Lehman Brothers Chapter 11 Bankruptcy

In 2008, one of the most prominence global financial services firm was declared bankrupt in 2008. Before filling for Chapter 11 bankruptcy, the Lehman Brothers was a primary dealer in the U.S. Treasury securities market. The reason for their bankruptcy is due to dabbling in the shadow banking system. The shadow banking system can be easily characterized by a financial system that consists of non-depository banks and other financial entities. Shadow banking institutions are typically intermediaries between investors and borrowers that channel funds from the investor to the corporation, profiting either from fees or from the difference in interest rates between what it pays the investor and what it receives from the borrower. So they depends on cash flow to finance their operation, without movement of cash, the only way to go is down.[1]

So,going on with Lehman Brothers reason for bankruptcy. At that time, U.S is facing a sub-prime mortgage problems where the falling in U.S. housing prices, a rise in mortgage delinquencies and foreclosures causing disruption in the shadow banking system. With this crisis, Lehman Brothers loose their financial support, resulting in bankruptcy.



Chapter 11 provides additional tools for debtors allowing the trustee to operate the debtor's business. In Chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business. In other words, all assets under the bankrupt company retains their value. Also, with bankruptcy, assets are generally frozen. Under Chapter 11, assets are release and given to the supervision of the court, and entrusted to a trustee. So, the victims could still retained the value of the assets, and not all is lost.