Bankruptcy of lehman brothers, Risk Management

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In its early stages, the financial crisis manifested itself as an acute liquidity shortage among financial intermediaries. In this phase, concerns over the solvency of the sophisticated centers of modern finance were increasing but a systemic collapse was deemed unlikely (EC 2009). After one year of bold efforts by policymakers, the financial crisis intensified in mid-September 2008 to the point where it overwhelmed the real economy. The bankruptcy of Lehman Brothers on September 15, 2008 triggered a run in the interbank lending market, a dramatic spike in corporate bond rates, and a global loss of business and consumer confidence (Cecchetti 2009). The crisis did not begin or end there. Deregulation of the financial sector in the advanced countries has started in the early 1980s and resulted in various complicated and widely used financial innovations (particularly the emergence of securitized lending) that attempted to reduce individual investors' risks but in hindsight increased systemic risks (Lin - Martin 2009). Unfortunately, weaknesses in financial regulation interacted with financial innovations such as securitized lending to create serious financial system vulnerabilities. The banking sector assumed that US housing prices would continue to rise and thus quickly raise the value of the houses against which the loans were secured. This resulted in an exceptionally high ratio of loan to value at the time when the loan contract was signed.


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