Lehman Brothers

 It is extremely important to learn about history and what's better than looking at the largest banking collapse in the history of the USA the Lehman Brothers

By far the largest bankruptcy by a huge margin. 

The 4th largest Investment in the states filed for bankruptcy on 15 September 2008. The bank formed 150 years before its collapse was founded by the Lehman bros and was not expected to fall at all. The bank that survived the Great Depression,the dotcom crash the crash was highly unexpected.   Historically the bank started off as a cotton broker connecting buyers and sellers of cotton and made money and in the 19th century they started focusing on investment banking. 

During  early 20th century  the interest rate in the US was very low which meant the real estate market in the USA was booming. Lehman Brothers like all other banks rushed to take part in the real estate boom. 

Most common method to buy a home was through mortgage and to earn profit Lehman bros bought multiple mortgage providers like Aurora Loan Services and Aurora mortgages. Some of them provided subprime mortgage lenders (ie  They give mortgages to people with bad credit scores and not steady income loans at high interest rates). Investment banks during that period developed a product called CDO 

Collateralized debt obligation (CDO):

• A financial product that bundles various debts (like loans, credit card bills mortgages in this case ) into one package.
• Think of it as a big basket holding different loan types.
• This basket is then sliced into smaller groups called "tranches."
• Each tranche acts like a separate investment with its own risk and reward level.

Tranches:

• Senior tranches: Low risk, first in line for payments if borrowers pay back. Like getting paid first in a restaurant line.
• Junior tranches: Higher risk, last in line for payments. Potentially higher returns if all loans do well, but could get nothing if many loans default. 

banks played a major role in selling CDOs, or Collateralized Debt Obligations, to investors during the early 2000s. CDOs were popular back then for several reasons:

• They promised potentially high returns: Banks marketed CDOs as a way for investors to earn significant profits, especially compared to traditional savings accounts.

• They offered risk diversification: CDOs were often divided into tranches with different risk levels, giving investors some flexibility to choose how much risk they were comfortable with.

• They helped free up capital for banks: By selling CDOs, banks could free up money that was tied up in loans and use it for other investments or activities.

Problems faced by banks:

. 1. Subprime Mortgages:

•  Initially, subprime mortgages weren't seen as overly risky. Banks assumed they could recoup losses by seizing and selling defaulter's houses.
• However, the sheer volume of defaults overwhelmed the real estate market, causing a supply glut and driving down house prices.

2. Lehman Brothers:

• Lehman Brothers heavily invested in CDOs backed by these risky mortgages.
• They also took on significant debt to finance these investments.
• When the real estate market crashed, the value of their CDOs plummeted, leaving them unable to repay their debts.

While many investment banks also faced problems Lehman bros were at the forefront of it. The lenders bought by Lehman bros were also in debt which meant nobody wanted to bail out lehman bros 

During the 2008 financial crisis, several investment banks faced severe financial difficulties due to various factors like exposure to risky assets, high debt levels, and declining confidence in the market. Some of these banks ended up being acquired by other bigger institutions:

These were some of the banks that also faced problems :

• Bear Stearns: Purchased by JP Morgan Chase in 2008.
• Merrill Lynch: Bought by Bank of America in 2008.
• Washington Mutual: Acquired by JP Morgan Chase in 2008 (its banking operations).
• Wachovia: Bought by Wells Fargo in 2008.