Lehman Bankruptcy

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all about bankruptcy of lehman brothers holding inc. & its impact


<p>LEHMAN BANKRUPTCY</p> <p>BY BHAVNA FATEHCHANDANI</p> <p>1</p> <p>LEHMAN BANKRUPTCY</p> <p>INTRODUCTIONLEHMAN BROTHERS HOLDINGS INC.Type Fate Founded Founder(s) Headquarters Area served Key people Industry Products Market cap Revenue Operating income Net income Total assets Total equity Employees Website Public Chapter 11 Bankruptcy Montgomery, Alabama, United States (1850) Henry Lehman Emanuel Lehman Mayer Lehman New York City, New York, United States Worldwide Richard S. Fuld, Jr. (Chairman) &amp; (CEO) Investment services Financial Services Investment Banking Investment management US$130 Million (As of September 15, 2008) US$59.003 Billion (2007) US$6.013 Billion (2007) US$6.7 Billion (2008) US$691.063 Billion (2007) US$22.490 Billion (2007) 26,200 (2008) www.lehman.com</p> <p>2</p> <p>LEHMAN BANKRUPTCY</p> <p>Lehman Brothers Holdings Inc, the fourth largest US investment bank, succumbed to the sub prime mortgage crisis in the biggest bankruptcy filing in history. The 158 year old firm, which survived railroad bankruptcies of the 1800s, the great depression in the 1930s, &amp; the collapse of long term capital management a decade ago, filed a chapter 11 petition with US bankruptcy caught in Manhattan on September, 15.The following day, its investment banking &amp; trading divisions were acquired by Barclays plc along with its New York headquarters building. Lehman Brothers Holdings Inc, was a global financial-services firm active prior to its bankruptcy and sale in 2008. The firm did3</p> <p>LEHMAN BANKRUPTCY</p> <p>business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. It was a primary dealer in the U.S. Treasury securities market. Its primary subsidiaries included Lehman Brothers Inc., Neuberger Berman Inc., Aurora Loan Services, Inc., SIB Mortgage Corporation, Lehman Brothers Bank, FSB, Eagle Energy Partners, and the Crossroads Group. The firm's worldwide headquarters were in New York .</p> <p>4</p> <p>LEHMAN BANKRUPTCY</p> <p>WHAT HAPPENED?In the biggest reshaping of the financial industry since the Great Depression, Wall Streets most storied firm, Lehman Brothers Holdings Inc., headed towards extinction. Lehman Brothers Holdings Inc, the fourth largest US investment bank, succumbed to the sub prime mortgage crisis in the biggest bankruptcy filing in history. The 158 year old firm, which survived railroad bankruptcies of the 1800s, the great depression in the 1930s, &amp; the collapse of long term capital management a decade ago, filed a chapter 11 petition with US bankruptcy caught in Manhattan on September, 15.The following day, its investment banking &amp; trading divisions were acquired by Barclays plc along with its New York headquarters building. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs World Com Incs insolvency in 2002 &amp; Drexel Burnham Lamberts failure in 1990. What happened that weekend was that the Fed got a bunch of bank presidents together and asked them to invest in Lehman (basically loan Lehman money). The bank CEOs, knowing the risk of such a loan (they could see Lehman's finances), refused to do so without some kind of assistance from the government (whether it be lossprotection, the government paying half of the loan, etc etc). Hank Paulson, the Secretary of Treasury, refused to do this, saying that he didn't want to saddle the taxpayers with paying to save a private company that screwed up. Lehman was forced into bankruptcy after Barclays plc &amp; Bank of America Corp abandoned takeover talks on 14 September &amp; the company lost 94% of its market value this year. Chief Executive Officer, Richard Fuld, who turned the New York based firm into</p> <p>5</p> <p>LEHMAN BANKRUPTCY</p> <p>the biggest underwriter of mortgage- backed securities at the top of the US real state market, couldnt survive this years credit crunch. The Chapter 11 filing did not include Lehman's broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them.</p> <p>6</p> <p>LEHMAN BANKRUPTCY</p> <p>BREAKUP PROCESSOn September 20, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of the deal, was put before the bankruptcy court, with a $ 1.35 billion (700 million) plan for Barclays Plc to acquire the core business of Lehman Brothers (mainly Lehman's $ 960 million Lehman's Midtown Manhattan office skyscraper, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7 hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency." Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $ 47.4 billion in securities and assume $ 45.5 billion in trading liabilities. Lehman's attorney Harvey Miller of Weil, Gotshal &amp; Manges, said "the purchase price for the real estate components of the deal would be $ 1.29 billion, including $960 million for Lehman's New York headquarters and $ 330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $ 1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays.7</p> <p>LEHMAN BANKRUPTCY</p> <p>Barclays had a potential liability of $ 2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days. On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan and Australia. The following day, Nomura announced it's intentions to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. A few weeks later it was announced that conditions to the deal had been met, and the deal will become legally effective on Monday, 13 October. In 2007, Non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.