What Caused the Collapse of Lehman Brothers?

On September 15, 2008, the fourth largest investment bank in the U.S., Lehman Brothers (holding over $600 billion in assets) filed for Chapter 11 bankruptcy protection, the largest bankruptcy filing in the history of U.S. This had raised series of questions and concerns by many renowned experts and players in the international banking community. Lehman increasingly turned to Repo 105 to manage its balance sheet and reduce its reported net leverage, after burdening itself with a huge volume of illiquid assets that it could not readily sell. Lehman’s acquisition of illiquid assets was also the subject for investigation relating to the liquidity and valuation issues. While Lehman’s risk decisions were within the business judgment rule and did not give rise to colorable claims, those decisions were described in retrospect by many experts as poor judgment. Going forward, there is the need for regulators of financial institutions to eliminate the gaps in their financial regulatory framework that allow large, complex, interconnected firms like Lehman to operate without robust consolidated supervision.