Question

The Lehman Brothers' case

1. What do you think was the cause for the bankruptcy of the former 4th largest investment bank in the US?
2. Why was the SEC unable to prove that they violated accounting practices?

Answer 1

The cause behind the bankruptcy of the Lehman brothers is sub-prime mortgage crisis.

Sub-prime lending are characterized by securities which are overvalued. That means the collaterals are not worth the amount being given as loan. Most of the sub-prime lending had mortgages as securities. This led to the inflation of the house prices. And when the housing bubble collapsed, it led to the devaluation of these collaterals. The interest rate eventually increased making it difficult for the borrowers to repay. Slowly it lead to the collapse of the Lehman brothers. They borrowed huge amount to function as an investment bank ( the assets were mainly related to housing ) . And when the prices of houses decreased suddenly, the securities were devalued. And it became difficult for the Lehman brothers to repay the borrowed amount. This eventually lead to its bankruptcy.

SEC has been unable to prove that the accounting practices has been violated because the Lehman brothers has concealed the identity and appeared as an investment bank.