Lehman Brothers Case

Lehman Brothers is the fourth largest bank in the United State which does business in investment banking, equity and fix-income sales and trading. It was also known as one of the most successful investment banks in the Wall Street. However from the year when depository banks were allowed to make risky investments by using their depositors' money, Lehman Brothers made a lot of mistakes in using too much leverage for risk investment in subprime mortgages, securitization and derivatives in the times of real estate bubble. Starting with the subprime mortgage crisis, on September 15th, the mighty Lehman Brothers collapsed after 158 years, the largest bankruptcy event ever in US.

Although every financial institutions are all connected with Lehman Brothers, many parties and almost all financial system are affected by the bankrupt of Lehman Brothers, US government decided not to bailout it. They thought that if they bailout Lehman Brothers like Bear Stearn, it would create a "moral hazard". Because by the late 1990s, US banking system is full of big banks and "they know that because they are too big they will be bailed" Willem Buiter (Chief Economist, Citigroup) said. If all investment banks thought to be rescued, they will take risker action which makes the situation more serious.

Moreover, in the case of Bear Stearn, US government couldn't measure the effect of that giant firm to the whole system if they went bankrupt, but with Lehman Brothers, Paulson saw that even if he bailed them out wouldn't stopped the coming crisis. He wanted the banks solve the problem themselves. So US let the market follow its rules and they thought the money should be used to pay back to the employees and to the savers.