Balance sheet exposures leading towards the credit crunch in global investment banks

ABSTRACT This paper examines the effect of the 2007-8 predicament in the investment banking sector from a balance sheet perspective. The main factors that led to the crisis are identified and discussed, along with how an investment banking sector searching for high yields got involved in mortgage-related securities. Data from the five major US investment banks between 2004 and the second quarter of 2008 is used to argue that the predicament is the result of the combined effect of the subprime crisis and the credit crunch. The main focus of this paper is an analysis of the effect of leverage and liquidity factors on the balance sheet during the crisis, using data from Goldman Sachs and, more importantly, Lehman Brothers from 1999 to the second quarter of 2008. The two investment banks are compared and analyzed to assess whether the balance sheet argument is holding as the crisis deepens.