An analysis of the financial crisis and collapse of Lehman Bros Essay

An analysis of the financial crisis and collapse of Lehman Bros - Essay Example An analysis of the financial crisis and collapse of Lehman Bros. Many of the investment strategies designed to improve the liquidity position of major banks and ensure asset growth had lost the majority of their value and companies such as Lehman Bros. were unable to find appropriate buyers for many derivatives that were backed by the high volume of home mortgages granted to higher-risk consumer segments prior to 2007. As aforesaid, the inter-dependency within the international banking system led to a crisis when asset values on certain derivatives plummeted, when major banking institutions could no longer successfully meet their debt obligations, and even sizeable financial bailouts both internal and from government were insufficient in sustaining banking operations. The main contributors to the financial crisis of 2007-2010 was not largely attributable to improper or lax regulatory forces, it was a product of poor banking leadership and inappropriate investment strategies within the financial institutions’ business models. This essay describes the catalysts for what drove the financial crisis, focusing specifically on the role of Lehman Bros. in facilitating the problem. Research has identified that the mechanisms creating the financial disaster included the derivatives market, investor and executive-level behaviour in the financial markets, poor auditing systems responding proactively to observable or quantitatively-supported market trends, and the growing consumer adoption of adjustable rate mortgages being offered by major banking institutions. ... The main contributors to the financial crisis of 2007-2010 was not largely attributable to improper or lax regulatory forces, it was a product of poor banking leadership and inappropriate investment strategies within the financial institutions’ business models. This essay describes the catalysts for what drove the financial crisis, focusing specifically on the role of Lehman Bros. in facilitating the problem. Research has identified that the mechanisms creating the financial disaster included the derivatives market, investor and executive-level behaviour in the financial markets, poor auditing systems responding proactively to observable or quantitatively-supported market trends, and the growing consumer adoption of adjustable rate mortgages being offered by major banking institutions. The Adjustable Rate Mortgage (ARM) Consecutive and recurring drops in the national interest rate in the United States and the United Kingdom occurring between 2001 and 2006 in an effort to stave off a perceived, impeding economic recession created a favourable environment for home ownership. When the Federal interest rate is lowered, it affects the published prime rate by which financial lenders establish an appropriate interest rate on home mortgages. In 1982, the prime rate in the United States was set at a record of 19 percent (Fedprimerate.com 2013), a period where the country was emerging from a period of intense inflation increases and previous economic recession. Home mortgages generated between 1982 and 2000, therefore, were significantly profitable for lending institutions as they were able to justify loan generation to diverse consumer