Lehman Brothers crisis 2008

Here’s a full explanation of the Lehman Brothers crisis of 2008, broken down step by step so you can understand what happened, why it happened, and what it led to:

1. Background

Lehman Brothers was a global investment bank, founded in 1850. By the early 2000s, it had become the fourth-largest investment bank in the U.S., behind Goldman Sachs, Morgan Stanley, and Merrill Lynch. It was heavily involved in investment banking, trading, asset management, and mortgage securities.

During the U.S. housing boom of the early 2000s, Lehman Brothers became one of the biggest players in the mortgage-backed securities (MBS) market. These are financial products made up of bundles of home loans sold to investors.

2. The Housing Bubble

In the early 2000s, U.S. housing prices rose rapidly due to low interest rates, easy credit, and strong demand.
Banks and lenders began issuing subprime mortgages—loans to borrowers with poor credit histories.
These risky loans were repackaged into mortgage-backed securities and sold worldwide, with high credit ratings from agencies like Moody’s and S&P.

This created the illusion that these securities were safe investments, even though they were backed by risky borrowers.

3. Lehman’s Risky Strategy

Lehman aggressively expanded in the mortgage market:

It bought subprime mortgage lenders, like BNC Mortgage and Aurora Loan Services.
It accumulated over $85 billion in mortgage-backed securities by 2007.
Lehman used very high leverage (borrowing huge amounts of money relative to its equity), sometimes 30 to 1, meaning even small losses could wipe out its capital.

This left Lehman extremely vulnerable if housing prices declined.

4. The Housing Crash

By 2006–2007, U.S. housing prices started to fall.
Borrowers with subprime loans began defaulting.
Mortgage-backed securities lost value.
Investors lost trust in financial institutions holding these assets.

Lehman’s huge mortgage exposure meant it suffered massive losses. In 2007 alone, it reported billions in write-downs.

5. The 2008 Meltdown

In March 2008, Bear Stearns (another investment bank) collapsed and was sold to JPMorgan Chase with government assistance.
This raised concerns that Lehman could be next.
Lehman tried to raise capital by selling stock and sought potential buyers (Bank of America, Barclays), but no deal materialized.
On September 10, 2008, Lehman announced a $3.9 billion loss for the third quarter and admitted it was sitting on billions in bad mortgage assets.
Its stock price collapsed—falling nearly 95% in a year.

6. The Bankruptcy

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy, with $613 billion in debt and $639 billion in assets—the largest bankruptcy in U.S. history.
Unlike Bear Stearns, the U.S. government and Federal Reserve decided not to bail out Lehman, fearing “moral hazard” (that saving reckless banks would encourage more risk-taking).

This decision shocked global markets.

7. Global Impact

Lehman’s collapse triggered a global financial panic:

Credit markets froze—banks stopped lending to each other.
Stock markets plunged worldwide.
Money market funds, thought to be safe, faced withdrawals after one fund “broke the buck” due to Lehman exposure.
Major institutions like AIG, Citigroup, and Merrill Lynch required government rescues.
The crisis spread globally, leading to a deep global recession (2008–2009).

8. Aftermath

The U.S. government launched TARP (Troubled Asset Relief Program), a $700 billion bailout package, to stabilize the financial system.
The Federal Reserve cut interest rates to near zero and provided emergency lending.
Worldwide, governments introduced stimulus measures to prevent economic collapse.

9. Lessons from Lehman

The Lehman Brothers crisis exposed:

Excessive leverage and risk-taking by banks.
Weak regulation of financial institutions.
Conflicts of interest with credit rating agencies.
The danger of a financial system so interconnected that one failure could bring down many others (“too big to fail”).

In response, the U.S. passed the Dodd-Frank Act (2010), aimed at stricter oversight of banks, derivatives markets, and “systemically important” institutions.

10. Summary

The collapse of Lehman Brothers in 2008 was the tipping point of the global financial crisis.
It highlighted how:

A housing bubble built on risky lending and complex securities could destabilize the world economy.
Lehman’s excessive exposure to bad mortgages and high leverage made it fragile.
The decision not to bail out Lehman sent shockwaves across global markets.

The crisis reshaped the financial system, economies, and regulations worldwide, leaving a legacy that still influences banking and policymaking today.

Would you like me to make a timeline-style version of the Lehman crisis (step-by-step by year and month) so it’s easier to visualize?