Why exactly are the reasons why Lehman and Bear Stearns failed?

In a broader sense, Lehman failed because of solvency issues, and Bear Stearns failed because of liquidity issues. But what are the more micro factors that are responsible for the demise of these two companies when we take a closer examination?

Pimp used to sneak away from his desk for lunch sometimes at LEH…

Borrowed 30-40x what they had in cash and invested a portion of the money into MBS.

Simple. Company has 1 dollar of capital for every 30 dollars of assets. In other words: Assets = 30 Liabilities = 29 Equity = 1 The assets are low quality, such as non-agency RMBS. Your assets lose 10% of their value… 30 x .9 = 27. Now assets = 27 Liabilities, still 29 Equity = -2 Bankrupt

1morelevel Wrote: ------------------------------------------------------- > Simple. Company has 1 dollar of capital for every > 30 dollars of assets. In other words: > > Assets = 30 > Liabilities = 29 > Equity = 1 > > > The assets are low quality, such as non-agency > RMBS. > > Your assets lose 10% of their value… > > 30 x .9 = 27. > > Now assets = 27 > Liabilities, still 29 > Equity = -2 > > END RESULT: Bankrupt good explanation, thanks.