Description Case

The main business of the two companies is hedge funds, which bring big return to them, supporting them to compete with the universe banks. If they do not bailed out the hedge funds, their stock price would be pushed down immediately, their clients will leave them that they loss the competitive strength, going to bankrupt.

Lehman Brothers and Bear sterns were two out of the five pure-play bulge bracket investment banks. They faced pressure to deliver equity, and became disguised hedge funds. They increased their leverage and proprietary trading (occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money, as opposed to depositors' money, so as to make a profit for itself.) this will lead in the collapse, merger and restructuring of these 5 major pure-play banks of Wall Street. However, Lehman was allowed to fail and not Bear Sterns. Lehman was in a liquidity crunch but for the Fed, it was not solvent. It had no collateral to offer to be solved. Also, Bear Stearns had an important role in the over-the-counter derivative market while Lehman was more focused on subprime mortgage and fixed-income securities in general. Moreover, banks involved into the OTC market can have time to short their shares in Lehman brothers’ equity, while the financial conditions of Lehman worsened. So there is less contagion in the case of Lehman (less involvement in the derivative market, and time for other investment banks to reduce their involvement with Lehman) than in the case of Bear Sterns. That is why Bear should not have failed whereas Lehman was allowed.

...