introduction The global financial crisis that erupted in September 2008 has thrown economies around the world into a recession. The root cause were sown in the credit boom that peaked in mid-2007, followed by the meltdown of sub-prime mortgages and securitized products. Fannie Mae and Freddie Mac were both taken over by the government and on September 24, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer. The fall of Lehman Brothers rattled the global market and led to a great drop in the United States (U. S. ) stock market the day after the announcement. The sudden failure of Lehman Brothers is widely viewed as a watershed moment in the global financial crisis of 2007 – 2009. With over $639 billion in assets and $613 billion in liabilities, it is one of the largest bankruptcies in the history of U. S. (Mamudi, 2008). Lehman Brothers was founded in 1850 by three cotton brokers in Montgomery, Alabama. The firm moved to New York City after the Civil War and grew into one of Wall Street’s investment giants. We will write a custom essay sample on Lehman Brothers Subprime Crisis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Lehman Brothers is a global financial services firm; the fourth largest investment bank in the U. S. Lehman Brothers’ clients is big institutions, not small individuals. It is an innovator in global finance, serving the financial needs of corporations, governments, municipalities, institutional clients and high-net-worth individuals worldwide. Lehman Brothers investment banking operations accounted for just 20 per cent of the company’s 2007 revenue while most of its net revenue comes from fixed income sales and trading; about 40 per cent. Some of the different fixed income investments that Lehman Brothers deals with include derivatives and swaps, mortgage-backed securities and futures (Callan, n. d. ). However, the investment management business still provides the stable earning base because of its fee-based structure. This term paper will further look into the how Lehman Brothers started off as an investment bank began getting entangled to the subprime mortgages and how it led to its bankruptcy. Lessons from the downfall of Lehman Brothers and the causes and consequences of the collapse will be highlighted in this paper. Subprime Mortgage Crisis The subprime mortgage market lends money to people who don’t meet the credit scoring for ordinary mortgages. For example, a FICO score less than 620 will disqualify the applications from loans at the prime rate. Since subprime borrowers mostly have poor credit history or low incomes, there is a greater possibility that the debts won’t be paid. Thus, making subprime mortgages risky for lenders. Therefore, to compensate the added risk, banks and other lenders charge higher interest rates on subprime mortgages. This made subprime lending very lucrative. Fannie Mae and Freddie Mac have led the mortgage industry in the 1990s promoting home ownership amongst lower income borrowers. The growth of subprime mortgage market can be attributed to a number of factors. The lower interest rates which resulted in home mortgage payments inexpensive led to a large number of demands for houses. Figure 1 show, a prolonged period of low interest rates which led to raise in house prices that was completely abnormal by historical standards. Banks searched for a method to meet the ever-increasing demand for mortgages and hence realized the perceived great profit opportunities in the real estate market. This prompted the innovation and design of new financial instruments and organizations such as securitized mortgage loans – mortgage backed securities (MBS), asset-backed securities (ABS) and collaterized debt obligations (CDOs) (Knutsen, 2011). As real estate prices rose in the early years of this decade and securitization provided more working capital for mortgage, lenders relaxed their underwriting criteria in order to issue more mortgages (Kirk, n. . ). During the refinancing boom from 2001 to 2003, interest rates fell, borrowing demand increased, mortgage lenders expanded