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The short answer was that Lehman was illiquid and lacked sufficient collateral to borrow enough from the Fed or to renew the repurchase agreement contracts (repos) to avert collapse. Surprisingly, just before filing for bankruptcy, Lehman was given investment-grade ratings by the big three independent rating agencies.
Essentially, Repo 105 is an aggressive and deceitful accounting off-balance sheet device which was used to temporarily remove securities and troubled liabilities from Lehman's balance sheet while reporting its quarterly financial results to the public. These transactions were recorded as sales rather than as loans.
Why Was Lehman Brothers Not Bailed Out? Regulators claimed they could not have rescued Lehman because it did not have adequate collateral to support a bailout loan under the Federal Reserve's emergency lending powers.
It gave a crushing blow to the world economy, which fell into a global recession. In this situation, major U.S. and European financial institutions suffered from enormous losses related to subprime mortgage loans and related securitized products.
In June 2007, two big hedge funds failed, weighed down by investments in subprime loans. In August 2007, losses from subprime loan investments caused a panic that froze the global lending system. In September 2008 Lehman Brothers collapsed in the biggest U.S. bankruptcy ever.
The demise of the investment bank Lehman Brothers on Sept. 15 sparked an economic downturn that was felt throughout the world. The crash led to the worst recession since the Great Depression.
Lehman Brothers had humble beginnings as a dry-goods store, but eventually branched off into commodities trading and brokerage services. The firm survived many challenges but was eventually brought down by the collapse of the subprime mortgage market.
Unethical Management practices In their quest to achieve their expansion strategy and other specific objectives, managers of Lehman decided to use a number of dubious mechanisms, unacceptable accounting practice coupled with their blatant disregard for prudent corporate governance practices (Caplan et al, 2012).