The failure of Lehman Brothers in 2008 was the largest bankruptcy in US history. A number of factors contributed to its failure, including excessive risk taking on housing assets, high leverage, and unethical actions. When housing markets declined, Lehman's vulnerable financial position was exposed and it collapsed, with global economic effects. The replacement of the Glass-Steagall Act allowed greater risk taking and conflicts of interest, which also contributed to Lehman's downfall.

1. Dipesh Raj Pandey
Ace Institute of Management
Year - 2014

2.  The 2008 global financial meltdown saw most
of the top global financial institutions crumble
into liquidation and bankruptcy. The
bankruptcy of Lehman Brothers in the midst of
the global financial crisis was the largest
catastrophe to hit the financial industry in the
United States. Lehman Brothers was the
leading US investment bank worth $600 billion.

3.  Following the fall of Lehman Brothers, a number
of reasons have been attributed to the failure after
thorough investigations were conducted by
financial and non-financial analysts. None of these
analysts gave a single cause to this failure ;
however, a number of factors were discovered for
their failure.
 The factors that accounted for this failure were
poor management choices coupled with unethical
actions; repeal of the Glass- Steagall Act of 1933;
liquidity crisis; financial leverage; excessive losses;
Repos 105, massive credit default swaps, subprime
mortgage crisis, complex capital structure,
unsuccessful bail-out and take-overs.

4.  Lehman borrowed significant amounts to fund its
investing in the years leading to its bankruptcy in
2008, a process known as leveraging or gearing. A
significant portion of this investing was in
housing-related assets, making it vulnerable to a
downturn in that market. One measure of this
risk-taking was its leverage ratio, a measure of the
ratio of assets to owners equity, which increased
from approximately 24:1 in 2003 to 31:1 by 2007.
While generating tremendous profits during the
boom, this vulnerable position meant that just a 3–
4% decline in the value of its assets would entirely
eliminate its book value of equity. Investment
banks such as Lehman were not subject to the
same regulations applied to depository banks to
restrict their risk-taking.
 In August 2007, Lehman closed its subprime
lender, BNC Mortgage, eliminating 1,200 positions
in 23 locations, and took a $25-million after-tax
charge and a $27-million reduction in goodwill.
The firm said that poor market conditions in the
mortgage space "necessitated a substantial
reduction in its resources and capacity in the
subprime space".

5.  The advocates of the Glass-Steagall Act of 1933 blamed the entire
US financial crisis on the enactment of the Gramm-Leach-Biley Act
of 1999 to replace the Glass-Steagall Act (LaRoche, n.d). To reduce
and eradicate possible conflict of interest, the Glass-Steagall Act of
1933 was enacted to separate commercial banking from
investment banking after the great depression years of 1930-1993.
During the great depression, 9,000 banks were reported to have
failed. This Act was amended and replaced in 1999 to allow
commercial banks carry investment banking activities. The
replacement of the Glass-Steagall Act of 1933 saw many
commercial banks merging with investment banks. Financial
analysts blamed this change on the failure of Lehman. In their
quest to compete with commercial banks which has high leverage
positions, Lehman merged and acquired many commercial and
investment banks. The unethical merging activities by Lehman
exposed them to several risks leading to their bankruptcy.

6.  The collapse of Lehman Brothers saw the US
stocks fluctuate with over $300 billion in market
value. Additionally, stocks were affected
throughout Europe and Asia while the dollar
reduced in value against other currencies such as
the yen (Fatehchandani, c. 2010). The reason why
Lehman Brothers sought to file for bankruptcy was
due to their failure to secure enough capital to
clear their debts. The other effect was that it
occasioned depreciation in the commercial real
estate’s prices (Fatehchandani, c. 2010).
 Like in Japan, banks and insurance companies
predicted that they would experience loses worth
$2.4 billion following the collapse of Lehman
Brothers (Fatehchandani, c. 2010). The demise of
Lehman Brothers led to the attrition of
approximately $10 trillion in market capitalization
deriving from global equity markets
(Fatehchandani, c. 2010).

7.  The Royal Bank of Scotland is one of the retail
banking subsidiaries which provides banking
facilities throughout the UK and Ireland.
 In October 2008, at the height of the financial
crisis, RBS failed and became part-nationalized.

8.  The immediate cause of RBS’s failure
was a liquidity run and poor decision
making especially in relation to risk.
 The capital rules which the FSA
(Financial Services Authority) of
Scotland was applying were in
retrospect severely deficient; they
allowed RBS to operate with
dangerously high leverage. This was
one of the most crucial drivers of RBS’s
failure. The erroneous belief that
financial markets were inherently
stable, and that the Basel II capital
adequacy framework would itself
ensure a sound banking system, drove
the assumption that prudential risks
were a low priority.

9.  The decision to go ahead with the AB AMRO
acquisition in 2007 played a significant role in
RBS’s failure. RBS entered the crisis with
extensive reliance on wholesale funding. RBS
was more reliant on overnight funding and
unsecured funding than most of its peers. The
acquisition of ABN AMRO increased its
reliance on short-term wholesale funding.

10.  By early 2007, RBS had accumulated significant
exposures containing credit risk in its trading
portfolio, following its strategic decision in
mid-2006 to expand its structured credit
business aggressively. The acquisition of ABN
AMRO increased RBS’s exposure to such assets
just as credit trading activities were becoming
less attractive. This increased the firm’s
vulnerability to market concerns. Structured
credit markets deteriorated from spring 2007
onwards which caused RBS decline.

11.  Central Bank declared Gurkha Development
Bank crisis ridden on 24 March 2011.

12.  Bad corporate governance on part of the bank
promoters.
 Declining trend of deposits over the last few
months after revelations of bad corporate
governance. Gurkha Development Bank’s
deposits came down to 5 billion as of mid-
March from Rs 5.65 billion in mid-January.

13.  Scandal over embezzlement of Rs. 130 million
by its former executive director D.B. Bomjan
and other staffers while issuing credit to a
customer, Panchalal Maharjan, a businessman
who was deprived of loans against his own
collateral and given to other persons with that
collateral.
 The bank was restricted to mobilize deposits
and float loans after being declared as a
troubled financial institution.