Articles on Stock markets

Before Lehman Brothers and Bear Sterns, probably the most well-known and publicized bankruptcy was the infamous Enron scandal.

To summarize, Enron executives, fully aware that the company was insolvent, started to sell their stock, while convincing the general public that the stock would continue to rise and the company was prospering (despite actual horrendous losses). As the stock dropped lower and lower, the executives continued to lie to the public, and most people fell into the trap, convinced that the low stock prices were a great opportunity (the stock was going to rebound any day – or so they thought).

Eventually, the multi-million dollar insider trading scam was revealed and Enron went bankrupt, causing widespread losses for thousands of investors.

A very similar bankruptcy happened in the case of WorldCom, which falsified its accounting reports to hide losses and report growth instead. After the fraud was uncovered in 2001, it became evident that WorldCom exaggerated its worth by over $10 billion dollars.

The former CEO of WorldCom, Bernard Ebbers, is currently serving a 25-year sentence in prison.

The most recent example of a large-scale bankruptcy (and the biggest to date) was Lehman Brothers. Lehman had over-leveraged itself by underwriting a huge amount of CDOs (Collateralized Debt Obligations), and when an accounting rule (FASB 157) called for marking those assets to market, their balance sheet shrunk overnight.

It was clear Lehman did not have enough liquidity to support its daily obligations, and in spite of last minute efforts by the US Department of Treasury and the Federal Reserve Board, the consortium of major investment houses refused to bail the company out.

Lehman Brothers collapsed and declared bankruptcy in the wee hours of the morning of September 15th, 2008. Hundreds of banks failed during the Great Recession.

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