On 15 September 2008, Lehman Brothers collapsed and became the largest bankruptcy in US history, just months after reporting record profits. Today Lehman is a cautionary tale of Wall Street greed and hubris, however its demise lay in collaborating with Main Street and facilitating the mortgage boom of the Nineties and Noughties. A series of balance sheet busting acquisitions catapulted Lehman into one of the country’s largest underwriters of subprime mortgages. Lehman had evolved from an asset-light, transaction driven trading house into a bloated behemoth laden with toxic assets, notably structured CDOs and ABS securities that offered high returns but which cleverly concealed intrinsic risk. As rates increased and mortgages soured, markets fell dramatically to expose billions in losses at highly leveraged banks, Lehman in particular, that would eventually lead to its insolvency.
Key learning objectives:
What was the Glass-Steagall Act and how did its repeal indirectly facilitate Lehman’s demise?
What are ABS and CDO securities and how did Lehman employ them to grow its mortgage business?
What are leverage ratios and why are they important?
What are level 3 assets and why are they important?