Lehman Brothers: A Detailed Analysis of the Financial Crisis of 2008

This report provides a detailed analysis of the Lehman Brothers' financial crisis of 2008, examining the key factors that led to the company's bankruptcy. It begins with an introduction to Lehman Brothers, highlighting its position as a global financial service firm and the circumstances surrounding its collapse. The report then delves into the causes of the crisis, including the acquisition of mortgage lenders, the subprime mortgage market, and the subsequent impact on the US housing market. The discussion section covers Porter's Five Forces, SWOT analysis, managerial performance, and stockholder analysis to provide a comprehensive understanding of the situation. The report also includes a valuation and ratio analysis of Lehman Brothers, offering insights into the financial health of the company. Finally, the report concludes with a summary of the key findings and recommendations for preventing similar crises in the future.

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Name of the student:
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Author Note:

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Lehman Brothers Porter five forces.......................................................................................3
Lehman Brothers fall SWOT analysis...................................................................................3
Managerial performance and stockholders analysis..............................................................4
Valuation and ratio of Lehman Brothers................................................................................5
Conclusion..................................................................................................................................6

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Introduction:
The assignment deals with the company which is the Lehman Brother holdings Inc. is
referred to as the global financial service firm. In the financial year 2008, Lehman is referred
to as the fourth largest investment bank company in the United States. The products of the
bank are equity and trading, investment banking, private equity and private banking. Due to
significant financial crisis in the year 2008, the company went bankrupt. Lehman Brother was
known for the investment banking and equity business in the Middle East and Europe. With
the amount of $639 billion in assets and $619 in equity the Lehman Brother bankruptcy was
filled in the history after the scam of the Enron and WorldCom.
The commencement of such huge mistake started in between the year 2003 and 2004
when Lehman acquired five mortgage lenders which further includes the subprime lenders of
the Aurora loan Services and BNC mortgages. Then a colossal problem took place within the
market which is subprime mortgage loan was provided a poor credit rating. There is actually
less chance that the subprime borrowers will pay of to the lenders at higher rate of interest.
This is the actual reason behind such crash in the US market in the year 2018 consisting
artificially low rates in the first couple of years. The problem took place in United States in
the subprime markets which further spread to rest of the housing market or rather hurting the
economy of US at the same time.

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Discussion:
Lehman Brothers Porter five forces
 Fall in competitive rivalry – The fall in competition of the Lehman brothers is further
based on the diversity in the development of the sectors and barriers related to the
entry in the market. The company also certain weakness in the strategies while
competing in the market (Gitman, Juchau and Flanagan 2015).
 Threat of new Lehman Brothers fall entrance – It was an opportunity for the Lehman
Brothers to create barriers for the new entrance in the industry. There are certain
elements which are the cost of raw material, culture and technical standard affect the
new entrance from entering into the market.
 Threat of Substitute products – The fall in the products of Lehman Brother were
another reason which are readily available in the market at far better price. The price
and products of the other competitive companies were far better than that of Lehman
Brothers (Cochrane 2017).
 Bargaining power of suppliers Lehman Brothers fall – basically the powerful
suppliers poses more power which further creates value to the quality and price of the
products. This further led to compromising the quality and price for the Lehman
Brothers.
 Lehman Brother fall in bargaining power of customers – Due to the effective
bargaining power of the supplier, where most of the customers felt that the company
is heavily dependent on its customers. This is the reason behind the fall in Lehman
Brothers as the clients were aware about this situation (Härdle, Chen and Overbeck
2017).

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Lehman Brothers fall SWOT analysis
The SWOT analysis referred to as the strength, weakness, opportunity and threat
which the Lehman Brothers faced during such time of downfall (Pilbeam 2018).
 Lehman Brother fall in Strength – The Company was struggling to hold a good
command in the current business due to the incompetence in the organization skill,
resource and market leadership.
 Lehman Brother fall in Weakness – The Company felt in a situation where there is
lack of resources, capability and marketing skills is one of the main reason behind the
fall in the Lehman Brothers.
 Lehman Brother fall in opportunities – In the organization there was lack of
environmental and social opportunities of the company in order to compete in such a
competitive market (Bashir 2016).
 Lehman Brother fall in threats – The external and environmental threats created the
major issues for the downfall in the performance of the Lehman brothers.
Managerial performance and stockholders analysis
The board of directors of the company is the main failure behind such bankruptcy in
the financial year 2008 (Shoup 2017). There was actually an agency problem within the
management system of the concern is further the main reason behind the collapse of the
concern. All the main causes behind the collapse of the Lehman brothers can further be
tracked by the process of the agency problem. There was a problem with the higher level
directors and the stock holders of the company were quite aware about the problem of the
concern. The shareholders and employees of the company were in constant struggle with the
agency problem in the internal management of the concern (Arcand, Berkes and Panizza
2015).

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Valuation and ratio of Lehman Brothers
Obtained from Sec.gov. (2019).
Obtained from Zonebourse.com. (2019).
Interpretation:

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In case of valuation of Lehman Brothers for four years from the annual report of the
company it is noted that the cost of debt of the firm is higher than the cost of equity. The
decline of the company started from the year 2004 and continued till 2007 and after that the
collapse of the company took place in that case. In case of investments, the return generated
by the company out of the potential investments was quite higher. The debt of the company
was higher in such a way that increased the risk of leverage of the firm (Horst 2018). The
policy makers which are the International Financial Reporting Standards (IFRS) and Security
and Exchange Commission (SEC) must have revised and rectify the policies in order to
protect Lehman Brothers collapse. As per the Basel 3, it would also have been better if the
bank holds capital for the purpose to absorb losses and further make it flexible.
Conclusion
From the above discussion it can be concluded that such risk in the leverage of the
firm was higher in such a way that it enhance the risk of the Lehman Brothers which is the
main reason behind the fall in the Lehman Brothers. In such a worst case scenario it will not
be a good decision to leverage the assets and liabilities of the company in case of valuation.
The evidence behind such crisis is that Repo 105 accounting policy where the senior
management of Lehman sets the total amount of the firm for the purpose to reduce balance
sheet on the particular day by implementing Repo 105 of transactions. A typical advice for
the existing or new shareholders of the market not to buy the shares at the existing market
price. The strategies which would have implemented by the Lehman brothers in that situation
is to avoid enhancing debt application and further implement effective management system to
concentrate on the valuation and working capital of the firm.

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References
Arcand, J.L., Berkes, E. and Panizza, U., 2015. Too much finance?. Journal of Economic
Growth, 20(2), pp.105-148.
Bashir, Y., 2016. Effects of treasury single account on public finance management in Nigeria.
Research Journal of Finance and Accounting, 7(6).
Cochrane, J.H., 2017. Macro-finance. Review of Finance, 21(3), pp.945-985.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Härdle, W.K., Chen, C.Y.H. and Overbeck, L. eds., 2017. Applied quantitative finance (Vol.
2). Springer.
Horst, U., 2018. Introduction to Mathematical Finance.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
Sec.gov. (2019). [online] Available at:
https://www.sec.gov/Archives/edgar/data/806085/000104746906001870/a2167455z10-k.htm
[Accessed 26 Jul. 2019].
Shoup, C., 2017. Public finance. Routledge.
Zonebourse.com. (2019). [online] Available at: https://www.zonebourse.com/NB-
PRIVEQPARTN-56192/pdf/87896/NB%20PRIV%20EQ%20PARTN_Rapport-annuel.pdf
[Accessed 26 Jul. 2019].