What are the Subprime mortgage reason of lahman brothers bankruptcy?

Answer 1

Mortgage backed Securities - MBS - is one of the main reasons for the fall of investment banks like Lehmann... Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization. Most MBS are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Let us take into consideration the following entities that would be used during the explanation. Bank ‘B’ - The Bank that is issuing mortgage loans Customer ‘C’ - The person who has taken the mortgage loan from the bank Agency ‘A’ - The Agency that is going to create the MBS Investor ‘I’ - The person who is going to purchase the MBS Customer ‘C’ approaches Bank ‘B’ with the request to issue a mortgage loan of Rs. 1,00,000/-. After all the scrutinizing process ‘B’ decides to grant a loan of Rs. 1,00,000/- to ‘C’. Agency ‘A’ buys the mortgage loan that was granted to ‘C’ at the rate of say Rs. 90,000/- and then packages it into a bunch of securities each with a face value of say Rs. 100/- each. Which means ‘A’ would be creating 1000 units of the MBS. These MBS units would be available for sale in the open securities market for investors to buy. Our Investor ‘I’ decides to buy these MBS units. He makes a payment of Rs. 1,00,000/- to ‘A’ and purchases the units. In many cases 'A' may opt to retain a portion of these units based on the loan mixture to generate revenue for itself. ‘B’ can now use this Rs. 90,000/- for granting fresh loans to other customers. This is how a typical MBS gets created and sold in the open market. Investment banks like Lehmann brothers sell a lot of MBS products. Even if banks default on their monthly interest payments, Lehmann would be responsible for it. When the defaults on Mortgage loans started going up, banks were unable to keep up their commitment to make payments to the investment banks. Since lehmann had to be keep its payment to the investors going it was unable to stand the losses incurred. Hence the bankruptcy...