RP321 The Bigger They Are, the Harder They Fall

 RP321 The Bigger They Are, the Harder They Fall

The investment bank with a 160-year history, Lehman Brothers, weathered its fair share of crises. From railroad bankruptcies to the Great Depression and even two world wars, it appeared the Lehman was built to last. That all changed however, on September 15, 2008 when that Lehman Brothers' luck ran out. It became the biggest bankruptcy in American history.
Just five years before its collapse, business was booming for the investment bank. In 2003 and 2004, the firm acquired a series of subprime mortgage lending companies. Subprime refers to high-interest loans that are given to financially risky clients. Most of the people who received subprime loans didn't earn enough money to pay them off. However, this wasn't considered to be a problem as long as property prices kept going up. Lehman Brothers was one of the Wall Street firms that dove headfirst into the subprime mortgage market, and from 2005 to 2007 it was rewarded with record profits.
In early 2008, however, everything changed. Property prices began to drop, and homeowners across America were suddenly on the hook for loans that were worth more than their houses. In March 2008, Bear Stearns, another large investment firm, nearly collapsed due to its exposure to subprime lending. Lehman Brothers stock gradually started to fall.
By September 2008, Lehman stock had fallen off a cliff. Global equity markets plunged worldwide, and the firm looked for salvation elsewhere. In a desperate attempt to stave off bankruptcy, Lehman looked for a partner that could buy it out. It reached out to Barclays PLC, Bank of America, and even the Korea Development Bank, but no deal could be reached in time to save it. The fourth-largest investment bank in the United States went under.
Even though the American Government bailed out other financial institutions such as Bear Stearns, Fannie Mae, and Freddie Mac, it did nothing to stop the collapse of Lehman Brothers. The decision to not help was based on Lehman's lack of valuable assets. The irony is that so many homeowners went bankrupt during this time for this very reason. After the news of Lehman Brothers' bankruptcy was announced, the Dow Jones Industrial Average dropped 500 points. This triggered a wider panic as investors pulled their money out of markets in America and around the world. The Great Recession had begun.