The 2007-2009 financial landslides left the U.S. and rest of the world knocked for six. Many of the U.S. banks that had heavily invested in loans and mortgages find themselves into hot water. As noted from Kaufman (2009), the main cause of this financial crisis was due to poor governance from the Federal Reserve Bank and the financial institution. One of the biggest banks in the U.S. that failed due to bankruptcy during this episode was Lehman Brothers Holdings Inc (Bank for International Settlements, 2004). As a result, this paper will analyse the reasons behind Lehman Brothers Holdings Inc failure and the role played by the U.S. central bank.
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Lehman Brothers Holdings Inc kicks its root in 1850, and was founded in Montgomery, Alabama by two cotton brokers. After the Second World War, Lehman Brothers transferred to New York City and grew tremendously into among the biggest Wall Street’s investment (Bloomberg, 2012). On September 14, 2008, the firm said that it was going to file for liquidation after it suffered big losses in the market of mortgage, but unfortunately, due to lack of investor confidence, the firm was not able to find buyers (The New York Times, 2011). Apart from this factor that caused its failure, there were other factors, such as bad mortgage holding, demands by rivals such as Citigroup and JPMorgan Chase, malfeasance, short-selling allegations, bankruptcy, financial fallout and accounting manipulation. Consequently, these aspects caused a huge impact to the firm financial statements and ratios (Jemime, 2004).
The failure of this bank can be attributed to the central bank, as it failed to regulate the market, especially when giving discount window rate. During this period, the U.S. central bank was giving the discount window rate at very low rates, thus allowing financial institution to borrow much and give loans to consumer at low rates. This enabled many defaulters to access loans and mortgage. On other hand, there was a high level of corruption among the cooperate structure of this firm. The bank could have avoided big losses if it had insured these loans and mortgages (Pritchard, 2011).
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