Third Assignment – Select One Of These Largest Bankruptcies

Third Assignment – Select one of these largest bankruptcies in modern United States business history

Third assignment – select one of these largest bankruptcies in modern United States business history: Lehman Brothers – 2008 ($691 billion in assets), Washington Mutual – 2008 ($327 billion in assets), WorldCom, Inc. – 2002 ($102.9 billion in assets), General Motors – 2009 ($91 billion in assets), CIT Group – 2009 ($80 billion in assets), Enron – 2001 ($65 billion in assets), Chrysler – 2009 ($39 billion in assets). Write a two to three-page paper on the bankruptcy you selected and answer the following questions. Use the MLA method to cite your sources for your paper:

1. There are always multiple reasons a company has to file for bankruptcy. What were the top two reasons the company you selected had to file bankruptcy?

2. What actions did senior management take to avoid bankruptcy?

3. What were the major management actions you think their senior management should have taken to avoid bankruptcy?

4. What are the three most important metrics you think senior management needs to focus on to avoid bankruptcies?

Paper For Above instruction

The bankruptcy of Lehman Brothers in 2008 stands as one of the most pivotal events in modern financial history, symbolizing the severe repercussions of risky practices in a saturated financial environment and the failure of regulatory oversight. The primary reasons for Lehman Brothers' collapse revolve around excessive exposure to mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), coupled with an absence of adequate risk management and liquidity buffers. This confluence of factors created a perfect storm that rendered the firm insolvent when the housing market collapsed and investors lost confidence, leading to its decision to file for bankruptcy (Brunnermeier, 2009).

Senior management at Lehman Brothers made efforts to mitigate the crisis. Prior to bankruptcy, the firm attempted to raise capital, sell assets, or seek government assistance; however, these initiatives were thwarted by market conditions and a lack of government intervention. Notably, Lehman’s management was hesitant to pursue a government bailout or to sell the firm to potential acquirers such as Bank of America, citing strategic and regulatory concerns (Morgenson & Jessop, 2008). Despite their efforts, these actions were insufficient to prevent insolvency.

In hindsight, the senior management’s primary failure was the inability to adapt risk management strategies effectively and to diversify the firm's asset portfolio. Additionally, they should have engaged more proactively with regulatory authorities or sought government assistance earlier when signs of distress became apparent. Implementing more conservative risk controls, maintaining higher liquidity reserves, and better transparency about exposure levels could have prevented the dire outcome (Acharya & Richardson, 2009). A more proactive management response, including strategic asset sales or capital infusion, might have alleviated liquidity pressures and preserved firm stability.

Among the metrics essential for management to monitor, three stand out: leverage ratios, liquidity ratios, and the quality of assets held. High leverage ratios directly increase vulnerability to market shocks, so maintaining a sustainable leverage position is critical. Liquidity ratios determine the firm’s capacity to meet short-term obligations amid stress, making liquidity management fundamental. Lastly, assessing the quality of assets helps identify potential losses early, enabling timely risk mitigation (Adrian & Shin, 2008). By focusing on these metrics, senior management can make informed decisions to prevent insolvency in volatile market conditions.

References

• Acharya, V. V., & Richardson, M. (2009). Restoring Financial Stability: How to Repair a Failed System. John Wiley & Sons.
• Adrian, T., & Shin, H. S. (2008). Liquidity and leverage. Journal of Financial Intermediation, 17(3), 211–231.
• Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77–100.
• Morgenson, G., & Jessop, D. (2008). Chains of disaster: The downfall of Lehman Brothers. The New York Times.