Lessons from Lehman Brothers collapse

The collapse of Lehman Brothers on September 15, 2008, triggered a global financial crisis that saw virtual meltdown of the financial markets. Ten years down the line, the world shudders to think about the nightmare that the collapse unleashed across the globe for many months thereafter.

The Lehman Brothers collapse witnessed global financial markets crashing down like nine pins, resulting in a massive erosion of the investors’ wealth that shook the confidence of the investors to the core.

There were many lessons to be learnt from the Lehman Brothers collapse. First, and most important, lesson that investors learnt was never resort to extreme leverage that far exceeds the capacity to repay. The root cause of Lehman Brothers collapse was that the government, institutions and investors resorted to extreme leverage, which led to massive defaults and ultimately culminated in the collapse of the financial markets. Banks were to blame for the crisis as they resorted to indiscriminate lending in utter disregard of the risks involved and without assessing the repayment capacity of the borrower. They also sold fancy financial products such as mortgage-backed securities to unsuspecting investors.

The second lesson to be learnt was never to invest borrowed money in equity markets. Equity markets promise higher returns, but since higher returns carry higher levels of risks, the possibility of default increases when the tide turns against the borrower.

Last, but not the least, investors should never panic and cash out in a falling market. In fact, falling markets present an opportunity to average down the cost, so instead of resorting to panic selling, one should keep buying, if possible. A smart investor who follows this approach will not only recoup all the losses, but will also make handsome gains when the markets turn around and head northward. The historic high that the markets have reached today is a testimony to the success of this investment strategy.