Why lehman brothers bank failed?lehmanbrothers is one of the largest banks in u.s.a which has failed in the month of september 2008 |
Why lehman brothers bank failed?lehmanbrothers is one of the largest banks in u.s.a which has failed in the month of september 2008 |
What happened is the following. Banks like Lehman Brothers collect capital and invest it, to make a profit. Like for any bank, most of the capital is not theirs, it is borrowed.
The company's assets are kept in all kinds of different diverse places, where it might gain a profit. The company has them, but they aren't in cash. They're in things like bonds, stocks, mortgage backed securities, etc. The problem is that most of these assets are not liquid.
Normally that is not a problem. The bank knows in advance when it has to pay back loans and can liquidate the assets easily and in time. However, the subprime crisis changed that.
In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches. Because of the crisis, these assets lost a lot of value and suddenly Lehman had problems liquidating these assets quickly enough to pay back loans.
This caused a cascading effect, which caused a lot of borrowers to call in their money. Too many borrowers...
to many sub prime mortgages.