Could you explain in layman's terms what led to Lehman Brothers Holdings' bankruptcy?

Simple answer:

Lehman makes money by, among other things, lending money for home mortgages Obviously, the more money lent, the more profit.

In the 80's and 90's and into the early 2000's, real estate prices went up astronomically. Mortgage companies such as Lehman's saw a chance to make additional money by extending loans to questionable lenders (folks who would not have qualified under normal circumstances). They did this by creating what could be called speculative mortgages that allowed people of dubious financial means to borrow now at a lower interest rate and lower payments with the promise to pay back later at higher interest rates. Both Lehman and the home buyers expected that real estate would keep appreciating, allowing the borrowers to finance down the road when their incomes increased and the home value increased - these new loans would be at fixed interest rates and be more affordable to the buyer (see the part about increased incomes).

However, the market soon peaked. Real estate prices no longer went up at 10-20 percent a year. The first folks to get hit were the speculators - especially in such places as the two coasts where folks were buying second/vacation homes. Speculators plan on "flipping" land (buying now to sell it soon at a profit). When the market stagnated, investors could no longer flip and started losing money. These speculative investments soon went on te market, but with investors no longer buying, the market demand was reduced and the investors soon started flooding the market with these properties, driving down prices.

This soon snowballed as more and more folks got caught up in falling markets. Soon, all those speculative loans extended by Lehman and other banks hit the adjustment point and interest rates on the mortgages went up, some very severely, causing payments to go up. Unluckily, the rest of teh economy was stagnating and the expected income increases never materialized. Couple the stagnant wages with some drastically increased mortgage payments and people started defaulting on mortgages. The folks who had planned on refinancing found out that their homes had not only not appreciated, but had fallen in value. Thus, they owed more on their mortgages then the houses were worth. Now, no bank would refinance because banks won't lend more than a house if worth. Since folks couldn't refinance to more affordable terms, and couldn't afford to pay the new payments, they started defaulting.

Banks with higher performing, better (read more conservative lending policies) will be able to ride this out. Banks/lenders like Lehman, etc. who have higher levels of these speculative loans are being hurt as folks are getting foreclosed on and the foreclosure sales bring in less money then the person owed.

"Lehman Brother has about $613 billion in outstanding liabilities"

http://www.reuters.com/article/bankingFinancial/idUSN1445999720080915

That's a lot more than we knew before. They wrote down $4Billion last week in an earnings announcement.They have waaaaaaay bigger problems that most people thought, but Wall Street suspected.

I believe his name is Richard Fuld, CEO of Lehman. He was more interested in the bonus he would make than in the safety of the company's assets. He did manage to walk away with over $150 million in compensation during the previous two years. It worked out well for him but not so great for the shareholders.

Adjustable Rate Mortgages (ARM) given for too much money to people who could barely afford the amount of the payment (Sub-Prime), who when the rate adjusted up could no longer make the payment, thus causing foreclosure. Lehman had too much of its assets in the Sub-Prime ARMs.

Hubris

Flud did not believe this could happen to him. He fired people who were giving him honest advice and surrounded himself with fraiddy cats.

When the mortgage market began to default (which simply had to happen, this suprises no one), Lehman and others were hoisted by their own petard.

Ten years ago, the New York Federal Reserve Bank called upon Lehman Bros. and a handful of other major players on Wall Street to rescue a high-flying hedge fund. The firms grumped and whinedâ€¦but they came up with the money, $3.7 billion. Wall Street soon went back to doing what it is supposed to do - separating customers from their money.

Leverage.

They borrowed too much money.

Their peers then lost "faith" in their ability to repay their loans which forced them into a liquidity crisis: in banking you borrow money to make money. If no one will lend you money, you cannot make money and, therefore, you fail.

put 100 bilyun dollars intu morgages that this yeer R werth maby 25 Bilyun
Also spekulated in derivatives in morgage-bakked papers & lost a bundel wen em bekum almost werthless.
Yuze mav leverage tu max profit. Tern out that = max loss.

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.024
Copyright (c) 2011 Financial Crisis Monday, May 28, 2012 - Terms of use - Privacy Policy