The Last Days of Lehman Brothers

7/26/2019 The Last Days of Lehman Brothers

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Lehman BrothersThe last days of


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Lehman Brothers considered too big to fail actuallyon September 15, 2008. It was believed that compa

big would be saved but was never saved.Why

What

When

How


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Agenda

History Backstage

The last days

What led to this collapse?

Impact of the collapse

How this collapse could have been prevented? Lessons learned


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History

1. 1850 - 1969

Founded in 1850

Started as a dry-goods store then to a cotton trader.

By 1884 started financial advisory services and underwriting

2. 1969 - 1984

Merged with Kunh, Loeb & Cowas the 4th largest investment ba

3. 1984 - 1994

Shearson acquired Lehman Brothers

4. 1994 - 2008

Went public for the first time.

CEORichard S Fuld

14 straight years of profit


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Backstage

The main business areas of Lehman was typical investment bankinas equities, fixed income, capital markets and investment manaTheir investment banking business provided financial servicesmergers and acquisitions, underwritings and issuing securities.

After 9/11 attacks there was a long period of low interest rates.

Shifted from lower risk brokerage model to high risk capital intmodel.

8 monthsfrom 4th largest investment bank to bankruptcy. Broke the myth that even too big can fail.


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Timeline 1850: Henry Lehman and brothers Emanuel and Mayer opened

trading business in Montgomery, Alabama, naming it Lehman Bro

2007: The firm bypasses smaller rival Bear Stearns Cos. as thunderwriter of mortgage-backed securities.

2007: Closes BNC Mortgage LLC subprime-lending unit, elimina

jobs.


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2008

March 17: Lehman shares fall as much as 48 percent on concernbe the next Wall Street firm to collapse after Bear Stearns was forc

itself for 7 percent of its market value the day before.

May, 21: Hedge fund manager David Einhorn questionsearnings report, saying the bank under-reported its problemsquarter.

June 9: The firm announces its first quarterly loss since going pusells $6 billion of stock to bolster capital.

Aug. 19: Lehman shares drop 13 percent on reports that the firm sobuyers for its investment-management division and that third-quawrite-downs would be worse than estimated.


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Sept. 9: Lehman shares plunged 45 percent after talks aboutinfusion from Korea Development Bank ended.

Sept. 10: Lehman reports a $3.9 billion third-quarter loss, the larghistory, on $5.6 billion of write-downs.

Sept. 12: Lehman shares sink 42 percent after Moody's Investorsaid the firm must find a stronger financial partner or it will dothe company's credit rating.

Sept. 13: Finance leaders meet at the Federal Reserve Bank of Nseeking a solution


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Sept. 14: Barclays pulls its bid after failing to secure guaranteelosses, Bank of America withdraws hours later. Firms meet to netcancel those that offset each other, as Lehman liquidation or b

draws near.

Sept. 15: Lehman petitions for Chapter 11 bankruptcy, listing $of assets in the largest filing in U.S. history.

Sept.16: Barclays announces $2bn deal to buy a large part of

US business out of bankruptcy.


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Causes

1. Repeal of the GlassSteagall Act 1933

The act allowed commercial banks to carry out investmentactivities.

Lehman Brothers in order to compete with other companiesmany commercial and investment banks which exposedseveral risks.

2. Complex capital structure Acquired various firms to compete in the market.

Conducted business over 3000 different legal entities.

Expansion strategy


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3. Losses

$2.8 billion in second quarter and $3.8 billion of third quarter of

Heavily exposed to the U.S real estate market.

4. Liquidity

Unable to meet short term obligations.

Lost market confidence.

5. Leverage Leverage ratio increased from 20 to 44 to 1 shareholder equity

Coupled with sliding of prices of assets due subprime crisis.


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6. Sub prime mortgage crisis

Banking panic

Excessively lent loans to unqualified borrowers without fulldocumentation.

To capitalize on speculative opportunities and to reduce risk Leentered into derivatives (credit default swaps).

Fall in the prices of collateralized debt obligations.

7. Unethical management practices

Use of Repo 105 & Repo 108

Violated Sarbanes-Oxley Act.

Financial statement fraud

Payment of excessive bonuses to directors.


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8. Risks

Market risk

Credit risk Liquidity risk

Operational risk

Reputational risk

9. Unsuccessful bailout & takeover attempts

Korean Development Bank Failed takeover attempts by Bank of America & Barclays.


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Impact

Key Highlights :

Almost 6 million jobs were lost.

Unemployment rate almost doubling to 10%

Popular index DOW JONES fell by 5000 points.

57% drop in stock prices from 2007 peak, coupled with howorth tens of thousands of dollars less.


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1. Impact on banks

Subject to greater govt. regulations

Inter banking lending rates spiked.

Operating with less borrowed money.

2.Impact on economy

Reduction in retail sales & employment opportunities.

Skimpier profits of U.S based companies.

Cost of borrowings also increased.

3. Impact on Global economy

GDP fall to 4.8%

Banks of Japan, Germany & England faced huge losses.


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4.Impact on investors

Turned conservative

Stared shifting to CDs and money market funds.

5. Impact on consumers

Way of spending got interrupted.

Uplifted the level of savings among households.


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Prevention Proactive risk management

Do not do business which you cant understand.

Control greed

Look for early threat signs.

Stricter regulations


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Lessons learned

The myth too big to fail was broken.

Any company even as big as Lehman Brothers should followsome basic rules.

Greed is good but not always.

Always invest in securities which you can understand.

Relation between strict regulations and good corporategovernance.

Goals are good, try hard to achieve it but never overdo it.


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References

Wikipedia

Various case studies

The last days of Lehman Brothers (BBC television film)

Too big to fail (film)

Documents

The Last Days of Lehman Brothers