Document Type

Case Studies


When Lehman Brothers filed for bankruptcy on September 15, 2008, it was the largest such filing in U.S. history and a huge shock to the world’s financial markets, which were already stressed from the deflated housing bubble and questions about subprime mortgages. Lehman was the fourth-largest U.S. investment bank with assets of $639 billion and its operations spread across the globe. Lehman’s clients and counterparties began to disclose millions of dollars of potential losses as they accounted for their exposures. But the impact of Lehman’s demise was felt well beyond its counterparties. Concern regarding its real estate assets, its large derivative book, and its significant involvement with collateralized debt obligations (CDOs)—a new type of security that incorporated subprime mortgages—soon “infected” the shadow banking system, contributing to a retraction of wholesale funding and a severe liquidity crisis for many firms, including many with no direct links to Lehman. In this case, we explore the concept of “financial contagion” and how a sudden shock to one firm, such as Lehman, can lead to other firms and markets experiencing similar impacts that are not totally explained by direct linkages.