Lately Lehman Brothers, among the five largest investment banks in the USA, had grown increasingly reliant on its fixed income trading and underwriting division, which served as the main engine for its strong profit growth.
As leverage amplified, the ongoing erosion of the mortgage-backed sector started to influence Lehman appreciably and its stock price plummeted. Regrettably, public outcry over taxpayer premise of $29 billion in potential Bear losses made repeating this kind of move politically untenable. The surreal scene of potential buyers traipsing into an investment bank's headquarters over the weekend to consider various merger or spin-out scenarios repeated itself.
The Fed's desperate attempts to organize its second saving of a leading U.S. investment bank in six months failed when it refused to backstop losses from Lehman's toxic mortgage holdings. Complicating matters was Lehman's reliance on short-term repo loans to finance its balance sheet. Unfortunately, constant renewal was required by such loans by counterparties, who had grown increasingly nervous that Lehman would lose the ability to make good on its trades. With this thought swirling around Wall Street, Lehman was forced to announce the biggest Chapter 11 filing in U.S. history, listing assets of $639 billion and obligations of $768 billion. The second domino had fallen. It would not be the last.
PUBLICATION DATE: March 06, 2009 PRODUCT #: KEL380-HCB-ENG
This is just an excerpt. This case is about FINANCE & ACCOUNTING
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