their businesses, and new lenders entered the market (Krinsman, 2007). Figure 2 shows the significant increased in subprime lending from 2004 to 2006. With the U. S. housing boom well under way, Lehman Brothers acquired five mortgage lenders; including subprime lender BNC Mortgage. BNC is ranked as one of the nation’s top 100 mortgage lenders and the eighth largest wholesale subprime lender (Mortgage info, 2007). BNC Mortgage, as the subsidiary of Lehman Brothers Holdings Inc. ecame the biggest underwriter of U. S. bonds backed by mortgages. As securitization of mortgages increased, the investment banks urged the mortgage lending industry to increase their loan volumes. However, on August 22, 2007, Lehman Brothers decided to close down its subprime-lending unit; BNC Mortgage, causing about 1,200 employees to lose their jobs (Onaran, 2007). Figure 2: The downfall of Lehman Brothers Until 2007, Lehman Brothers has generated a significant portion of its revenue through the issuance of mortgage-backed and asset-backed securities. Lehman Brothers had grown increasingly reliant on its fixed income trading and underwriting division which served as the primary engine for its strong growth throughout the first half of the decade as shown in Exhibit 1 (Stowell, 2010). When the collapse of the U. S. subprime mortgage industry started, it result in credit crisis and the mortgage default rates began to rise and the demand for these securities began to disappear. Lehman Brothers was left with billions of dollars of rapidly depreciating securities on its balance sheet, forcing it to take large write downs and write-offs (Callan, n. d). As the credit crisis reupted in August 2007 with the failure of two Bear Stearns hedge funds due to a lack of confidence in its subprime mortgage holdings, Lehman Brothers’ stock fell sharply. As Lehman Brothers is one of the major players in the subprime lending, it faced a huge difficulty when the housing bubble burst. Lehman Brothers underwrote a huge amount of MBSs, accumulating an $85 billion portfolio, four times its shareholders equity (Investopedia, 2011). House prices began to decline while short-term interest rates rose and borrowers found themselves unable to pay higher monthly payments by refinancing began to default. The decline in mortgage payments also reduces the value of mortgage-backed securities which erodes the net worth and financial health of banks. Lehman Brothers suffered huge losses accrued in lower-rated mortgage-backed securities throughout 2008 (Anderson Dash, 2008). Another cause of the downfall could be due to the extremely high level of leverage and short-term debt financing. Lehman Brothers significantly increased its leverage over the same timeframe, going from a debt-to-equity ratio of 23. 7 times in 2003 to 35. times in 2007 as shown in Figure 3 (Stowell, 2010). While commercial banks are regulated and cannot leverage their equity more than 15 to 1, Lehman Brothers had a leverage of more than 30 to 1. So, as the leverage increased, the ongoing erosion of the mortgage-backed security industry began to impact Lehman Brothers greatly. In turn, the instability created by the leverage problem was aggravated by Lehman Brothers’ large use of short-term debt which financed m ore than 50 per cent of the asset shown in Figure 4 (Zingales, 2008). After the beginning of the crisis, Lehman Brothers tried to reduce its leverage and reduce its reliance on short-term debt, but it was a little too late. Lehman Brothers, the 158-year-old investment bank finally announced the largest Chapter 11 filing in U. S. history, listing assets of $639 billion and liabilities of $768 billion in September 2008. However, before the filing of Chapter 11, Lehman Brothers was said to be using an â€Å"accounting gimmick† to make it appear as if it had off-loaded risky assets and reduced its balance sheet during the height of the financial crisis. This gimmick is known as a â€Å"Repo 105†. This allows Lehman Brothers to use the booking of repurchase agreements as sales rather than temporary transactions (Evanson, 2010). Exhibit 1:   Lehman Brothers’ Financial Performance Since 1999 Source: Stowell (2010) Figure 3: Increase in leverage among investment banks Figure 4: Lehman Brothers Liabilities and Shareholders’ Equity Source: Lehman Annual Report Consequences and Lessons Lehman Brothers’ global footprint meant that thousands of financial market participants were directly impacted by its collapse. Numerous aftershocks were felt throughout the world resulting from numerous cross-border and cross-entity interdependencies. Lehman Brothers’ insolvency has resulted in more than 75 separate and distinct bankruptcy proceedings (PricewaterhouseCoopers, 2009). Lehman Brothers’ collapse has forced the market to reassess risk. There are many lessons learnt from the collapse of Lehman Brothers is the internal management structure of the company. Advice from Darryl Steinberg, the managing director and senior tax counsel to Lehman Brothers is for in-house tax professionals to be involved with the firm’s business managers from the outset. He said â€Å"Assisting with the firms organisation and structural planning and providing tax-sensitive input in establishing best business practices at the same time as the creation of those business operations is imperative in the highly regulated business world of today† (Snowdon, Steinberg, ; Lippman, 2009). Global rating agencies were widely condemned as being asleep on the job or being compromised by a system where their revenue derived from the very firms they were assessing. Closer supervision was called by the European Commission to ensue the publication of high quality credit ratings in the future (Allen, 2009). Finally, from this event, all banks should learn that nothing can be taken for granted. When there is signal of warning that the company might be in financial danger, the bank must take heed. References Allen, C. (2009). Lesson learned: one year after Lehman. Global Investor, 15 – 19. Anderson, J. ; Dash, E. (2008, August 28). For Lehman, more cuts and anxiety. The New York Times. Retrieved from http://www. nytimes. com/2008/08/29/business/29wall. html? em Evanson, D. (2010, April 12). Lessons from the collapse of Lehman Brothers. TheStar Online. Retrieved from http://biz. thestar. com. my/news/story. asp? ile=/2010/4/12/business/6017192;sec=business Investopedia. (2011). Case study: the collapse of Lehman Brothers. Retrieved May 4, 2011, from http://www. investopedia. com/articles/economics/09/lehman-brothers-collapse. asp Kirk, E. (n. d. ). The â€Å"subprime mortgage crisis†: An overview of the crisis and potential exposure. Retrieved May 3, 2011, from www. rli-epg. com/articles/Subprime-Mortgage-Crisis. pdf Knutsen, S. (2011). Why did â€Å"it† happen again? The American subprime crisis compared with the Norwegian banking crisis 1987-92. Past, present and policy: 4th International Conference. Retrieved from www. epr. org/meets/wkcn/1/1730/papers/KnutsenFinal. pdf Krinsman, A. (2007). Subprime mortgage meltdown: How did it happen and how will it end? The Journal of Structured Finance, 13(2), 1 – 9. Mamudi, S. (2008, September 15). Lehman folds with record $613 billion debt. The Wall Street Journal. Retrieved from http://www. marketwatch. com/story/lehman-folds-with-record-613-billion-debt? siteid=rss Mortgage Info. (2007). BNC Mortgage Inc. Retrieved May 3, 2011, from http://www. mortgage-info. us/lender_bnc_mortgage. htm Onaran, Y. (2007, August 22). Lehman Brothers shuts down subprime unit, fires 1,200. Bloomberg. Retrieved from http://www. bloomberg. com/apps/news? pid=newsarchive;sid=a87FPr78qX9w mp;amp;refer=news Snowdon, C. , Steinberg, D. , ; Lippman, M. (2009). Managing the bankruptcy of Lehman Brothers. International Tax Review, (49), 3 – 6. Stowell, D. (2010). Investment banking in 2008 (B): A brave new world. An Introduction to Investment Banks, Hedge Funds, and Private Equity, 403 – 417. Zingales, L. (2008). Causes and effects of the Lehman Brothers bankruptcy. Retrieved from http://www. scribd. com/doc/11096014/Causes-and-Effects-of-the-Lehman-Brothers-Bankruptcy

