by elycefeliz

Question by Lauren L: what is the cause of lehman brother’s financial trouble?
what decisions did Lehman Brothers, Bear Stearn’s and Merrill Lynch make that led them to financial trouble?

Best answer:

Answer by HJ Bear
Somewhat applicable to the industry as a whole
1) thin capital base to start
2) investments in alt-a mortgage loans and commercial real estate soured. in better times, they made good money buying assets and reselling for a profit; but the music stopped. they were also “hung” with a lot of bad corporate bridge loans.
3) financed themselves very aggressively with repo loans from other financial institutions which could get called quickly
4) the investment banks attempted to hedge some of their sub-prime and securitization risk with third parties (such as MBIA, SCA) who lost their AAA credit rating due to sub-prime crisis
5) underwriting profits came to a halt

More specific to Lehman
6) they did not raise capital (dilutive to current shareholders) and tried to ride out storm. Even when they were close to the abyss, they were high-handed when the Korean Development Bank was considering an investment
7) they lost credibility because they were seen hiding the ball
8) short sellers may have exacerbated the perceptual issues. the ban on certain types of short selling had been lifted a week before they blew up.
9)The recent conservatorship of FNMA and Freddie may have destabilized access to funding. The form of rescue by the Treasury inadvertently chilled the potential for other financial institutions to tap the equity markets
10) The US Treasury Dept and Fed Reserve, stung by criticism about their handling of Bear Stearns, took a tough line on aiding Lehman. Their desire to administer tough love to the capital markets backfired when none of the rescuers stepped up to the plate.

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