On September 15, 2008, a petition for bankruptcy of the fourth-largest US investment bank, Lehman Brothers, shocked the whole world and brought economic stagnation. Why did Lehman Brothers bankrupt and cause the heaviest fall in Dow Jones Industrial Average since 9.11 terror?
The bankruptcy arose from an aggressive investment in Mortgage and other derivatives. When the real estate prices and demand for houses rose, many people borrowed money through derivative. However, as bubble in house prices faded away, house prices fell gradually and people who borrowed money taking risks became unable to repay to the banks. They couldn’t even sell their houses due to low demand, and eventually absence of repayment caused a decline in liquidity of banks.
Due to the collapse of the Lehman Brothers, many stockbrokerage firms and banks who invested a lot in Lehman Brothers suffered financial damage. This provoked instability of the stock market. In order to restore companies with low liquidity, United States needed to invest enormously, which might lower the value of the dollar. It affected many companies of each country who export/import to the States in a negative way. As a result, global economy gradually slowdowned its growth.
