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Lehman Brothers Case Study

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The credit crisis of 2008 resulted in, for the first time since 1930, a global credit market pause (Arner, 2009). Lehman Brothers, a stand-alone investment bank, along with other companies such as Bear Stearns, American International Group, Inc. (AIG), Fannie Mae, and Freddie Mac suffered catastrophic losses. However, unlike Lehman Brothers, the federal government instituted rescue efforts for Bear Stearns and AIG, along with Fannie Mae and Freddie Mac. The government’s lack of intervention regarding Lehman Brothers prompted questions as to why the government showed inconsistency in implementing bailout efforts. In addition, allowing Lehman Brothers to fail set off a series of unfortunate events that the government wanted to avoid by not intervening.…show more content…
The discussion that follows will describe the situation that led to the problem at Lehman Brothers. In addition, the analysis will review what Lehman Brothers sought from the regulators, and why the ultimate decision of the government led to Lehman Brothers’ insolvency. Lessons learned from the federal government in its handling of Lehman Brothers, and speculation of what might have happened if AIG did not receive a bailout, requires thought on what the role of government is in inspiring and maintaining confidence it the market. The credit crisis of 2008 caused investment banks to suffer enormous losses on their holdings of mortgage-backed securities. During the financial crisis, some institutions acquired investment-banking companies or merged with them to avoid having the troubled institutions declare bankruptcy. However, Lehman Brothers, having suffered severe losses, failed…show more content…
Companies whose success and continuous operation prove vital to the economy and financial systems should receive auditor scrutiny and regulation oversight. It is clear that Lehman Brothers required oversight and possible prohibition of its liabilities financing practices using repo borrowing. Likewise, AIG deserved more review of its credit swap business practices. The negligence of these institutions cost the United States and foreign economies billions of dollars. The federal government chose not to intervene on Lehman Brothers’ behalf, for reasons that some say are inconsistent with other bailout decisions (Smith, 2011). However, the government did find that an AIG failure would constitute systemic risk and chose to rescue the insurance company. The government created incentives to increase depositor confidence by guaranteeing market-based fund-raising. The financial crisis of 2008 offered lessons learned to both government and banking
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