Lehman Brothers was one of the five largest investment banks in USA and was regarded as the leader in fixed interest transactions. The bank had a substantial amount of investment in the subprime mortgage market of America. When the investments in this market were rejected as being very risky, the confidence of investors in Lehman Brothers decreased and the share prices started declining.
In 2007 the bank made write downs of $700 million and this write down amount rocketed to $7.8 billion in 2008 and the largest loss of the bank’s history was reported. Even after this tremendous write down of value the bank had a risky investment of $54 billion in mortgage securities. The problem for Lehman Brothers was worsened by the financial policy of the management as the bank had a very high level leverage of 30 to 1 and high dependence on short term financing (Zingales). After the record loss the shares of the company took a nosedive by shedding 95 percent in prices. Although the bank had a substantial amount of cash reserves the shareholders lost confidence in the bank when on August 22, 2008 the talks of the state owned Korea Development Bank acquisition of Lehman Brothers came to a halt.
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