Question

What was Lehman Bros. exposure in dollars in the crisis? Why did it fail?

Answer 1

Lehman Brothers had a lot of exposure to the mortgage – backed securities which resulted in the financial issues faced by the company in the year 2008. The company had a very low level of ash reserve and a lot of pressure resulted from the higher degree of financial leverage. The company had a debt of more than $30 billion. In fact, a major part of this debt was in the form of short-term debt and thus it could be cut off or not renewed if the creditors had a feeling that the company is facing some financial issues. During that time, the stock price of the company’s share dropped by 85%   and thus the firm was not able to raise sufficient funds via stock offerings. Apart from this, due to decreased creditworthiness, the company hampered a lot from taking the debts at reasonable rates.. In fact, some its business allies discontinued their financial and business relation with Lehman Brothers which were further degraded the cash inflow situation. Lehman searched for some financial institutions which can facilitate it the sufficient cash so that it can operate without any hurdle but all these attempts were in vain.