Why did Lehman Brothers file for Bankruptcy?

Answer:

So they can get out from under their present load, reopen under a new name with a fresh start, dump all their bad clients and keep all their best ones.

The above is speculative and unspecific. Lehman Brothers filed for bankruptcy because they failed to raise enough capital to secure their debts. The next logical question is why did they have so much debt? This is a two-fold answer: First, Lehman Brothers had massive exposure to property derivatives. These are investments that are tied to the value of properties such as homes and mortgages. Due to the recent housing crash (the biggest part of which is falling property values), the value of the investments that Lehman had fell significantly.

The second part is slightly more complex. Lehman had a ton of what is called "leveraged assets". Basically what happened (the non-basic is for another question) is Lehman took their assets and took out loans secured by those assets (for instance, using their on-hand cash as down payments on loans) and then invested those loans in the aforementioned property derivatives. So, not only did those investments lose value, but Lehman had to pay the interest on the money they borrowed (and subsequently lost). In short, Lehman was a casualty of the credit crunch due to exposure to bad debt.

Lehmann was exposed to a lot of Sub prime Mortgage Backed Securities. A MBS is nothing but a bunch of loans packaged into a set of securities and sold off to the general public in the securities market. Lehman would buy loans from other banks and then sell them off as MBS. Every month the bank would pay the interest it earns out of that loan to Lehman who in turn would pay to the investors who bought the MBS. The catch here is that, if the loans become defaulted the bank is not obliged to pay Lehman but Lehman is obliged to pay the customers who bought the MBS. So when loan customers started defaulting, banks stopped paying Lehman. The customers wanted their money and now Lehman was stuck. This was also one of the reasons for its downfall...

What happened this weekend is that the Fed got a bunch of bank presidents together and asked them to invest in Lehman (basically loan Lehman money). The bank CEOs, knowing the risk of such a loan (they could see Lehman's finances), refused to do so without some kind of assistance from the government (whether it be loss-protection, the government paying half of the loan, etc etc). Hank Paulson, the Secretary of Treasury, refused to do this, saying that he didn't want to saddle the taxpayers with paying to save a private company that screwed up.