Lehman Brothers in the 2007-08 Financial Crisis

Wrote by Dongliang "Larry" Yi on Nov. 18, 2015

1.     Economic Crisis, Financial Crisis or Credit Crisis?

When the 2007-08 Financial Crisis is first reported in China, I was a graduate student who is interest in the business world. The first concern of mine is that it may affect my job hunting. So, what is 2007-08 Crisis, and the influences on the financial industry?

1.1 Chain Effect

First, the name of this crisis. Generally, we use ’Economic Crisis’ for those depressed periods of capitalist countries. But this time, most media call it financial crisis, or credit crisis. The key reason is that this time, the most affected industry is concentrated in financial industry, and the incentive of this crisis is the credit issue in housing market.

Second, the credit risk. Although US has a great credit system compared to China, it also has credit risks. To be frank, there are still a lot of people in US do not deliver their commitment in Loan. To start with, we need to know the housing bubble of US before talking about this crisis. The US housing market experienced high growth after the stock market crash in 2000. The subprime loans had increased 292% from 332 million in 2003 to 1.3 trillion in 2007^[1]. When the housing price crashed in 2007, many subprime loads went to default and caused a chain results. ^[8]

What everyone is saying about CCAR?

By Dongliang “Larry” Yi

       

The Origin of CCAR

The 2008 financial crisis is considered to be the worst financial crisis since the Great Depression of the 1930s. ^[1] It caused banks to be acquired or bankrupted, including Lehman Brothers and Merrill Lynch. Concerns on bank solvency, falls in credit availability and impaired investor confidence affected worldwide equity markets, where investors experienced huge losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade dropped. US government bailout banks and prevented the collapse of US financial system. ^[2]

This bailout is called Troubled Asset Relief Program (TARP) in which US government purchased toxic assets from financial institutions to help stabilize the US financial system and restart economic growth. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was passed to protect money spent in TARP. ^[2] In Nov. 2011, Comprehensive Capital Analysis and Review (CCAR) is introduced by the Federal Reserve in order to measure, regulate, and supervise large Bank Holding Companies (BHCs). ^[3] The Federal Reserve want to ensure that BHCs have vigorous processes for determining how much capital they need to maintain access to funding and continue to function as credit intermediaries, even under adverse situations. ^[4]