The filing for Chapter 11 bankruptcy protection by financial services company Lehman Brothers on September 15, 2008, remains the largest bankruptcy filing in US history, with Lehman holding more than US $ 600 billion in assets.
Banks have become heavily involved in mortgage origination that effectively becomes a real estate hedge fund disguised as an investment bank. At the height of the subprime mortgage crisis, it is particularly vulnerable to declining real estate values.
The bankruptcy triggered a one-day drop in the Dow Jones Industrial Average of 4.5%, the biggest drop since the Sept. 11, 2001 attacks.
Video Bankruptcy of Lehman Brothers
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Rise of mortgage origination (1997-2006)
Lehman was one of the first Wall Street companies to move into the mortgage origination business. In 1997, Lehman purchased Colorado-based Aurora Loan Services lender, Alt-A lender. In 2000, to expand their mortgage origination pipeline, Lehman bought West Coast subprime mortgage borrowers, BNC Mortgage LLC. Lehman quickly became a force in the subprime market. In 2003 Lehman made $ 18.2 billion in loans and ranked third in the loan. In 2004, this number reached $ 40 billion. In 2006, Aurora and BNC lent almost $ 50 billion a month.
Lehman has turned into a real estate hedge fund disguised as an investment bank. In 2008, Lehman had $ 680 billion in assets supported only $ 22.5 billion of the company's capital. From equity positions, commercial real estate ownership is three times greater than capital. In a highly leveraged structure, a decrease of three to five percent in the value of real estate will wipe out all capital.
Exposure to the mortgage market
Lehman borrowed large sums to fund his investments in the years leading up to his bankruptcy in 2008, a process known as leveraging or gearing. Much of this investment is a housing-related asset, making it vulnerable to a downturn in that market. One measure of risk taking is the leverage ratio, the size of the asset to ownership ratio, which increased from about 24: 1 in 2003 to 31: 1 in 2007. While generating tremendous profits during the boom, this vulnerable position means that only a decrease 3-4% in the value of its assets will completely eliminate the book value of its equity. Investment banks like Lehman are not subject to the same rules applied to depository banks to limit their risk taking.
In August 2007, Lehman shut down subprime lender BNC Mortgage, removing 1,200 positions in 23 locations, and taking tax costs after 25 million dollars and a $ 27 million reduction in good faith. The company said that poor market conditions in the mortgage room "necessitate a substantial reduction in resources and capacity in the subprime space".
Lehman's last months
In 2008, Lehman faced unprecedented losses due to the ongoing subprime mortgage crisis. Lehman's loss resulted from holding a large position in subprime and other lower-ranked mortgage sub-segments while securing an underlying mortgage. Whether Lehman does this for not being able to sell bonds with lower ratings, or making conscious decisions to hold them, is unclear. In any case, large losses arising in low-grade mortgage-based securities throughout 2008. In the second fiscal quarter, Lehman reported a loss of $ 2.8 billion and decided to raise $ 6 billion in additional capital by offering new shares. In the first half of 2008 alone, Lehman shares lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intends to release 6% of its workforce, 1,500 people, just before the September third quarter reporting deadline in September.
On Aug. 22, 2008, shares in Lehman closed up 5% (16% on the week) on reports that the state-controlled Korea Development Bank is considering buying Lehman. Most of the profits were quickly eroded when news surfaced that the Korea Development Bank "faces the trouble of pleasing the regulator and attracting partners to the deal." It peaked on Sept. 9, 2008, when Lehman's shares fell 45% to $ 7.79, after it was reported that the state-run South Korean company has postponed talks.
Investor confidence continues to erode when Lehman shares lose about half its value and drive S & amp; P 500 fell 3.4% on Sept. 9, 2008. Dow Jones lost nearly 300 points on the same day, due to investor concerns about bank security. The US government has not announced plans to help all possible financial crises that arise in Lehman.
On September 10, 2008, Lehman announced a $ 3.9 billion loss and their intention to sell a majority stake in their investment management business, including Neuberger Berman. Stocks slid 7% that day.
On September 12, 2008, Timothy F. Geithner, then President of the New York Central Bank, convened a meeting on Lehman's future, which included the possibility of the emergency dismissal of his assets. The bankers representing all the big Wall Street companies attended. The purpose of the meeting was to find a personal solution in saving Lehman and extinguishing the flare of the global financial crisis. Lehman reported that it had been in talks with Bank of America and Barclays for possible sale of the company. The New York Times reported on September 14, 2008, that Barclays has terminated its offer to buy all or part of Lehman and the deal to save the bank from liquidation failed. It emerged later that the deal had been vetoed by the Bank of England and the British Financial Services Authority. The leaders of the major Wall Street banks continued to meet on that day to prevent the bank's rapid failure. The rumored involvement of Bank of America also seems to end when the federal regulator rejects his request for government involvement in Lehman's sale. On Sunday, after the Barclays deal failed, news of the pending destruction hit Lehman, and many employees arrived at the headquarters to clean up their offices. On Sunday afternoon, the government summoned Harvey Miller from Weil, Gotshal & amp; Manges to file for bankruptcy before the market opens on Monday.
