Skip to content

FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Lehman Brothers' failure in September 2008 is often linked to its reliance on short-term wholesale funding. Which feature of Lehman's business model made it especially vulnerable to a loss of counterparty confidence?

Lehman funded large illiquid real estate positions with short-term repo and commercial paper that had to be rolled over frequently. When counterparties lost confidence and refused to roll funding, it could not sell assets quickly enough, so the maturity mismatch produced a fatal funding liquidity crisis.

  1. AIt financed large holdings of illiquid real estate assets with short-term repo and commercial paper that had to be rolled over frequentlyCorrect
  2. BIt relied primarily on insured retail deposits that depositors withdrew en masse
  3. CIt held mostly long-term equity capital that could not be redeployed quickly
  4. DIt had no exposure to real estate and failed solely because of operational errors

Explanation

Lehman held large illiquid commercial and residential real estate positions funded by short-term repo and commercial paper, creating a maturity mismatch. When confidence fell, lenders refused to roll funding. As an investment bank, it did not rely mainly on insured retail deposits.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions