Introduction
The following paper analyzes the ArticleArticle by Liaquat Ahamed titled ‘Did Lehman’s Fall Matter’ that was published in Newsweek in May 2009. The ArticleArticle focuses on the failure of the large and prominent capital and investment market entity Lehman Brothers, which filed for Bankruptcy in 2008 officially signall8ing the failure of the capital markets in the West due to lending in the subprime markets.
The author however has a different view to the failure of the capital markets and openly declares that it was the acceptance of the congress of a capital market failure that led to the failure of the markets, instead of the bankruptcy that was filed by Lehman Brothers. The following paper discusses the issue as well as highlights the main arguments that are provided by the author in this regard along with personal opi9nions on the matter.
Economic Issue
The economic issue that has been raised in the selected ArticleArticle by the author Liaquat Ahamed is the economic failure of the Lehman Brothers Investment Bank and related affiliations, which caused the meltdown of the global financial and capital investment markets. Lehman Brothers was one of the largest, oldest and one of the most popular banking establishments that had a prominent presence in the capital and ine4vstment markets.
However, in early 2008, the Lehman Brothers openly filed for bankruptcy due to failure of the business structure and the company. This caused a domino effect on the other banks present in the investment and capital market resulting in their failure and more filed bankruptcies. “At 9am, shares in HBOS, Britain’s biggest mortgage lender, crashed 34 per cent in early trading. By noon, panic had gripped the London Stock Exchange and the FTSE had shed almost 400 points.
No one could believe it. Yet worse was to come: within three days, HBOS would be taken over by Lloyds, and within three weeks the FTSE would fall below 4,000, wiping billions off the value of our leading companies. We had grown used to the idea that it always stayed around the 6,000 mark.” (Farndale, 2008)
The failure of the Lehman Brothers was largely due to their inefficiency of operations and the target market that they were catering to as a result of market saturation. The company as a result had piles of increasing debt that it was unable to furnish and repay, resulting in the company losing out on revenues.
The Lehman Brothers company dealt with multiple other banks like American Express, as well as other prominent banks like Lloyd, CITI and its subsidiaries that included Neuberger Berman Incorporates, Aurora Loan Services, Lehman Brothers Bank, the Crossroads Group and FSB all of which suffered severely due to the failure of the Lehman Brothers. This large scale bankruptcy and failure of operation form the group led to a global market failure for the financial sector, which marked the aggravation of the imminent global recession and rise in unemployment levels due to large job cuts.
Relation of the Economic Issue to the Concepts
All markets strive for the perfect market structures in order to operate in the most efficient possible manner. In theory as well it has been discussed that markets fail when the markets are run inefficiently and the perfect market stage is not reached through perfect competition. However, this theory cannot be applied to the real world as there exists nothing that can be termed as perfect in nature. Similarly, all markets that operate in the world globally as well as regionally are imperfect in some form or the other as perfect competition and a perfect stage for a market cannot be reached as a result in the real world, it is easy and imminent for markets to fail.
Markets fail when they operate in an inefficient and in an ineffective manner. The Lehman Brothers failure and the resultant failure of the financial capital markets across the world can also be attributed to the inefficiency of the markets and the lack of government intervention. Starting 2006, the failure of the housing and estate mortgage markets in the North America and Europe was evident due to lending of mortgage loans to the subprime markets.
Similarly, the Lehman Brothers also had to face the sub prime mortgage crises where loans and mortgages were provided to the sub prime market that could not repay the loans and debts being written out to them. The implementation of this lending strategy that was only halted in august 2007 gave a strong push to the operations of the Lehman Brothers in order to make it inefficient at turning profitable revenues.
The sub prime mortgage crises for the entity continued to increase in 2008, which led to large losses being suffered by the Lehman Brothers. This, combined with the imminent recession and the hesitant behavior on the part of the stock market investors greatly contributed to the failure of the company as well. Facing a high level of debts, a large amount of losses through inefficient operations of lending and ill management of bonds/ capital market instruments, the Lehman Brothers started to reduce their costs by decreasing their workforce by 6%.
This strategy led to the initial layoff of 1500 people, which was followed by more layoffs and the imminent failure of stakeholder/ shareholder confidence in the group. Lehman Brothers was a massive empire in the capital market which had a stake in other capital market entities as well. The failure of the market leader resulted in lack of consumer confidence in the market and a crippling effect that has put the capital markets in a recession state.
Arguments and Opinions in the Article Article (s)
The ArticleArticle that has been selected for the paper depicts the opinion of the author on the failure of the Lehman brothers and the failure of the capital markets. The author Liaquat Ahamed is of the opinion in his ArticleArticle that the failure of the Lehman Brothers was a massive letdown, however the straw that broke the camels back was not the failure of Lehman Brothers or the decreasing consumer confidence in the capital markets, but instead it was the lack of government intervention to rectify the failing market.
Economic theory for perfect markets states that market failures occur when a market strived to become perfect; however, some sort of intervention is often required by the government to support and rectify the failing market. In this regard, the author states that the lack of the congress support for the bailout plan for Lehman Brothers and the failing capital markets in early 2008 triggered the final failure of the capital markets.
Others have also openly discussed that while the failure of the Lehman brothers was a shock for everyone and a definite cause of the failure of the capital markets, the capital market still could have been saved if the congress and approved for a bailout plan for the company and market. “The failure of Lehman Brothers last September was the catalyst for a massive sell off in the credit and stock markets and a general flight to safety from which the markets have yet to recover. Had the government found a way to save Lehman, the assumption has been, things today would still be pretty terrible, but we probably would not have seen the economy’ fall off a cliff,’ as Warren Buffett said this weekend” (Surowiecki, 2009).
Ahamed mentions in his ArticleArticle that while the bailout plan would not have been overly successful in making the market profitable, it would have helped retain customer confidence in the market if not boost it, preventing the capital market from the imminent utter failure,
Personal Opinion/ Argument
The personal opinion regarding the failure of the Lehman Brothers and the resultant failure of the capital markets reflects the arguments that have been put forward by Surowiecki and Ahamed in their respective articles.
The capital markets were heading for a failure due to their inefficient operations and leading top the subprime markets. However, the role that was played by the failure of the Lehman Brothers was largely psychological in nature, inspiring fear and lack of confidence in the market. IN such a position, the government could have intervened by investing in the market to prevent it from failure and boost consumer confidence in order to help the capital markets at their time of crisis. However, the decision of the government to let Lehman Brothers fail and become bankrupt cost the capital markets and the stakeholders of the market their lives worth leading towards a global recession of the financial markets.
References
Ahamed, L., ‘Did Lehman’s Fall Matter – The financial-service firm’s collapse didn’t trigger the meltdown. Congress did’, Newsweek Web Exclusive, 2009. Web.
Farndale, N., ‘Lehman Brothers collapse: How the worst economic crisis in living memory began’, Telegraph, 2008. Web.
Surowiecki, J., ‘Did Lehman Brothers’ Failure Matter‘, 2009. Web.