The Cause Essay Sample Is an Excellent Way to Understand an Intro to Essay Topic

The Cause Essay Sample Is an Excellent Way to Understand an Intro to Essay TopicThe cause essay is a great writing technique for college and high school students, but it is also useful in many situations where the writer needs to write a concise summary of some topic that is important to them. For example, if you're an English major writing an essay on the topic of literature, you can use the cause essay sample to help you remember and think about what it is that you are writing about.Because this essay is supposed to be used as a general topic, you don't have to worry about doing research. There isn't any real depth or meaning in the topic, so everything is going to be used as a guideline for the outline that will lead into the body of the essay. For example, it's easy to get sidetracked by all the wonderful world-building that you're going to read about; therefore, you'll want to make sure that you take your time before you start reading.If you have enough time to read, you can loo k up more information in a more informative way by reading something related to the topic that you're currently focusing on. This is not an effective way to use a cause essay sample. You want to move on from the introduction to the body, not dwell on it.When you are working with the cause essay sample, it's easier to use a preface at the beginning to sum up what the essay is about. Then you can go over all the information again later to make sure that you still understand what the essay is about. It also helps to start out with a conclusion that will answer the question that you're trying to answer.To summarize, the cause essay is a way to summarise a general topic for you to think about what your overall objective is for your essay. If you've taken the time to sit down and write the theme and outline of your essay, it's also a good idea to take the time to work over your thesis statement. By putting your overall thesis down in the body of the essay, you're able to refer back to it at any time to help you remember your writing style.It's important to remember that a thesis statement doesn't exist in the essay format. You'll find that the cause essay sample is very similar to the thesis statement used in academic essays, but there is an added twist. It's always better to read the cause statement over before starting to write your essay, so that you can make sure that you understand it. By doing this, you won't have any problems trying to make sense of your essay later.It's also possible to use the cause essay sample as a means of summarising your thesis statement. All that you need to do is to open your sample essay and you'll see that there is a table that will show you which chapters and sentences contain what keywords. These keywords are important because they will give you a way to easily remember what you're looking for. The last thing that you want to do is to waste time or effort researching keywords that aren't relevant to your topic.With these three ti ps, you'll be well on your way to understanding what this basic introduction to essay writing is all about. By using the cause essay sample as a guide, you'll be able to produce an effective outline, easily work over your thesis statement, and provide yourself with the knowledge that you need to help you in your essay. Now go create a great introduction to your paper and start writing!

The detective genre Essays

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Recommendation letter Essay Example | Topics and Well Written Essays - 250 words - 1

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Academic writing Essay Example | Topics and Well Written Essays - 1000 words

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Personal Impact Term Paper Example | Topics and Well Written Essays - 1250 words

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Human Function: Aristotle’s Basis for Ethical Value Essay -- Philosoph

Human Function: Aristotle’s Basis for Ethical Value I. Aristotle’s Virtue Ethics Depend on the Human Function Aristotle presents a system of virtue ethics in Nicomachean Ethics. This work presents a prescriptive theory with the aim of showing how humans may reach a proper state of happiness in which the natural human end is fulfilled. This end is regarded as an end in itself to which subordinate ends are related. This master end itself is understood as a type of activity rather than a state that can be achieved with a limited series of actions, and this activity is described as a general practice of acting well in accord with reason. The Ethics launches an inquiry into what makes human happiness, or eudaimonia, possible, and Aristotle believes this is the highest good for mankind. Aristotle expresses this good as being the highest end that action reaches for, which is something self-sufficient, and he suggests that to understand action we should understand function. He presents his concept of the human function and says that humans must function well in order to reach the highest good. Funct ioning well is what is understood as virtue, and so his system of virtue ethics is overall concerned with humans functioning well. Functioning well is seen as aiming at a mean between excess and deficiency. The virtue of a thing is understood in terms of its function. A function fulfills a need, and a need is met by being provided the right amount of something but not too much or too little. This is why a craftsman designs goods without excess or deficiency — so that they will function well — and likewise human virtue must be understood as aiming between excess and deficiency. So the Nicomachean Ethics develops a system where all val... ...ve. Indianapolis: Hackett Publishing Company, 1998. Aristotle. Nicomachean Ethics. Trans. David Ross. New York: Oxford University Press, 1925. Irwin, Terence. Aristotle’s First Principles. New York: Oxford University Press, 1988. Kraut, Richard. Aristotle on the Human Good. Princeton: Princeton University Press, 1989. MacIntyre, Alasdair. After Virtue. Notre Dame: University of Notre Dame Press, 1981. Plato. Protagoras. Trans. Stanley Lombardo and Karen Bell. Indianapolis: Hackett Publishing Company, 1992. Reeve, C. D. C. Practices of Reason: Aristotle’s Nicomachean Ethics. New York: Oxford University Press, 1992. 1 C. D. C. Reeve, Practices of Reason: Aristotle’s Nicomachean Ethics (New York: Oxford University Press, 1992) 124. 2 Richard Kraut, Aristotle on the Human Good (Princeton: Princeton University Press, 1989) 313-16. 3 Reeve 125-26.