This week I watched a documentary series on the collapse of
the American investment bank Lehman Brothers. It is a 1 hour film that shows
the events that happened before the company declared bankruptcy. Prior to
watching this, I had no idea that the Lehman Brothers is one of the biggest
investment bank in America. After watching the documentary, I went on to Google
to look for more information about this incident because the film itself is not
very clear to me. I am ashamed of calling myself a finance student when I have
no clue about one of the biggest financial crisis in the world back in 2008.
However, to be fair I was only 14 at that time but from now onwards, I will
start reading the news and find out what is happening in the business and
finance world to keep myself updated.
From what I have learnt watching this film is that Lehman
Brothers borrowed a large amount of money to fund its investments. They had the
confidence that the house market is a lucrative market to invest money in.
Having a high leverage ratio means that a small change in the value of the
assets that they own would change the value of equity of the company. Lehman
Brothers lost a lot of money after the housing bubble burst due to the mortgage
negligence and foreclosures as well as the securities related to housing being
devalued. Their shares continued to drop and investors gradually had lower
confidence in the company. To save themselves, they tried to sell off a
majority stake of the company to Bank of America and Barclays Bank. Bank of
America rejected the deal because of the company’s poor valuation but Lehman
Brothers see signs of hope as Barclays were interested in acquiring them.
However, in the film, it was portrayed to the viewers that under British law,
Barclays cannot guarantee Lehman's debts until its own shareholders vote on the
matter. The Federal Reserve Bank of New York refuses to bailout on the company
therefore they had no choice but to file for bankruptcy.
The most interesting part of the documentary was when
Paulson gathered all the major bosses of investment banks on Wall Street to
have a meeting to save Lehman Brothers. Having watched this documentary, I have
learned that even the biggest player in the industry can fail. Furthermore, I have
now also acquired the knowledge of this incident so whenever my friends or
future colleagues talk about this, I will not be as clueless as before. This
knowledge could be important for me as I intend to work in an investment bank
in the future after I graduate before I eventually start my own business.
