Download - 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 sub- prime 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)