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2. Liquidity
Most businesses fail not because of lack of profits but because of cash-flow problems. Like all banks, Lehman was an upturned pyramid balanced on a small sliver of cash.
Although it had a massive asset base (and equally impressive liabilities), Lehman didn't have enough in the way of liquidity. In other words, it lacked ready cash and other easily sold assets. As markets fell, other banks started to worry about Lehman's shaky finances, so they moved to protect their own interests by pulling Lehman's lines of credit. This meant that Lehman was losing liquidity fast, which is a dangerous state for any bank. Only six months earlier, in March 2008, Lehman rival Bear Stearns faced a similar loss of liquidity before JPMorgan Chase rode to its rescue. Believing that Lehman did not have enough liquidity at hand, other banks refused to trade with it. Once a bank loses market confidence, it loses everything. Being unable to trade meant that Lehman and its business ceased to exist in other banks' eyes.
3. Losses
After the terrorist attacks of 11 September 2001, US interest rates plummeted, causing a five-year boom in domestic and commercial property prices. This boom ended in 2006 and US housing prices have since fallen for three years in a row. Lehman was heavily exposed to the US real-estate market, having been the largest underwriter of property loans in 2007. By the end of that year, Lehman had over $60 billion invested in commercial real estate (CRE) and was very big in subprime mortgages (loans to risky homebuyers). Also, it had huge exposure to innovative yet arcane investments such as collateralised debt obligations (CDO) and credit default swaps (CDS). As property prices crashed and repossessions and arrears sky-rocketed, Lehman was caught in a perfect storm. In its third-quarter results, Lehman announced a $2.5 billion write-down due to its exposure to commercial real estate. Lehman's total announced losses in 2008 came to $6.5 billion, but there was far more 'toxic waste' waiting to be unearthed.
In summary...
Lehman once employed 28,000 people across the world, including 5,000 in London. At their peak, its shares traded at $85, but they are now roughly 10. Lehman's remains were shared out between Barclays, which bought its US broking arm, and Japanese giant Nomura, which bought its European and Asian assets. These firms, plus numberone investment bank Goldman Sachs, have profited most from picking over the bones of Lehman's businesses. In short, Lehman Brothers -- a company with a 158-year history, including 14 years as an NYSE-listed giant -- failed simply because it took on too much risk in a booming market. In the end, its move from the safety of corporate finance and M&A (mergers and acquisitions) income into the risky world of proprietary trading proved to be its downfall. The lesson here is that any firm, no matter how big and powerful, can be dashed to pieces on the rocks of leverage, liquidity and losses!