During the U.S. Subprime Loan Crisis and the following Global Great Recession, many financial institutions had inadequate capital to cover the losses they experienced including financial institutions that were systemically important. Discuss an example of a financial institution that experienced severe financial difficulties and had inadequate capital at this time.

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The Answer is Lehman Brothers is one example of a very large, internationally active financial institution that did business in 40 countries and 650 legal entities outside the U.S. and was also counterparty to many other financial institutions that was inadequately capitalized. In addition, Lehman Brothers had a huge derivative book, large involvement with collateralized debt obligations associated with subprime mortgages. Lehman Brothers also used wholesale, short-term funding, and when confidence was lost for Lehman in the financial markets, sources of short-term funding refused to renew that financing. Lehman' Brothers capital ratio (Tier 1 and Tier 2 relative to risk weighted assets) in 2007 was also only about 7.27% (compared to a 9.87% ratio earlier in 2003), which was insufficient to cover its losses, contributing to its bankruptcy.