Lehman Brothers (rise and fall of a banking big)

Today the fateful bankruptcy of Lehman Brothers, is considered a representative icon of the global financial crisis.

This important financial entity had thousands of employees around the world and assets of 639,000 million, historically became the largest bankruptcy occurred, as it is thought that it left a gap of more than 610,000 million dollars, in addition its fall made world markets tremble, accelerating the crisis world economy.

In September 2008 Wall Street was moved by the official declaration of bankruptcy of the fourth best bank in investment by the United States, after 158 years of activity, causing effects that are still being felt in the economy global.

Origins of the Lehman Brothers

This entity was founded by the brothers Henry, Emanuel and Meyer Lehman, in the year 1850 in the city from Alabama, in its beginnings the company accepted raw cotton as payment, which it treated and then sold.

It survived the 1861 Civil War in the United States without much difficulty and played an important role in the creation of the financial market for cotton in New York City.

Later it expanded its operations, also dedicating itself to the railways, tobacco and coffee. In the 70s it obtained the Abraham & Co. company. It also merged with the Loeb & Co and Kuhn companies, transforming itself into a banking entity and occupying the fourth place as an investment bank in the country.

Despite the economic boom of the 1920s in the United States, there was a surprising collapse in the stock market for the time, close to 2,000 financial institutions closed due to lack of liquidity, however, Lehman Brothers, thanks to its enormous profits and solvency, achieved survive.

What really happened?

When the decline starts

In 2002, seeking to recharge the spirits of the population after the 9/11 attack, President Bush under the interest of 6% to 1%, with such a measure the American population could own their home. Based on this, the banking entities granted credits practically without the use of requirements or filters, giving rise to the well-known junk mortgages, which would trigger a key crisis point economical.

This excessive emotion in society generated a real estate bubble that at some point should explode.

The weight of the debt collateral obligation

The CDO backs financial assets, accounting titles, understanding the existence of a payment commitment to investors. However, in the years before the crisis, these CDOs were tied to mortgages rather than bank loans, boasting a higher risk, giving lenders a greater incentive to award the enormous volume of loans and mortgages that would later provoke the crisis of the year 2006.

The subprime or junk mortgage crisis

The real estate bubble spread throughout the world, in many countries the so-called subprime mortgage, understood as mortgages with a very high non-payment risk, used by clients with little solvency and with a payment paid to the invested capital very high in when compared with personal loans. Making it impossible for investors to meet payments, raising the delinquency rate.

The entities negotiated and sold these debts to banks around the world, which were affected by the lack of payments and the lack of confidence of the investors, causing the bankruptcy in many banks falling in that group the Lehman Brothers.

It is a bit strange that the great economists, responsible for important Wall entities Street have not seen the bursting of this housing bubble coming, which caused the fall of the market.

The definitive closure of Lehman Brothers

The entity was in charge for years of making huge and risky investments in this sector, granting junk mortgages, granting private loans with a high risk of default.

For the year 2007, the company reported losses of billions of dollars and by that time just before its end its value on the stock market was much lower. No possibility of recovery was distinguished, only a rescue by the federal reserve or the purchase of said entity by another bank would do the miracle.

Possible buyers? If there were, few, but they backed down and the Government did nothing, one of the best collapsed. investment banks in the United States without any anticipation of the impact it would have on the economy world.

Stock market crash worldwide

Since the beginning of the mortgage crisis in 2007, many banks went bankrupt, a situation that showed the size of the approaching storm, however, Lehman Brothers was a great company, some would say a big shot in the pond, so its bankruptcy and closure destabilized the stock market and brought with it the collapse of the stock market. insurance company AIG.

The New York Stock Exchange suffered the worst fall in its history, the bubble burst and caused chain reactions in the United States and later in the world, causing serious economic consequences.

After the impact, the first thing was to look for those responsible, the investigations tried to discover how it was arrived to that point, verifying that many businessmen and bankers used the situation in order to get rich. This market could not bear such misappropriation, the consequences were suffered by the citizens so the state It should have left the moral risk and protect the citizen and the national economy and saving the main causes of the crisis.

Countries acted quickly to stop the domino effect before the global economic system was completely bypassed. As a first measure, central banks had to inject large amounts of money, and they also lowered interest rates, in this way the banks would increase their liquidity, managing to recover some entities affected.

On the other hand, efforts were added to avoid a new inflation and control systems were created that would prevent companies and banks from dragging the global market into a situation similar to this.

Finally, it is worth emphasizing that the collapse of Lehman Brothers accent a precedent and governments now had to be aware that this could not happen again, because the magnitude of the bank was clear as the consequences that its fall should be clear bring.

States and their central banks would end up understanding the importance of saving the main financial entities in order to avoid an economic collapse like the one that appeared in 2008 with the Lehman Brothers downfall.