Causes and Effects of the Lehman Brothers Bankruptcy

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1、TestimonyofLuigiZingaleson"CausesandEffectsoftheLehmanBrothersBankruptcy”BeforetheCommitteeonOversightandGovernmentReformUnitedStatesHouseofRepresentativesOctober6,2008CausesandEffectsoftheLehmanBrothersBankruptcyLuigiZingales*October2008AbstractIarguethatthedemiseofL

2、ehmanBrothersistheresultofitsveryaggressiveleveragepolicyinthecontextofamajorfinancialcrisis.Therootsofthiscrisishavetobefoundinbadregulation,lackoftransparency,andmarketcomplacencybroughtaboutbyseveralyearsofpositivereturns.Lehman’sbankruptcyleadtoareassessmentofther

3、isk,inparticularinthemarketforcreditdefaultswaps.*UniversityofChicagoGraduateSchoolofBusiness,NationalBureauofEconomicResearchandCenterforEconomicPolicyResearch.AddresscorrespondencetoLuigiZingales,UniversityofChicagoGraduateSchoolofBusiness,5807SouthWoodlawnAvenue,Ch

4、icago,IL60637ore-mailatluigi@chicagogsb.edu.IthankFedericoDeLucaforexcellentresearchassistantship.2ThedemiseofLehmanBrotherscanonlybeunderstoodwithinthecontextofthecurrentfinancialcrisis,thebiggestfinancialcrisissincetheGreatDepression.Therootsofthiscrisishavetobefoun

5、dinbadregulation,lackoftransparency,andmarketcomplacencybroughtaboutbyseveralyearsofpositivereturns.IwillstartbyexplainingthesethreerootsandthenIwilldiscusshowLehmancontributedtoitsowndemiseandwhattheconsequencesofitsfilingforbankruptcyare.1.MarketComplacencyTheseedso

6、fcurrentcrisisweresewnduringtherealestateboom.AsFigure1shows,aprolongedperiodoflowinterestratesleadtoariseinhousepricesthatwascompletelyabnormalbyhistoricalstandards.FromMarch1997toJune2006theCaseandShillernationalindexofrealestatepricesincreasedeverymonth,exceptfortw

7、o.Duringthesameperiodtheaverageincreaseinrealestatepriceswas12.4%peryear.Thisincreasewasinpartfueledbyextraordinarylowinterestrates.BetweenJanuary2002andJanuary2004theaverage3-monthT-billratewas1.3%,whiletheaverageinthepreviousfortyyearswas6.1%.Thissustainedpriceincre

8、aseengenderstheillusioninmanyactualandaspiringhomeownersthatpriceswillalwaysgoup.Ina2005surveyofSanFranciscohomebuyersCasean