</p> <p>IMIDIATE AFTER EFFECTSUS stocks tumbled, more than $300 billion in market value, pummeled by the developments. Lehman plunged 95%; AIG retreated 42% on funding concerns while Bank of America Corp slumped 14% after agreeing to buy Merrill Lynch &amp; Co. for $50 billion. Stocks fell across Europe &amp; Asia the dollar lost the most against the yen in a decade &amp; treasuries surged. The Standard &amp; Poors 500 index declined 27.33 points, or 2.2 % , to 1224.37 at 10:18 a.m. on 15 September in New York. December futures on the bench mark index had fallen as much as 4.4%. The Dow Jones Industrial Average sank 300.20 to 11121.79. Seven stocks slipped for each that rose on the New York Stock Exchange. The Dow Jones closed down just over 500 points 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.This drop was subsequently exceeded by an even larger plunge on September 29th, 2008.)</p> <p>8</p> <p>LEHMAN BANKRUPTCY</p> <p>WHY HAPPENED...?The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management, but not the global credit crunch. Financial institutions globally have recorded more than $500 billion of write-downs and credit losses as the U.S. subprime mortgage crisis has spread to other markets. Bankruptcy also represents a bad end to Chief Executive Dick Fuld's four-decade career at Lehman. Fuld, who piloted the investment bank through prior crises with aplomb, was widely seen as too slow to recognize Lehman's need to raise capital and shed bad assets.</p> <p>Lehman Brothers filed for bankruptcy because they failed to raise enough capital to secure their debts. The next logical question is why did they have so much debt? This is a two-fold answer:FIRST, Lehman Brothers had massive exposure to property derivatives. These are investments that are tied to the value of properties such as homes and mortgages. Due to the recent housing crash (the biggest part of which is falling property values), the value of the investments that Lehman had fell significantly. SECOND, Lehman had a ton of what is called "leveraged assets". Basically what happened (the non-basic is for another question) is9</p> <p>LEHMAN BANKRUPTCY</p> <p>Lehman took their assets and took out loans secured by those assets (for instance, using their on-hand cash as down payments on loans) and then invested those loans in the aforementioned property derivatives. So, not only did those investments lose value, but Lehman had to pay the interest on the money they borrowed (and subsequently lost). In short, Lehman was a casualty of the credit crunch due to exposure to bad debt.</p> <p>THE OVERALL PROCESS LEADING TO THE BANKRUPTCYIn August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". At the end of August 07, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company's billions of dollars of mortgage securities. In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgagebacked securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off10</p> <p>LEHMAN BANKRUPTCY</p> <p>$6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September. On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank. Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold. On September 17, 2008 Swiss Re estimates its overall net exposure approximately CHF 50 million to Lehman Brothers. Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&amp;P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank. The U. S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman. The next day, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman. The stock slid 7 percent that day. Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008. Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and11</p> <p>LEHMAN BANKRUPTCY</p> <p>investors that management is not shirking accountability for recent performance." Lehman Brothers Investment Management Director George Herbert Walker IV, second cousin to U. S. President George Walker Bush, dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize." In its Chapter 11 filing, Lehman named Citibank and Bank of New York Mellon as trustees for about $138 billion of senior Lehman bonds. It said Citi's Hong Kong affiliate had made a $275 million bank loan to Lehman. Among Lehman's other unsecured creditors are Japanese banks Aozora Bank, Mizuho Financial Group Inc, Shinsei Bank and UFJ Bank. France's BNP Paribas is also on Lehman's list of its 30 largest unsecured creditors. The firm said that as of May 31, it owed about $110.5 billion on account of senior unsecured notes, $12.6 billion on account of subordinated unsecured notes, and $5 billion on account of junior subordinated notes. Lehman also disclosed that it owned stakes of 10 percent or more in a number of companies, including Imperial Sugar Co , Lpath Inc, Derma Services, Flagstone Reinsurance, GLG Partners, Ronco Corp , Pacific Energy Partners, Blount International , Pemstar Inc and Transmontaigne Inc. The investment bank, once the fourth-largest in the United States, had hoped to raise capital by selling off a stake in its investment12</p> <p>LEHMAN BANKRUPTCY</p> <p>unit, and use that capital as well as other funds to spin off some of its toxic assets to shareholders. But that plan did not satisfy investors, who punished Lehman's share price, or rating agencies, who pressed the company to find a stronger partner. Lehman said the uncertainty, particularly among banks through which it clears securities trades, ultimately made it impossible for it to continue to operate its business. The bankruptcy filing comes after a weekend of heated negotiations among regulators and Wall Street firms about Lehman's fate. The U.S. government refused to backstop...</p>


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