Maps Bankruptcy of Lehman Brothers
Bankruptcy filing
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. According to Bloomberg, a report filed with the US Bankruptcy Court, Southern District of New York (Manhattan) on September 16, showed that JPMorgan Chase & Co provided Lehman Brothers for a total of $ 138 billion in "Federal Reserve-backed advances." "Federal Reserve support reserves" as provided by JPMorgan Chase amounted to $ 87 billion on September 15 and $ 51 billion on September 16.
Archiving remains the largest bankruptcy filing in US history, with Lehman holding more than $ 600 billion in assets.
The splitting process
On September 22, 2008, a revised proposal to sell the Lehman Brothers ownership brokerage section of the deal was filed before a bankruptcy court, with a $ 1.3666 billion (Â £ 700 million) plan for Barclays to acquire Lehman Brothers core business (primarily building the central office skyscraper in Midtown Manhattan) of $ 960 million, has been approved. Manhattan court bankruptcy Judge James Peck, after a seven-hour trial, decides: "I have to approve this transaction because this is the only transaction available." Lehman Brothers is a victim, consequently the only true icon falls in a tsunami that has hit the market This is the most important bankruptcy hearing I've ever had, it can never be considered a precedent for future cases, it's hard for me to imagine a similar emergency. "
Luc Despins, an adviser to the creditor committee, said: "The reason we do not mind is really based on a lack of viable alternatives.We do not support transactions because there is not enough time to review them properly." Under the amended agreement, Barclays will absorb $ 47.4 billion in securities and assume $ 45.5 billion in trading obligations. Lehman's lawyer Harvey R. Miller from Weil, Gotshal & amp; Manges, said "the purchase price for the real estate component of the deal would be $ 1.29 billion, including $ 960 million for Lehman New York's headquarters and $ 330 million for two New Jersey districts, and Barclays will not acquire the Eagle unit Lehman, but will have an entity known as Lehman Brothers Canada Inc., Lehman Brothers Sudamerica, Lehman Brothers Uruguay and Private Investment Management business for high-value individuals.Finally, Lehman will retain $ 20 billion of securities assets at Lehman Brothers Inc. that is not transferred to Barclays, Barclays has a potential liability of $ 2.5 billion to be paid as a severance, if he chooses not to keep some of Lehman's employees out of the 90-day guarantee.
On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers franchise in the Asia Pacific region including Japan, Hong Kong and Australia. The next day, Nomura announced its intention to acquire Lehman Brothers' banking and investment equity business in Europe and the Middle East. A few weeks later it was announced that the conditions of the deal had been met, and the deal became legally effective on Monday, October 13. In 2007, non-US Lehman Brothers subsidiaries were responsible for more than 50% of the global revenue generated.
Impact of bankruptcy filing
Dow Jones closed more than 500 points (-4.4%) on September 15, 2008, at the time of the largest point drop in a single day since the days after the attacks on September 11, 2001. (This decrease was then exceeded by -7.0 % plunge on September 29, 2008.)
Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate. The outlook for Lehman $ 4.3 billion of liquidated mortgage securities triggered a sell-off in the commercial commercial-backed securities market (CMBS). The additional pressure to sell securities in commercial real estate is feared as Lehman gets closer to liquidating his assets. Investors who build the apartment are also expected to feel pressure to sell because Lehman dismantled debt and equity shares from the $ 22 billion Archstone purchase, the third largest real estate investment trust in the United States (REIT). Archstone's core business is the ownership and management of apartment buildings in major metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at UBS said that in a market with an apartment building competing with Archstone, "there's no question that if you need to sell assets, you'll try to get ahead" from Lehman's sales, adding "Every day that goes by there is more pressure on prices. "
Some funds and institutional cash funds have significant exposure to Lehman with institutional cash funds run by The Bank of New York Mellon and the Reserve Primary Fund, money market funds, both falling under $ 1 per share, called "breaking money" , following losses on their Lehman asset holdings. In a Bank of New York statement Mellon said the fund had isolated Lehman's assets in a separate structure. It said the assets accounted for 1.13% of the funds. The Reserve Fund owns $ 785 million or 1.2 percent of its holdings in Lehman commercial paper. The drop in the Reserve Fund is the first time since 1994 that money market funds have fallen below the $ 1 per share level.
On Monday, September 15, 2008, the market moved on AIG with shares falling 61 percent. Shareholders also fled from Goldman Sachs and Morgan Stanley. Two weeks later, the Fed agreed to grant them the status of the bank holding company that provides vital access to the Fed discount window.
