Explaining the Collapse of Lehman Brothers to a Ten-Year-Old

Imagine you have a big lemonade stand with your friends. You all work together and decide to borrow some money to buy more lemons and sugar to make even more lemonade. At first, everything is great, and you sell a lot of lemonade. But then, some people in your neighborhood don’t want lemonade anymore, and you can’t sell as much as you thought.

Beyond this, you have to pay back the money you borrowed. So you work hard to sell more lemonade to pay it all back. But let’s say your friends start to worry that you won’t be able to pay them back, so they stop helping you. Pretty soon, everyone gets scared, and they don’t want to buy lemonade from you or lend you more money. This is kind of what happened with Lehman Brothers. They were a big bank that borrowed a lot of money to invest in things like houses. When people started losing their jobs and couldn’t pay their mortgages, the bank lost a lot of money. After that, everyone got scared and stopped trusting the bank, leading to its collapse. This collapse caused problems for other banks and businesses just like how your friends might stop selling lemonade if they think your stand is failing.

The Sub Prime Melt Down or 'Melt Down on Wall Street'

In the 2000s, oversea and American investors looking for low-risk high-return investments started to put money into the U.S. housing market. They thought there would be a better return on their money from interest rates. Large financial institutions, such as Morgan Stanley, Merrill Lynch, Bear Stearns, and many others, bought thousands of mortgages, bundled them together, and sold shares to investors. Ordinary people with low incomes were given loans that they couldn't realistically pay back, and because the cost of houses was escalating, many people defaulted on their loans. Banks took back the properties, but there were few buyers for all the properties back on the market. In 2007, many big lenders declared bankruptcy. Insurance policies had been sold without money to back them, and the stock market crashed.

The U.S. government and Federal Reserve Bank had to bail out the banks, which cost around 700 billion dollars. Certain individuals walked away with millions of dollars. This corruption involving Lehman Brothers, U.S. Government insurance companies, and so-called 'watchdogs' threatened to engulf the world. It was a time of greed, lack of ethics, and monumental corruption. Ordinary people were financially crippled, and states like California were bankrupted under Governor Arnold Schwarzenegger’s leadership. 'Too Big To Fail' provides a detailed analysis of this corrupt system. It's fascinating to read or watch anything about Enron, which is another company involved in significant fraud.

Understand the Key Concepts

The key concepts in this story are:

Lehman Brothers: A large American multinational bank that collapsed during the global financial crisis. Sub Prime Crisis: A financial crisis that began in the U.S. housing market, where many homeowners could not afford to pay their mortgages. Financial Meltdown: A sudden and severe failure of the financial system, often characterized by a loss of trust and the collapse of major financial institutions.

Reflect on the Outcomes

The financial meltdown had significant consequences far beyond the banking sector. It impacted regular people who lost their savings and jobs, and it affected other businesses and governments. It emphasized the importance of financial regulations and ethical practices in the banking and investment sectors.

This story can be a learning tool to explain complex financial concepts to children in a simple and relatable way. It helps them understand the importance of being responsible with money and the impact of unethical business practices on society.