Lehman Brothers was one of the largest investment banks in the United States prior to their bankruptcy in September of 2008. During the late 1990’s and most of the early 2000’s Lehman Brothers took advantage of the profitable housing market to increase revenues. They began investing in and selling mortgage-backed securities to their clients. The securities were not material items and were largely backed by investor confidence, just as financial statements published by external auditors are secured by the idea of confidence.
As the economy and housing market began to decline, as it normally does in a post war era, Lehman Brothers was realizing that all of the securities they had invested in were going to be worthless. Homeowners began to default on their mortgages and the security bundles that had spiked Lehman’s profits came crashing down.
“Commentators agree that the fall of Lehman Brothers changes everything. According to economists Robert Lucas, “Until the Lehman failure the recession was pretty typical of the modest downturns of the post-war period…After Lehman collapsed and the potential for crisis had become a reality, the situation was completely altered” (Lucas 2009 p.67) (Swedeberg 72).
Lehman Brothers eliminated all investor confidence by using an accounting method they designed called “Repo 105.” They took advantage of a loophole and were able to remove bad debt from their books to falsely report their financial position. Although the public release of the failure may have been influenced by outsiders but it was bound to happen. The confidence of the investors led to the share price of Lehman Brothers to plummet overnight and force them to file bankruptcy.