Essay: Downfall of Lehman Brothers

Sample Essay

The picture got clearer with the downfall of Lehman Brothers as it was evident that it was not easy to manage the risk. Risk has to be scrutinized on the basis of the entire system, taking into consideration the accumulating people and investors from different firms, which usually leads to a market bubble. Banks need to decide their extent of exposures to further markets that can simply be pressurized in a descending liquidity curve once a bubble ruptures.

Lehman Brothers vulnerability to breaking down was augmented when they started to operate with high levels of risk and started to give out large numbers of short-term debts.  These factors were combined with a risk prone model of doing business. In contrast synchronized banks, Lehman carried out its activities largely free from the important prudential constraints that come with banking regulation.  Looking at this, Lehman Brothers was considered to be in the middle of bigger problem. Looking at the current turmoil, we can be witness to an era of considerably larger growth in maturity revolution outside the boundary of prudential banking directive.  This analogous, unconscientiously synchronized arrangement has turned out to be developing as the shadow banking (Acharya 2009).

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