The purpose of this paper is to present a brief overview of three companies that collapsed due to events that occurred in the past. The companies include Lehman Brothers, Washington Mutual, and Deway & Leboeuf. The paper will focus on the factors that led to the collapse of the companies. Additionally, it will highlight the dates when the companies collapsed and the losses that were incurred.
Lehman Brothers was an investment company in the USA banking industry. The company collapsed in September 2008 due to its heavy investment in risky assets. In particular, the company had borrowed a large amount of money to finance its investment activities prior to its collapse in 2008.
A large percentage of the borrowed capital was invested in the subprime mortgage industry (Sorkin, 2008). This exposed the company to the risk of making huge losses if a significant number of its clients defaulted. Unfortunately, the subprime mortgage crisis of 2008 led to a high default rate in the banking industry. Consequently, the company made a loss of $2.8 billion in the second quarter of 2008 (Hines, Kreuze, & Langsam, 2011, pp. 40-49).
Additionally, the company had to sell assets worth $6 billion and to reduce its workforce by 5% in order to remain solvent. In the third quarter of 2008, Lehman made a loss of $3.5 billion (Hines, Kreuze, & Langsam, 2011, pp. 40-49). Consequently, the firm’s management opted to sell it to other financial institutions. However, this plan did not succeed because no firm was willing to inherit Lehman’s losses. In addition, the government of the USA failed to give financial assistance to the company.
Washington Mutual was one of the largest holding companies in the USA’s banking industry. The firm owned Washington Mutual Bank, which was one of the largest commercial banks in the USA prior to 2008. Before its collapse, the company had assets worth over $400 billion (Grind, 2012, p. 213).
The holding company collapsed in 2008 after the OTS took a disciplinary action against Washington Mutual Bank. In particular, customers withdrew nearly 9% of the deposits that were held by the bank in less than ten days. The huge withdrawal occurred because the bank’s credit rating had been downgraded.
The large withdrawal attracted the attention of the Office of Thrift Supervision (OTS), which is one of the regulators of the USA’s banking industry. The OTS responded by seizing the bank and placing it under statutory management. Eventually, the OTS sold the bank to JP Morgan. Consequently, Washington Mutual went out of business and incurred losses of approximately $13 billion (Grind, 2012, p. 114).
Deway & Leboeuf was one of the most successful multinational law firms in the USA. Prior to its collapse, the company had assets worth approximately $100 billion. The firm collapsed in 2012 due to financial constraints (Bernard, 2012). Concisely, the company had promised its lawyers (partners) high remuneration in order to retain them.
However, high competition and declining demand for the company’s services significantly reduced its revenue. Consequently, the firm was not able to keep its promise of paying high salaries to its employees or lawyers (Bernard, 2012). This led to the resignation of more than 60% of the partners, thereby limiting the firm’s ability to operate in the USA.
References
Bernard, T. (2012). As Dewey collapses, partners and retirees face big financial losses. Web.
Grind, K. (2012). The lost bank: The story of Washington Mutual. New York, NY: Simon and Schuster.
Hines, C., Kreuze, J., & Langsam, S. (2011). An analysis of Lehman Brothers bankruptcy and repo 105 transactions. American Journal of Business, 26(1), 40-49.
Sorkin, A. (2008). Lehman for bankruptcy; Merrill is sold. Web.