Putnam Investments, Canada's Great-West Lifeco unit, closed a $ 12.3 billion money market fund against "significant redemption pressure" on September 17, 2008. Evergreen Investments said its parent company Wachovia Corporation will "support" the three Evergreen money markets to prevent their shares fell. This move to cover $ 494 million of Lehman's assets in the fund also raises concerns about Wachovia's ability to raise capital.
Nearly 100 hedge funds used Lehman as their primary broker and relied heavily on the company for financing. In an effort to meet their own credit requirements, Lehman Brothers International routinely re-hypothesizes assets from their hedge fund clients who utilize their main brokerage services. Lehman Brothers International holds nearly 40 billion dollars of client assets when proposing Chapter 11 Bankruptcy. Of these, 22 billion have been re-hypothetical. When administrators took over the London business and the US holding company filed for bankruptcy, the position held by hedge funds in Lehman was frozen. As a result, hedge funds are forced to reduce levers and sit on large cash balances, impeding opportunities for further growth. This in turn creates further market dislocations and overall systemic risks, resulting in a reduction of 737 billion dollars in outstanding guarantees in securities lending markets.
In Japan, banks and insurance companies announced a combined 249 billion yen ($ 2.4 billion) potential loss associated with Lehman's shock. Mizuho Trust & amp; Banking Co cut its projected earnings by more than half, citing ¥ 11.8 billion yen on bonds and loans linked to Lehman. Bank of Japan Governor Masaaki Shirakawa said, "Most loans to Lehman Brothers are made by major Japanese banks, and their possible losses are visible in levels that can be covered by their profits," adding, "There is no concern that the latest events will threaten stability Japan's financial system. "During the bankruptcy process, a lawyer from the Royal Bank of Scotland Group said the company was facing between $ 1.5 billion and $ 1.8 billion in claims against Lehman partly on the basis of Lehman's unsecured collaterals and related to trade losses with a Lehman subsidiary, Martin Bienenstock.
Lehman is a partner for mortgage financing Freddie Mac in unsecured loan deals due on September 15, 2008. Freddie said he has not received any principal payments of $ 1.2 billion plus accrued interest. Freddie said it has the potential for further exposure to Lehman of about $ 400 million associated with single-family home loan payments, including repurchase obligations. Freddie also said, "do not know whether and to what extent will maintain transaction-related losses" and warned that "actual losses may exceed current estimates." Freddie is still in the process of evaluating his exposure to Lehman and its affiliates under other business relationships.
After Constellation Energy reportedly exposed on Lehman, its shares fell 56% on the first day of trading after starting at $ 67.87. A large drop in stocks caused the New York Stock Exchange to stop trading Constellation. The next day, when stocks slumped as low as $ 13 per share, Constellation announced it hired Morgan Stanley and UBS to advise him on "strategic alternatives", suggesting a purchase. While the rumors suggested French power companies ÃÆ'â € ° lectricitÃÆ'Â © de France would buy the company or increase its holdings, Constellation finally approved the purchase by MidAmerican Energy, part of Berkshire Hathaway (led by billionaire Warren Buffett).
The Federal Agricultural Mortgage Corporation or Farmer Mac said it had to spend $ 52.4 million of Lehman's debt in its senior bonds as a result of bankruptcy. Mac farmers say it may not fit the minimum capital requirement by the end of September.
In Hong Kong, more than 43,700 people in the city have invested in HK $ 15.7 billion from Lehman's "mini bonds" (????). Many claim that banks and brokers mis-sell them as low risk. In contrast, bankers note that minibonds are indeed low-risk instruments because they are backed by Lehman Brothers, which is only a few months before its collapse is a respected member of Wall Street with a high credit and investment rating. Lehman Brothers' error is a low probability event, which is completely unexpected. Indeed, many banks accept minibonds as collateral for loans and credit facilities. Another HK $ 3 billion is invested in similar forms such as derivatives. The Hong Kong government proposes plans to buy back investments at their current estimated value, which will allow investors to recover some of their losses by the end of the year. HK Chief Executive Donald Tsang insisted that local banks respond quickly to government buyback proposals because the Monetary Authority received more than 16,000 complaints. On October 17, He Guangbe, chairman of the Hong Kong Banks Association, agreed to repurchase the bonds, which were valued using an agreed methodology based on current value estimates. This episode has a profound impact on the banking industry, where misguided investor sentiment becomes hostile to both wealth management products and the banking industry as a whole. Under intense pressure from the public, all political parties came out to support investors, increasingly fanning distrust of the banking industry.
