On September 15, 2008, the fourth-largest US investment bank, Lehman Brothers filed the largest bankruptcy petition to date. The nearly 158-year-old Firm was originally founded in 1850 by Jewish immigrant brothers Emanuel, Henry and Mayer Lehman, and successfully survived several monumental economic crises—such as the railroad bankruptcies, the Great Depressions, and the fall of Long-Term Capital Management. In fact, until June of 2008, Lehman Brothers Inc had not once reported a quarterly loss. Therefore the bankruptcy of Lehman Brothers came as a shock for markets around the world, causing them to take a plunge once Lehman Bothers Inc filed Chapter 11 with the US Bankruptcy court. Now how could the giant investment bank succumb to a bankruptcy estimated to be at 613 billion dollars?
One of the instrumental causes of Lehman’s bankruptcy was the sub-prime mortgage crises that was sweeping through both the Global and US economy. In essence, people who possessed low credit scores were being given loans that they were essentially unable to pay back, creating a massive credit crisis for Lehman. With plummeting real estate prices accompanying the massive credit crisis, the investment bank lost over 60 billion dollars in bad real-estate loans.
In addition to the sub-prime mortgage crises, the collapse of Lehman brothers is often said to be triggered by the refusal of other banks to partake in business transactions with the Lehamn brothers. Because of the high risk entailed in providing housing loans to consumers with low credit scores and the rise of interest rates, when Lehman Brothers began to suffer losses, other banks ended all trading with the Lehman Brothers causing the investment bank to essentially lose almost all its business.
With that being said, the most prominent reasons for the collapse of the investment bank, in my opinion is that of the hubris of Richard Fuld, the CEO of Lehman Brothers. Despite the conspicuous signs that Lehman Brothers was heading towards a crisis, Fuld continued to reject bids intended to save Lehman in hopes that buyers would recognize that his bank was worth much more than Wall Street was giving it credit for. In fact, many analysts have stated that had the bank been sold just a week before it filed Chapter 11, it could have in fact avoided the disgrace of bankruptcy. However, Fuld was acting too selfish to see reason and as a result the 158-year-old investment giant is no more.
Sources
http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoil/index.html
http://news.bbc.co.uk/2/hi/business/7615974.stm
http://www.guardian.co.uk/business/2008/sep/15/lehmanbrothers.marketturmoil
Nina's Econ Blog! 
October 4, 2009 at 10:45 am
I thought that this article was very well constructed and showed lots of insight, Nina. Good job. I espacially liked the detail of your reasons for the bancruptcy of LB. It was very interesting and educational, due to your detail and descriptiveness of economic terms, such as the “sub-prime mortgage crisis.”