Lehman Brothers is perhaps one of the most famous example of a bank collapse.
At the time, it was the 4th biggest bank in the USA. By 2008, the investment bank had made a lot of money by investing in different things like stocks, bonds, and mortgages, but they had taken on a lot of debt to do so.
‘At that time, a lot of people, too many perhaps, had been given loans to buy houses’
Unfortunately, some of the investments that Lehman Brothers had made were in the over-inflated US housing market. At that time, a lot of people, too many perhaps, had been given loans to buy houses, there was a false sense of euphoria in the market and many people were “flipping” house after house for a profit.
Lehman Brothers took over many of these mortgages, then those people realised they had too much debt and couldn’t afford to repay them. As sales began to slow, the problem got worse. As a result, a lot of houses went into foreclosure (then the property is repossessed). This caused the bank to end up with so many repossessed properties, and no one to buy them (because it had been over priced in the first place and because no one had any money to buy anything).
‘the value of those houses dropped suddenly, which meant that the investments Lehman Brothers had made in the housing market also lost value’
When that happened, the value of those houses dropped suddenly, which meant that the investments Lehman Brothers had made in the housing market also lost value. This was a big problem for Lehman Brothers, because now they owed more money than they had, and they couldn’t repay it.
As a result, the people and companies that had lent money to Lehman Brothers started worrying that they might not get their investments back. They started to pull their money out of the firm, which made it even harder for Lehman Brothers to pay off their debts. Eventually, the firm had to file for bankruptcy.
That triggering a global financial crisis among banks and other investment firms that had all done the same, it was chaos!
We are still feeling the effects decades later.
