Before the Fall: Lehman Brothers 2008 Harvard Case Solution & Analysis


Lehman Brothers is the fourth largest investment bank in the USA. It started its operations in 1849 and is considered as the oldest investment bank in the industry. The major source of revenue of the firm is through fixed income and more than 50% revenue of the firm comes through fixed income.By the end of year 2007, the firm used to generate most of the revenue through asset backed mortgages and securities. The credit crisis resulted in the collapse of subprime mortgage industry, which affected the company adversely by reducing the asset side of the balance sheet with billions of dollars.

Problem Identification

The major source of the firm is from asset backed mortgages and securities. By the end of year 2007, the firm was generating about 64% of total revenue from asset backed securities. The credit crisis resulted in the collapseof subprime mortgage industry and by the end of 2nd quarter of the year 2008, the revenue from the asset backed securities decreased to 54%, which left the company with cash flow problems. In order to deal with the cash flow problems, the firm sold its common shares and preferred stock, which resulted in the increased value of leverage and created more problems for the company as most of the investment banks and firms refused to work with Lehman Brothers.

Situation Analysis

Lehman Brothers is the fourth largest investment bank in the US.  The main source of revenue generation of the firm is through asset-backed securities and mortgages. It is expected that more than 50 % revenue is generated through fixed income. The credit crisis had hit the US financial market and this resulted in the bankruptcy of certain investment banks like Bear Stearns.

The reason behind the bankruptcy of investment banks is due to being highly leveraged and highly dependent upon asset backed securities. Credit crisis resulted in the collapse of US subprimemortgage industry, which decreased the value of mortgages and put pressure on the companies by lowering the value of asset sides of the balance sheet of these companies. The decrease in asset sight increased the leverage ratio and also increased the cash flow problems.

The CFO of the Lehman Brothers does not forecast the credit risk efficiently and credit crisis affects the company greatly by decreasing the value of asset-backed mortgages and increasing the leverage ratio. In order to cope with cash flow problems, Lehman Brothers sold its common stock and preferred stock of worth 6 billion dollars, which increased leverage ratio and asserted more pressure on the firm by creating cash flow problems.

The firm used to finance the short term operations through Repo finance. The condition became worse for the company when other investment banks and financial institutions refused to provide finance in order to run day to day operations and it created further problem for the company.

Investment Management

Lehman Brothers used to generate more than 50% of its revenue from fixed income. Instead of decrease in mortgage values and asset backed securities, Lehman managed its assets in such a way that the assets of the Lehman are 24 times more than the shareholders’ equity. It is a plus point for Lehman as it is able to offset some of the uncertainty however, Erin Callan the CFO of the company did not manage the risk related to credit crisis and he was dependenton the value at risk in order to forecast and manage the risk.


Lehman Brothers is the fourth largest investment bank in US. The market share of the company is highest for asset-backed mortgages, which gives the firm a competitive advantage over the other investment banks. Lehman Brothers is the oldest company in the financial market of the US and having great impact upon mortgage industry with having greater mortgage assets and greater human capital. The company has sufficient resources to fight back against this credit crisis. The current CFO of the company only uses value at risk in order to forecast the future uncertainties, therefore the firm needs a good leader with extraordinary skills. There is a need to follow the principles of corporate governance so that no such falsifying and fraudulent activity occur in future.

Before the Fall Lehman Brothers 2008 Case Solution

The company should manage the needed funds from federal reserve’s department of the US government by claiming that the failure of the firm will result in the loss of job of thousands of employees, which exerts pressure on the government by increasing the unemployment ratio and it is expected that the failure of the firm will also create uncertainty among the other investment banks..........................

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