Question

What could Lehman Brothers have done to address its Liquidity concerns, which initiated the run on the bank?

Answer 1

The primary reason for the downfall of Lehman brothers was its aggressive and 'beyond capacity' acquisition of companies which had large exposure in subprime mortgage business. As in the year 2008 the prices of real estate starts to go down, the company's asset quality goes down and it started to raise concerns over the liquidity situation of the company that whether it will be able generate the same kind of revenue that it has been a year ago. As the prices of sub prime mortgages started to fall sharply, the company's assets were not enough to cover its liabilities resulted in bankruptcy and liquidation.

The company could have avoided this crisis by focusing on its urgent liquidity situation that were arising in the beginning of the year 2007. The asset prices started to fell sharply, which was a warning signal and at that time only company could have offloaded its some of the assets, to maintain liquidity and better cash flow. However, holding on to those assets resulted in a huge loss for the company. The company could have reached to government or federal reserve for bailing them out, and the government might have taken the concern of bank seriously, if it wanted to avoid panic and financial crisis that unfolded due to fall of Lehman brothers. The company also had the option to liquidate some of its better performing assets to avoid negative cash flows and liquidity crunch. Sticking on to assets which were not good enough to generate cash for the company was one of the fatal mistake done by the bank which lead to its fall in 2008.