Neuberger Berman
Neuberger Berman Inc. , through its subsidiaries, especially Neuberger Berman, LLC , is an investment advisory firm founded in 1939 by Roy R. Neuberger and Robert Berman, to manage money for high net worth individuals. In the following decades, the growth of the company reflects that of the overall asset management industry. In 1950, he introduced one of the first non-burden funds in the United States, Dana Wali, and also began to manage the assets of pension plans and other institutions. Historically known for its value investment style, in the 1990s the company began diversifying its competence to include added value and growth investment, across the entire spectrum of capitalization, as well as new investment categories, such as international investment trusts, real-estate and high yield investments. In addition, with the establishment of national trust companies and several state-charters, the company became able to offer fiduciary trust and services. In 2016, the company has about $ 246 billion in managed assets.
In October 1999, the company made its initial public offering and started trading on the New York Stock Exchange under the ticker symbol "NEU". In July 2003, shortly after Mr. 100's birthday The retired Neuberger, the company announced that in a merger discussion with Lehman Brothers Holdings Inc. This discussion ultimately resulted in the acquisition of the company by Lehman on October 31, 2003, about $ 2.63 billion in cash and securities.
On November 20, 2006, Lehman announced that its Neuberger Berman subsidiary will acquire H. A. Schupf & Co., a money management company that targets wealthy individuals. Its $ 2.5 billion asset will belong to Neuberger for $ 50 billion in assets of high value managed clients.
An article in The Wall Street Journal on September 15, 2008, announced that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection, citing Lehman officials regarding Neuberger Berman: "Neuberger Berman LLC and Lehman Brothers Asset Management will continue to do business as usual and not will be subject to the case of the parent company's bankruptcy, and portfolio management, research and operating functions remain intact. In addition, the fully paid securities of Neuberger Berman customers are separated from Lehman Brothers assets and are not subject to Lehman Brothers Holdings creditors' claims, Lehman said. "
Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent an e-mail memo showing, among other things, that Lehman Brothers 'top people canceled a multi-million dollar bonus to' send a strong message to employees and investors that management do not neglect accountability for last performance. "
Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to genuinely apologize to the other members of the executive committee of Lehman Brothers for the proposed bonus reduction idea. He wrote, "Sorry team. I'm not sure what's in the water at Neuberger Berman I'm embarrassed and I'm sorry."
Controversy
The controversy of executive payments during the crisis
Richard Fuld, head of Lehman Brothers, faces questions from the US Government's Supervisory and Reform Committee. Rep Henry Waxman (D-CA) asks: "Your company is now bankrupt, our economy is in crisis, but you have to save $ 480 million (Â £ 276 million).I have a very basic question for you, is this fair? Fuld said he has actually taken about $ 300 million (£ 173 million) in payments and bonuses over the past eight years. Despite Fuld's high paying defense, Lehman Brothers executive salaries are reported to have increased significantly before filing for bankruptcy. On October 17, 2008, CNBC reported that some Lehman executives, including Richard Fuld, have been called in cases related to securities fraud.
Accounting manipulation
In March 2010, the Anton R. Valukas report, Bankruptcy Examiner, drew attention to the use of Repo 105 transactions to improve the bank's clear financial position around the year-end balance sheet date. New York Attorney General Andrew Cuomo subsequently filed a lawsuit against bank auditor Ernst & amp; Young in December 2010, alleging that the company "substantially helps... big accounting fraud" by approving the accounting treatment.
On April 12, 2010, a New York Times story reveals that Lehman has used a small company, Hudson Castle, to move a number of transactions and assets from Lehman's book as a means of manipulating Lehman's financial accounting numbers and risks. A Lehman executive describes Hudson Castle as Lehman's "alter ego." According to the story, Lehman has a quarter of Hudson; The Hudson Board is controlled by Lehman, most of Hudson's staff members are former Lehman employees.
Section 363 sales
On February 22, 2011, Judge James M. Peck of the US Bankruptcy Court in the Southern District of New York dismissed a claim by a lawyer for Lehman's estate that Barclays had reaped a fortune from the sale of section 363. "The sales process may be imperfect but still adequate under exceptional circumstances at Lehman Week. "
See also
- Anton R. Valukas Report
- The Last Days of Lehman Brothers
- Bear Stearns
- List of entities involved in the financial crisis 2007-2008
- Subprime crisis impact timeline
- Correction of United States housing market
- The Federal Takeover of Fannie Mae and Freddie Mac
- Failure of Healthy Colossal Colossals
- Aurora Bank
- Hudson Castle Group
- Margin Call , 2011 movie about investment fraud.
- Free Money Day
- Too Big for Failure , a HBO 2010 documentary about the 2008 financial crisis.
- The Big Short , a 2015 movie about bank fraud.
- C , anime 2011 inspired by Lehman Brothers bankruptcy.
References
External links
- Channel 4 News: How England can save Lehman Brothers
Source of the article : Wikipedia
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