The Problem of Bankruptcy: Two Lessons From Lehman

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Table of Contents

Description of the Analysis
Report on the Findings
Works Cited

In the US, public companies have a tendency of attempting to file for bankruptcy as it enables them to continue carrying out their operations and manage the bankruptcy progression. If such companies fail, every asset is liquidated, and shareholders are paid back in accordance with absolute precedence. Nearly seven years ago, Lehman Brothers decided to file for bankruptcy and the temporary marketplaces for non-public liability froze up across the globe, compelling banking institutions to reduce greatly on loaning to companies, in addition to family units (Pozen par. 1). The majority of people deem the failure of Lehman the experience that inclined the globe into the worst monetary crisis ever since 1929.

Description of the Analysis

If a firm chooses to file for bankruptcy, there is a possibility that the shareholders will get back their money. Dissimilar bankruptcy filings or processes offer some perception regarding whether the shareholders will receive all or just a fraction of their venture even though that is established per occurrence. There is as well an order concerning the creditors or shareholders that will get paid foremost or last. The shareholders are normally held at a stalemate if their firms encounter bankruptcy. Apparently, no one devotes their finances to any business in any way while anticipating that the business will declare or be declared bankrupt. The moment a firm chooses to file under whichever kind of bankruptcy defense, the rights and privileges of the shareholders vary to reveal the bankruptcy position of the firm. When a number of firms make effective comebacks following a reformation, the risks that the shareholders accept when they venture in the firm at times turn into realities (Pozen par. 1-3).

The disorder that led to the collapse of Lehman was a direct result of the government’s unclear explanation of the reasons behind Fed bailing out Bear Stearns in early 2008. The silence was misconstrued by both the shareholders and Lehman executive directors. Some days prior to its downfall, the United States representatives attempted greatly to plan an arrangement to protect Lehman through trading its defective properties and selling the rest to Barclays (Pozen par. 2-6). The American officials were left with just a couple of alternatives, which were to either inculcate enormous quantities of federal cash into Lehman or allow it to become bankrupt.

Report on the Findings

Lehman could have decided to file for bankruptcy mostly since it could not borrow adequate money to satisfy its short-term operating requirements. To seal the gap, the government could have warranted Lehman’s business paper for at least one or two months. Moreover, the majority of shareholders had declined doing securities deals with Lehman in the course of the week prior to its bankruptcy filing. Finally, the federal government could have at least made sure that there was a conclusion of all transactions with Lehman. Assuming that Bear Stearns was successful to an extent that it could not collapse made most shareholders presume that, as in the case of Bear Stearns, the Fed could easily save Lehman, which was double the size of Bear. The investors kept on with this assumption regardless of an acute spike in the price of default safeguard for the bonds of Lehman in the course of the month prior to its collapse (Pozen par. 3-9). Hence, when the Fed failed to save Lehman, the investors were caught unawares.

Works Cited

Pozen, Robert. “Two lessons from Lehman.” Harvard Business Review, 2009. Web.

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The Problem of Bankruptcy: Two Lessons From Lehman

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