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Lehman Brothers Bankruptcy

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GROUP MEMBERS

Muhammad Hassaan Arif

Shehroz Shabbir

Uneeb Ahmed

LEHMAN BROTHERS

HISTORY OF LEHMAN BROTHERS

• Founded by German immigrant Henry Lehman in Montgomery, Alabama,

in 1844.

• In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded

Lehman Brothers

Lehman survived them all:

The railroad bankruptcies of the 1800s, The Great Depression of the 1930s,

two world wars, a capital shortage when it was spun off by American

Express in 1994, and the Long Term Capital Management collapse and

Russian debt default of 1998.

LEHMAN BROTHERS

INTRODUCTION

• The disorderly and costly nature of the LBHI bankruptcy the largest, and

still ongoing, financial bankruptcy in U.S. history contributed to the

massive financial disruption of late 2008.

• The collapse of Lehman Brothers Holdings Inc. (LEH) had a crippling

effect on the global economy with the financial crisis escalating to other

parts of the world. In the aftermath of this event, financial institutions

froze lending activities thereby creating liquidity problems in the shadow

banking financial system.

LEHMAN BROTHERS

According to the World Bank, the economic recession hit USA and the

world at large in three phases

Phase 1

U.S.-subprime-mortgage-cum-structured-finance catastrophe .

Phase 2

Post-Lehman global financial market turmoil

Phase 3

The worldwide economic recession

LEHMAN BROTHERS

PRIME CULPRIT

In 2003 and 2004, Lehman acquired five mortgage lenders,

including subprime lender BNC Mortgage and Aurora Loan Services, which

specialized in Alt-A loans (made to borrowers without full documentation)

LEHMAN BROTHERS

REASONS BEHIND THE COLLAPSE

SUBPRIME BOOM

THE REAL STATE BUBBLE

LEHMAN BROTHERS

LEHMAN BROTHERS

• Asset-backed securities (ABS) and Collateral debt obligations(CDOs)

• Lehman underwrote mortage-backed securities more than any other

firm, accumulating an $85-billion portfolio, or four times its shareholders'

equity

• Leverage levels up to 20-35 percent of their equity capital in order to

invest on securitized products using debt capital.

• Excessive risk-taking

REASONS BEHIND THE COLLAPSE

LEHMAN BROTHERS

• Passing the investment risks through unregulated ‘credit default

swaps’ (CDS) where they didn’t have any adequate capital behind

them.(AIG case)

• Weakness of the FED to recognize the economic catastrophe that

Lehman Brothers bankruptcy would cause.

LEHMAN BROTHERS

IMPACT

• At the time when LEH filed for bankruptcy, the Lehman Brothers’

worth was estimated at $639 billion while on the other hand the Lehman

Brothers were $613 billion in debt.

• After the Lehman Brothers had filed for bankruptcy in the US, the

financial markets in the country nearly collapsed when the Washington

Mutual failed, a double tragedy for the American economy .

• Due to their extensive global imprint on the debt, equity and derivatives

markets, the Lehman Brothers had subsidiaries all over the world.

LEHMAN BROTHERS

LEHMAN BROTHERS

• Consequently, these global subsidiaries and companies affiliated to the

Lehman Brothers also filed for financial insolvency hence catalyzing the

traumatic as well as catastrophic effects of the global economic recession

on financial markets worldwide .

• Several money funds and institutional cash funds had significant exposure

to Lehman with the institutional cash fund run by The Bank of New York

Mellon and the Primary Reserve Fund, a money-market fund, both falling

below $1 per share, called "breaking the buck", following losses on their

holdings of Lehman assets

LEHMAN BROTHERS

• The Dow Jones closed down just over 500 points (−4.4%) on September 15,

2008, at the time the largest drop by points in a single day since the days

following the attacks on September 11, 2001.

• Lehman's bankruptcy is expected to cause some depreciation in the price of

commercial real estate. The prospect for Lehman's $4.3 billion in mortgage

securities getting liquidated sparked a selloff in the commercial mortgage-

backed securities (CMBS).

• In Japan, banks and insurers announced a combined 249 billion yen ($2.4

billion) in potential losses tied to the collapse of Lehman. Mizuho Trust &

Banking Co. cut its profit forecast by more than half, citing 11.8 billion yen

in losses on bonds and loans linked to Lehman.

LEHMAN BROTHERS

• Several money funds and institutional cash funds had significant

exposure to Lehman with the institutional cash fund run by The Bank

of New York Mellon and the Primary Reserve Fund, a money-market

fund, both falling below $1 per share, called "breaking the buck",

following losses on their holdings of Lehman assets.

• Putnam Investments, a unit of Canada's Great-West Life co, shut a

$12.3 billion money-market fund as it faced "significant redemption

pressure" on September 17, 2008.

• Lehman Brothers International held close to 40 billion dollars of

clients assets when it filed for Chapter 11 Bankruptcy. Of this, 22

billion had been re-hypothecated.

LEHMAN BROTHERS

CONTROVERSIES

CONTROVERSY OF EXECUTIVE PAY DURING CRISIS

ACCOUNTING MANIPULATION

SECTION 363 SALE

LEHMAN BROTHERS

ACTIONS TAKEN

LBHI filed a petition under Chapter 11 of the US

bankruptcy code.

Its US broker-dealer subsidiary was acquired by Barclays

a few days later.

LEHMAN BROTHERS

This box discusses three particular market implications linked to the failure of Lehman Brothers that had the potential to cause systemic liquidity disturbances:

1) The impact on the CDS market;

2) The liquidation of money market funds due to losses suffered on Lehman

debt; and

3) The consequences of the bankruptcy for the company's prime brokerage

clients.LEHMAN BROTHERS

• Lehman's bankruptcy led to more than $46 billion of its market value

being wiped out.

• Its collapse also served as the catalyst for the purchase of Merrill Lynch

by Bank of America in an emergency deal that was also announced on

September 15.

LEHMAN BROTHERS

THANK YOU