Lehman Brothers, originated in 1850, was a leading
investment bank which arose to become the biggest underwriter of US mortgage
bonds (Onaran, 2008). In addition to the investment banking services that they delivered,
they also served a critical role in the buying and selling of US treasuries as
a main trader. Before being detached from the list of main traders due to
filing for bankruptcy, there were only 19 financial organisations that served
the Federal Reserve Bank of New York (2008) in this capacity. The enormous
economic slowdown that has been given the name, ‘the Great Recession’, was the
longest collapse that the USA faced since the depression of the 1930s.
According to the National Bureau of Economic Research (NBER), the most recent
recession started in December 2007 and finished in June 2009. The failure of
the US housing market is given the majority of the credit for causing this certain
recessionary period. The problems in the real estate market carried over to
financial organisations and since 25 September 2008, 279 banks have failed
(Smith and Sidel, 2010).
When the United States investment bank Lehman Brothers trailed
for bankruptcy on Monday, September 15, 2008, its catastrophe was the largest
in U.S. corporate history. Beyond even the damages following the Enron and
WorldCom bankruptcies at the beginning of the millennium, Lehman Brothers’
collapse headed to the lay-off of 26,000 workforces, triggered 80 insolvency
proceedings of its subsidiaries in eighteen countries, and caused in more than
66,000 claims on its insolvency estate (FCIC, 2011). As a consequence of
Lehman’s collapse, the path of the financial crisis of 2007 moved towards
“cataclysmic proportions” (FCIC, 2011). Therefore, the failure of Lehman
Brothers presents a transitory event linking two different periods of
escalation throughout the financial crisis. Yet, even with the significance of
Lehman’s death, surprisingly tiny sociological attention has been paid to evaluating
why Lehman collapsed in the first place.
Till nowadays, no study has evaluated how the bankruptcy
filing of Lehman Brothers, a firm with obligations in excess of $600 billion, crushed
other financial organisations. One noticeable method is to focus on the
economic losses the bank suffered in 2008. Yet, such a line of inquiry promises
only limited insights, as Lehman Brothers’ business model – highly leveraged
investments in the real estate market – was anything but unusual (Valukas, 2010).
But it was the catastrophe of Lehman Brothers that evinced
to be significant during the US Great Recession that lasted from December 2007
until June 2009. “The Lehman decision abruptly and surprisingly tore the
perceived rule book into pieces and tossed it out the window” (Stewart and
Eavis 2014).Ivashina and Scharfstein (2010) classify Lehman’s failure as a dangerous
turning point inside the financial bazaars. On 9 June 2008 when Lehman Brothers
publicised a second quarter loss of $2.8 billion, significant negative effects
were experienced by banks, savings and loans, chief sellers and brokerage companies.
Months later as the recession continued and it turn out that KDB was
contemplating investing in Lehman, bank stocks rose on this bit of optimism.
But when this investment never came to achievement and Lehman Brothers
pre-announced their third quarter loss of $3.9 billion, more negative means
effects were observed. And on that vital 15 September 2008 date when Lehman
would file for Chapter 11 bankruptcy protection, markets panicked and a
significant stock market sell-off took place.