System Analysis of Lehman Brothers Leading Up to Their Collapse

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Quality and reliability problems are found everywhere. They are found in every process, product and service and their problems are occurring all the time. The goal of any process, product, or service is to increase their reliability and minimize risk. However, the fall of Lehman Brothers was the cause of reliability problems that had a tremendous impact on the global economy when they filed for Chapter 11 bankruptcy on September 15, 2008, making it the largest bankruptcy filing in the United States where Lehman Brothers has incurred a large debt, totaling more than $600 billion dollars. The reason for the collapse for Lehman Brothers was because of the housing market. However, the true issues at Lehman Brothers were within its system, mainly dealing with the decision makers and their method to evaluate risk.
What really toppled this investment bank was the housing market collapse. According to the BBC Documentary “The Fall of Lehman Brothers” , Clinton and Bush Administrations supported home ownership making it easier to obtain mortgages. Especially in the early 2000s, house prices sky rocketed and gave birth to “subprime” mortgages. With these mortgages, interest rates were slashed and the housing market was fueled. These mortgages were known as NINJA mortgages, where the mortgage holders had No Income, Job, or Assets, and these mortgages were given solely relying on house prices. The way Lehman Brothers became involved in the NINJA mortgages was this, as described by Oxford University PhD Candidate Horatio Boedihardjo:
“On a sunny morning in 2001, a piece of investment plan landed on the desk of Dick Fuld, the then Chief Executive of Lehman Brothers. The document, compiled by a team of maths and physics PhDs, included a calculation to show how the bank will always end up with a profit if they invest on the real estate markets. Fuld was impressed. The next five years saw the bank borrowing billions of dollars to invest in the housing market. It worked. The housing market boom had turned Lehman Brothers from a modest firm into the world's fourth largest investment bank.”
Lehman was the largest underwriter of real estate mortgages in America. What is really startling is that these financial wizards eliminated the worry of risk. For example, Lehman Brothers loaned $78 million to a developer in the central valley in California to make shopping centers, hotels, and a new apartment complex. However the land in central valley was left untouched. Investments such as these should have been a red flag for Lehman Brothers to not give out loans so freely, given that they had small capital themselves. For example, in August 2007 their leverage was 44 to 1, meaning for every $1 they owned, they borrowed $44. At such a high leverage rate, where the typical ratio is about 20 to 1, somebody at Lehman should have spoken up to prevent this type of mismanagement of finances to occur. This brings to question, who allowed this to happen? Who were the decision...

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