From UPSC perspective, the following things are important :
Prelims level : Lehman Crisis
Mains level : Not Much
The fire sale of about $20 billion of Archegos assets, comprising Chinese and US stocks, has sent jitters in the global financial markets, raising worries that the event could be a possible “Lehman moment”.
What is the Lehman Crisis?
- The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis.
- After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate to finance for its reorganization.
- These discussions failed, and Lehman filed a petition that remains the largest bankruptcy filing in US history, involving more than US$600 billion in assets.
Note: The subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans.
What defines the moment?
- It signalled a limit to the government’s ability to manage the crisis and prompted a general financial panic.
- Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure.
- The government and the Federal Reserve system responded with several emergency measures to contain the panic.
- Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off.
- As the margin account contains securities bought with borrowed money, a margin call occurs when lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value.
- A margin call is usually an indicator that the securities held in the margin account have decreased in value.
- When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.
- If the investor fails to pay up the margin amount, the lender will resort to the sale of assets lying in the investor’s account.