Q:

Why did Lehman Brothers go bankrupt?

A:

Lehman Brothers declared bankruptcy in 2008 due to a total debt burden of $619 billion with remaining assets of $639 billion. The main reason for their significant amount of debt was subprime mortgage lending between the years of 2003 and 2007.

During the housing bubble of 2003 and 2004, Lehman Brothers acquired five mortgage lenders, including two subprime mortgage specialists, Aurora Loan Services and BNC Mortgage. These lenders had many loans out to borrowers who didn't have full documentation of their financial status.

While these subprime loan companies were initially profitable, more and more borrowers defaulted on their loans. By 2007 there were serious concerns in financial markets about the profitability of companies that were carrying many defaulted subprime loans, yet Lehman Brothers underwrote more mortgage-backed securities than any other firm that year. This situation came to a head in August 2007, when two Bear Stearns hedge funds defaulted and caused panic in the marketplace. There was a temporary rebound in late 2007, but when Bear Stearns nearly collapsed in early 2008 due to subprime mortgages there was widespread belief that Lehman Brothers would be the next to fail. Lehman Brothers began announcing losses in June of 2008, and by September their stock was dropping sharply in value. By mid-September Lehman Brothers had only $1 billion in cash and declared bankruptcy.

Sources:

  1. investopedia.com

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