Downfall of Lehman Brothers and The 2008 Financial Crisis

Over many years world have witness how prominent and successful companies felt helpless and ran into bankruptcy over a night. While numerous reasons led to the fall of those companies, it was all centered to the unethical practices that prevailed in such organisation. Companies such as Enron Corporation, Worldcom Company, Washington Mutual Company and many others were victims of unethical practices and Lehman Brother is no exception in the list. This investment banking company not only ran into bankruptcy but also became the prime reason for 2008 financial crisis (Chu, 2018). It is a marvel how powers and money takes over one’s integrity and paves roads to unethical practices in an organizations.

As a human being we are inclined to both ethical and unethical behaviors; all human conducts which relates to moral principles and which are permissible in societies and under laws are all ethical behaviors. On the other hand, any conducts which are morally wrong and is not accepted in people’s belief, a complete reverse to the ethical conducts are all unethical behaviors. People working in companies and organizations can be ethical or unethical in their conducts. Hence, organization ethics evolves as an important question for the success and wellbeing of the organization. Letendre (2019) asserts that organizational ethics is strong form of discipline that governs moral choices which are guided by values, standards, principles, rules, and strategies associated with organizational activities and goals.

It is apparent and necessary that every businesses and organizations should work to generate more profits and growth. However, breaching regulations and indulging in unfair means to generate profits, thereby, neglecting value and morals for company’s welfare would call as an unethical organization. Much like it, Lehman Brother pushed aside all company’s values and norms and started practices which was corrupt and immoral.

Background of Lehman Brother’s Crisis

Lehman Brothers was once fourth biggest investment bank in America until it filled for the financial bankruptcy in September 2008 (History.com Editors, 2018). Story dates back from mid-2000 when house price in United State started rising and Lehman as an investment banking company was issuing loan and mortgage-backed securities to borrowers. According to Sraders (2018) by the end of 2004, Lehman in order to issue more loans acquired other lenders namely BNC Mortgage and Aurora Loan Services - both of which specialized in subprime loans. These mortgages targeted borrowers who were traditionally poor credit risks and short term lucrative. Subprime mortgages charged higher interest rates on the loan, and generated larger fees than conventional mortgages. This made lenders highly motivated to originate such mortgages. On the other hand, so long as the housing price increased, subprime borrowers could always refinance the mortgage or sell the property if risk were imminent.

As these subprime leaders like BNC mortgage and Aurora Loan Service were ensuring loans without full documentation, Lehman was already taking a big gamble. The main problem arise when the housing prices greatly exceeded their long run trend of price appreciation. By 2006, the interest rate started to climb an increasing number of obligors started to default resulting to significant lose in revenues and severe increase in liquidity risk (Chu, 2018). The Lehman’s investor realized that the securities had more risk than assumed and started to avoid Lehman Brothers, while rating institutes started to downgrade them. That made Lehman Brothers very difficult to sell assets with constant failing values as price of the house began to drop rapidly. Lehman was left with assets they could not sell, asset which was steadily decreasing in value.

With the dawn of 2008, Lehman brothers made a quarterly loss of over file=php/clean_code.php.8 billion which extended to .9 billion in following quarter September 2008 (Sraders, 2018). It resulted to tragic reputation of Lehamn’s enterprise which led to successively loss in the self-belief amongst lenders which created difficulties in getting short time period funding’s to maintain liquidity. With only rdaddphp billion left by the end the September week, Lehman had not much time left. Last efforts was made in the weekend of September 13 between Lehman, Barclays and Bank of America aimed at acquiring of Lehman which was proved unsuccessful (Sraders, 2018). Eventually, Lehman declared itself as bankruptcy on Monday 15th September (Lioudis, 2019)

References

1. Belyh, A. (2019, September 9). The Collapse of Lehman Brothers: A Case Study. Retrieved from www.cleverism.com: https://www.cleverism.com/the-collapse-of-lehman-brothers-a-case-study/
2. Chu, B. (2018, September 12 ). Financial crisis 2008: How Lehman Brothers helped cause 'the worst financial crisis in history'. Retrieved from www.independent.co.uk: https://www.independent.co.uk/news/business/analysis-and-features/financial-crisis-2008-why-lehman-brothers-what-happened-10-years-anniversary-a8531581.html
3. History.com Editors. ( 2018, January 19). Lehman Brothers declares bankruptcy. Retrieved from www.history.com: https://www.history.com/this-day-in-history/lehman-brothers-collapses
4. Letendre, M. (2019, May 9). Organizational Ethics - ResearchGate. Retrieved from www.researchgate.net: https://www.researchgate.net/publication/302472978_Organizational_Ethics
5. Lioudis, N. k. (2019, October 19). The Collapse of Lehman Brothers: A Case Study. Retrieved from www.investopedia.com: https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
6. Sraders, A. (2018, September 12). The Lehman Brothers Collapse and How It's Changed the Economy Today. Retrieved from www.thestreet.com: https://www.thestreet.com/markets/lehman-brothers-collapse-14703153