Date of Graduation
12-2022
Document Type
Thesis
Degree Name
Bachelor of Science in Business Administration
Degree Level
Undergraduate
Department
Finance
Advisor/Mentor
Riley, Timothy
Abstract
Lehman Brothers’ bankruptcy was a major turning point during the 2008 Financial Crisis, and Lehman Brothers itself has become a prime example of regulatory failure since its closing. The demise of Lehman stemmed from the repeal of the Glass-Steagall Act of 1933. The deregulation of investment banking in the 1990s forged the way for new investment practices on Wall Street. The relaxation of rules allowed investment banks to be heavily invested in volatile assets. Lehman’s issues were an extremely high leverage ratio, illiquid assets, and poor corporate governance. An extremely high leverage ratio left Lehman susceptible to large movements in firm valuation based on small movements in asset values. Lehman’s assets were illiquid because they were unable to sell them quickly to raise the capital necessary to keep the firm in operation. Lehman’s management was informed of the impending doom but chose not to act. Lehman ceased operations on September 15, 2008, creating significant market upheaval. Congress subsequently passed new regulations to mitigate the risk of Wall Street’s activities on the average American. In this paper, I dissect Lehman’s failure with the goal of identifying its root causes, its initial effects on the market, and how the market was able to recover.
Keywords
Investing; Regulation; Lehman; Corporate Governance; Leverage; Liquidity
Citation
Reller, C. J. (2022). Lehman Brothers Bankruptcy: Reasons, Effects, and Outcome. Finance Undergraduate Honors Theses Retrieved from https://scholarworks.uark.edu/finnuht/89
