Monday, May 19, 2014

Economy: What We Could Learn From Lehman Brothers And The Financial Crisis

(Drivebycuriosity) - The cow is dead, but it is still giving milk: "Almost six years after Lehman Brothers Holdings Inc. filed for the largest bankruptcy in history, triggering a global market meltdown, hedge funds are still feeding on its remains", writes Bloomberg (bloomberg). Some hedge funds have made billions of dollars trading in Lehman`s debts. "Some parts were initially traded at 20 cents on the dollar in mid-2009 and are currently at the equivalent of about 150 cents", reports the media service. According to Bloomberg the bankrupt firm has paid out more than $56 billion to the new owners of her debts so far.

"Lehman filed for Chapter 11 in September 2008 listing $613 billion in debt after it couldn’t get U.S. government aid or attract a buyer" (bloomberg). Then Lehman - and the firm`s assets & debts - were treated as if the recession never would end and as there would be no comeback for the markets. The market prices of Lehman´s assets - which should cover her debts -  had fallen to zero because of the recession and the gloomy sentiment and the market presumed that the debts weren`t covered any more. Lehman debts are claims, which give investors the right to collect any income tied to the defunct firm´s assets like loans to other banks, home owners and other debtors. The market had assumed that Lehman wouldn`t earn enough money from her assets to finance principal and interest for her debts in the years to come which caused finally the death of the company. Lehman`s demise started a chain reaction and created a vortex which pulled the whole economy into a deep recession.

The gains which the debt owners have made since 2009 show that Lehman Brothers (and their assets) weren´t totally worthless as the firm went bankrupt. The revival of Lehman´s debts & assets also prove that the US Government  and the Federal Reserve Bank made a huge mistake as they let the firm go bankrupt. If they had saved  the bank - by buying her debts - they could have made the gains which are now earned by some hedge funds. They also could have avoided the panic which led to the general meltdown of the financial markets that caused the biggest recession since the depression in the1930s.

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