5 - Lehman’s Liquidity Crisis

Summary

This chapter reviews Lehman’s liquidity management and the run that forced the firm into bankruptcy. The most damaging part of the run was the refusal of counterparties to roll over Lehman’s repurchase agreements, or “repos.” These repos were essentially loans to Lehman from other financial institutions, such as mutual funds, that were very short-term (often one day), with Lehman posting securities as collateral. Because the collateral protected lenders against losses, it was widely assumed that the lenders had no reason to cut off funds even if Lehman were at risk of bankruptcy. That assumption was a crucial mistake underlying Lehman’s crisis.