Financial Risk Manager Part 1

Explanation

During the lead-up to the 2007/2009 financial crisis, Lehman Brothers relied heavily on the repo market as its main source of funding.

Key Points:

• Repo Market: Repurchase agreements (repos) were extensively used by Lehman Brothers for short-term financing
• Leverage Strategy: Lehman employed significant leverage, with repo financing being a key component
• Risk Exposure: This reliance on short-term repo funding created substantial liquidity risk
• Crisis Impact: When the repo market froze during the crisis, Lehman lost access to this crucial funding source, contributing to its collapse

Why not the other options:

• Bond Market: While Lehman did issue bonds, this was not their primary funding source
• Stock Sale: Equity issuance was not the main funding mechanism for their leveraged operations

The repo market dependency was a critical vulnerability that became apparent during the financial crisis when counterparties became unwilling to roll over Lehman's repo positions.