Lehman Brothers Bankruptcy Filing
Market Context & Analysis
Starting Price: $3.65Lehman Brothers, the 158-year-old investment bank, files for Chapter 11 bankruptcy—the largest bankruptcy in US history. The firm held over $600 billion in assets. The collapse sends shockwaves through global financial markets. This is the defining moment of the 2008 financial crisis, triggered by massive exposure to subprime mortgages.
US housing market has collapsed with prices down 20%+ from peak. Unemployment rising rapidly to 6.1%. Credit markets are frozen—banks won't lend to each other. Bear Stearns was already rescued in March. Fannie Mae and Freddie Mac were just taken over by government. Financial crisis is accelerating.
Treasury Secretary Paulson and Fed Chair Bernanke are scrambling to prevent total financial collapse. Government decided NOT to bail out Lehman after public backlash from Bear Stearns rescue. Presidential election between Obama and McCain is weeks away. Global coordination becoming critical.
Lehman has been desperately seeking a buyer—talks with Bank of America and Barclays both fell apart over the weekend. The firm is massively leveraged with toxic mortgage assets. CEO Dick Fuld refused to raise capital or sell assets earlier when there was still time. Lehman's collapse was preventable but became inevitable.
Absolute panic and fear in markets. Money market funds are breaking the buck. Credit default swaps are skyrocketing. Counterparty risk is paralyzing the entire financial system. Dow Jones plunges 500+ points. VIX (fear index) spiking to extreme levels. Contagion risk is critical—which firm is next?
- Largest bankruptcy in US history
- Systemic risk—interconnectedness of financial system means Lehman's collapse threatens everyone
- Government explicitly chose not to rescue—moral hazard concerns
- Toxic mortgage assets have unknowable value
- Counterparty exposure creating panic selling
- Credit markets completely frozen
- Global financial system on brink of collapse
- Precedent set—no firm is too big to fail?