The day of the bankruptcy of Lehman Brothers – level 3
15-09-2008
Lehman Brothers was one of the biggest banks in the United States. It invested heavily into the mortgage market. The bank had assets of 680 billion dollars which were supported only by 22 billion dollars of firm capital. It was a very risky situation because just a four-percent decline in house values would wipe out all capital.
In 2008, the housing market collapsed and the bank’s shares lost 50% of their value. The management asked the government for help but the government refused to help.
On September 15, 2008, Lehman Brothers filed bankruptcy. It was the biggest bankruptcy in the history of the United States.
Difficult words: mortgage (a contract by which a bank gives you money to buy a house), assets (things which have value and which a company owns), firm capital (the actual money a company has), decline (a moment when something goes down), share (a part of a company which you can own), file bankruptcy (to ask to be officially bankrupt).
What strategies could Lehman Brothers have employed to reduce their risk in the mortgage market and potentially avoid bankruptcy?
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