Lehman Brothers Case: Failure, Prevention and Recommendations

The recent credit crisis erupted in August 2007, with the failure of two Bear Stearns hedge funds, was a warning sign of what would follow. However, most firms did not take advantage of those signals to correct their weaknesses, and remained impassive to the new economic reality. Indeed, Lehman Brothers as one of them did not take the opportunity to reduce the risky mortgage portfolio, which in retrospect would prevent the future bankruptcy of the company. It was September 15, 2008 when Lehman Brothers filed for Chapter 11 bankruptcy and generated a tsunami of recession to financial markets. Johnson and Mamun (2012) refer, for example, that on the same day the stocks of banks and primary dealers declined by 2.90% and 6.00% respectively. Five years after the collapse of Lehman Brothers, financial markets still remain as vulnerable as it were on the eve of collapse. The paper seeks to address the exact factors that led to the failure and consequently the bankruptcy event of Lehman, as well as to examine whether it could have been prevented. Finally, research will make recommendations for going forward and ways to avoid another future failure of a financial institution.