Lehman Brothers: Identified Catalyst of the Crisis

When Lehman Brothers filed for bankruptcy in September 2008, this was taken as a bad sign for Wall Street. As one of the biggest global banking institutions, Lehman Brothers’ fall would apparently create a transatlantic impact given that the company had an outstanding debt of about US$130 billion and all the assets and hedge funds in Lehman Brothers were badly affected. As a global company in which many foreign entities held a stake, the bankruptcy of Lehman Brothers would plummet the company’s stock value down to about $0.

10 thereby also affecting shareholders. Fund within Lehman Brothers had to be frozen thereby making the funds, assets and investments of its holders unreachable to them. Legal Issues After the Bankruptcy In addition to the legal issues pertaining to the local market Lehman Brothers is serving such as its American stakeholders, a bigger problem lies in its foreign clients as Lehman Brothers hold international hedge funds and assets. In cases such as bankruptcy, these assets are frozen thereby even the foreign entities may not be able to access their own assets.

This apparently creates a problem for Lehman and these foreign investors and asset-holders because there is the legal framework that has to be addressed. Since that there are many foreign entities affected by the turnout of Lehman Brothers, there is actually a legal issue that should be addressed especially when it comes to bankruptcy laws. As European institutions were affected with this fold-up, Lehman Brothers also need to face legal bankruptcy frameworks especially as its significant market, Europe, has different bankruptcy laws as compared to the United States.

Admittedly, Lehman Brothers’ legal issues with respect to its bankruptcy woes can take a while before lawyers from both sides of the Atlantic figure out how to unwind this situation. This issue is addressed by the International Monetary Fund: ‘With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system’.

Apparently, even foreign banking institutions have gone as far as offering extra liquidity in order to save money markets, such as the case of the European Central Bank, the Bank of England and the Swiss National Bank. Lehman Brothers’ filing for Chapter 11 or bankruptcy protection can be therefore seen as a reflection of what has been actually happening in the financial markets; given the Lehman Brothers’ position in the market and the industry, it would be inevitable that many would follow suit, as financial institutions in and outside the United States would actually start filing for protection and bailouts in order to save itself.

On the Royal Bank of Scotland The Edinburgh-based Royal Bank of Scotland fell victim to the recent G-20 protests as people expressed their frustrations as to the current developments of one of the biggest bank in the UK; the bank had posted its largest losses in the midst of the global financial crisis as its shares plummeted thereby affecting shareholders.

The RBS also had to be injected with $30 billion by the British government in order to survive its situation. The bank’s former head, Fred Goodwin, gained notoriety for his continuous acquisitions that it would exhaust the limit of the bank’s reserves especially with the $100 billion takeover of ABN-Amro, RBS’ Dutch rival; in simple terms, Goodwin became greedy.

Such loss would evidently create an impact in the local economy as this would lead to job losses and cuts; in addition, RBS would start to sell off not only some of its assets but some of its divisions such as its insurance operations to the American firm Allstate. In addition, the company has been making negotiations with the Commonwealth Bank of Australia an Australian corporate-finance business which RBS acquired along with its takeover of ABN-Amro.

Because of the injection of the stimulus and near-state of bankruptcy, the Royal Bank of Scotland has to make these financial decisions in order to pay off its debts. In such example it can be gathered that greed in RBS’ leadership would lead to the bank’s near-collapse; although RBS remains to stay afloat amidst the crisis, its current situation would have been prevented if the bank, under Goodwin’s leadership, practiced a more responsible approach when it comes to its investment strategies.

The consequences of such greed would therefore result to the jeopardisation of the stakes of its shareholders and investors, with the impact eventually being felt by its clients as its services would become more fragment as some of its operations have to be sold off. Similar to the case of Lehman Brothers, in such scenarios the challenge is in the legal framework that would be operated especially as the sales would potentially involve foreign institutions — Allstate of the United States, and the Commonwealth Bank of Australia — each of them governed by different legal and financial platforms.