EP108 Three Famous Corporate Bankruptcies

Several well-known companies have filed for bankruptcy over the years, often due to poor management, economic downturns, or significant shifts in their industries. Here are three famous corporate bankruptcies:

1. Lehman Brothers (2008)

• Industry: Investment Banking
• Bankruptcy Type: Chapter 11 (Reorganization)
• What happened: Lehman Brothers, once the fourth-largest investment bank in the U.S., filed for bankruptcy in September 2008, with debts exceeding $600 billion. The collapse was one of the key events that triggered the global financial crisis. Lehman’s downfall was largely due to its exposure to subprime mortgages and risky investments in mortgage-backed securities, which became worthless when the housing market collapsed. The bankruptcy sent shockwaves through the global financial system, leading to massive losses, a credit crunch, and widespread economic instability.
• Impact: Lehman’s bankruptcy caused panic in global financial markets, leading to the collapse of other financial institutions and prompting government bailouts. It also prompted significant regulatory changes in the financial industry.

2. Enron (2001)

• Industry: Energy
• Bankruptcy Type: Chapter 11 (Reorganization)
• What happened: Enron was once considered one of the most innovative companies in the U.S., but it filed for bankruptcy in December 2001 after it was revealed that the company had been engaged in an elaborate accounting fraud scheme. Enron’s executives used off-balance-sheet entities to hide billions of dollars in debt and inflate profits, misleading investors, analysts, and employees about the company’s true financial health. When the fraud was uncovered, Enron’s stock price plummeted, and the company filed for bankruptcy.
• Impact: Enron’s collapse led to thousands of employees losing their jobs and savings, and it caused a significant loss of investor confidence. It also led to the enactment of the Sarbanes-Oxley Act in 2002, which implemented stricter regulations on corporate governance and accounting practices.

3. General Motors (2009)

• Industry: Automotive
• Bankruptcy Type: Chapter 11 (Reorganization)
• What happened: General Motors (GM), once the largest automaker in the world, filed for bankruptcy in June 2009 due to a combination of high labor costs, declining sales, and mounting debts. The company’s troubles were exacerbated by the global economic downturn and rising oil prices, which hurt the demand for GM’s gas-guzzling vehicles. In order to avoid liquidation, GM was forced to restructure its operations with the help of a government bailout, which amounted to $49.5 billion.
• Impact: GM’s bankruptcy led to significant job losses and closures of manufacturing plants, but the company ultimately emerged from bankruptcy with a leaner business model. The U.S. government provided substantial assistance, and GM was able to return to profitability after restructuring. It also reshaped the American auto industry, with a focus on more fuel-efficient vehicles and a greater emphasis on innovation.

These corporate bankruptcies highlight how mismanagement, economic challenges, and market shifts can lead even the largest and most influential companies to fail. Each case also prompted significant changes in regulations and business practices.