Lehman Brothers Declares Bankruptcy - History

Lehman Brothers Declares Bankruptcy - History

On September 15, 2008, Lehman Brothers declared bankruptcy. It was the largest bankruptcy in US history. The filing by Lehman was not the cause of the financial crisis, but the bankruptcy turned the financial problem into a full-fledged crisis.

The seeds of the financial crisis were the rapidly increasing house prices in the United States throughout the first years of the century. More and more people were buying homes, and the banks came up with new ways of lending them money. Providing a mortgage with no money down became a norm. This was fine as long as house prices were rising. When they stopped rising, that became a significant problem.

Traditionally mortgages were issued by local banks who knew their clients and knew the value of real estate in their markets. However, in the years leading up to the crisis new lenders including Lehman entered the market- especially in what was called subprime- meaning borrowers who might otherwise not qualified for a loan. The new lenders created a new method of financing these loans by creating back mortgage securities and collateralized debt obligations (CDO). These were packages of mortgages at different values that were then resold as you would a stock or bond.

Housing prices had peaked in 2006 and began going down in 2007. As a result, homeowners were finding it more and more difficult to refinance their homes. As a result, more an more homeowners began to default. Because of the defaults and the rapidly dropping value of the price of homes the value of the CDO’s started to fall, even worse it was not clear what their values were.

Lehman Brothers was particularly vulnerable to the drop in the value of homes and the mortgage-backed securities. The company had borrowed heavily to invest in the mortgage market. Lehman reported ever-growing losses due to the drop in the value of real estate. In the second quarter of 2008, the company reported losses of $2.8 billion and Lehman was having a harder time of borrowing, and Lehman shares plunged. Lehman announced on September 10th an additional loss of $3.9 Billion. On September 12, 2008, the New York Fed met to find a way to save the bank. An attempt to arrange the sale of Lehman to Barclays or Bank of America failed, and finally, the decision was taken that there was no choice but to declare bankruptcy.

The bankruptcy of Lehman pushed the stock markets into a tailspin with the Dow Jones Industrial dropping 500 points the next day. AIG and other funds suffered runs on their funds. The Federal Reserve stepped in to try to stabilize the markets and were ultimately successful in stopping a complete collapse of the financial system.


Lehman folds with record $613 billion debt

NEW YORK (MarketWatch) -- Lehman Brothers Holdings is closing its doors with more than $600 billion of debt -- the biggest bankruptcy in U.S. history.

Lehman LEH, has total debts of $613 billion against total assets of $639 billion, according to a filing prepared Sunday.

The previous largest bankruptcy was that of WorldCom Inc. in July 2002, which had $104 billion of assets.

The Chapter 11 Petition filing with the Bankruptcy Court of the Southern District of New York shows that Lehman has more than 100,000 creditors and more than $150 billion in outstanding bond debt.

"In the judgment of the Board, it is desirable and in the best interests of the Company, its creditors, employees, and other interested parties that a petition be filed by the Company seeking relief under the provisions of chapter 11 of [the bankruptcy code]," said the filing, effectively ending Lehman's 158-year existence.

The filing also names Lehman's three largest stockholders: AXA AXA, -4.11% , ClearBridge Advisors and FMR, parent of Fidelity Investments. Axa holds 7.3% of outstanding common stock, while ClearBridge holds 6.3% and FMR holds 5.9%. As of 8.45 a.m., shares of Lehman were down to 33 cents in pre-market trading the stock closed just below $13 on Monday September 8.

The largest listed claimants of Lehman's debt were Citigroup Inc. C, -3.64% and Bank of New York Mellon Corp. BK, -3.42% , which were the indentured trustees of about $138 billion of Lehman's senior notes.

That exposure is not directly with the banks -- as indentured trustees they were the agents for the Lehman bonds.

Bank of New York was also listed as the second- and third-largest creditor, with separate claims of $12 billion of subordinated debt and $5 billion of junior subordinated debt -- again, in its role as indentured trustee.

The next largest creditors are Japanese banks Aozora and Mizuho Corporate Bank, a unit of Mizuho Financial Group Inc. MFG, -0.67% .

New York corporate law firm Weil Gotshal & Manges is handling the bankruptcy.


The history of Lehman Brothers bankruptcy

The bankruptcy of the US bank Lehman Brothers is a symbol of the global financial crisis. Its failure started from the beginning of 2007 and the boom in mortgage lending bankruptcies until September 2008.

In February 2007, a number of the US banking institutions that specialize in high-risk mortgage loans (subprime) declare bankruptcy. These variable interest loans, which are almost blind to households with fragile finances, turn to creditors when their number grows. Millions of households were unable to pay their monthly installments, which were rising, thus destroying their creditors, and at the same time the value of their homes sharply decreased.

Some analysts said that there is a “risk” to the financial markets, but most prefer to be optimistic and note that this sector has a “minimal impact” on the US economy.

In June 2007, investment bank Bear Stearns announced the bankruptcy of two speculative funds that had made large investments in financial intruments created and tied to high-risk mortgage loans that have fallen sharply. This is the first big bank institution which suffered the hit of the financial crisis.

In August 2007, when other banks, such as the French BNP Paribas, announced their investments in these risky loans, which resulted the stock exchanges around the world to come out of rails. The interbank markets were affected (banks are reluctant to lend to each other), and a number of central banks were making joint interventions by injecting billions into available funds.

While big world banks (UBS and Citigroup) continue to bear the effects of the crisis, devaluing with billions of dollars the assets that have lost their full price, Lehman Brothers posted a record annual finance statement in December 2007, accounting for a net profit of 4.2 billion USD. The New York Investment Bank has not announced any new asset depreciation or provisions to offset the effects of “high-risk mortgage loans”, expressing satisfaction with its ability to “act beyond market cycles” thanks to the diversification of its business.

Lehman Brothers, however, fired over 3,000 mortgage credit workers between August 2007 and January 2008.

On January 22, 2008, the US central bank cut its key interest rate by 0.75% to 3.50%, an extraordinary measure, followed by a further drop of 0.50% a week later.

In February, Northern Rock, Britain’s fifth-largest bank, was nationalized by the British government.

On March 16, 2008, JP Morgan Chase buys Bear Stearns for amount 15 times less than its market capitalization to prevent further bankruptcies. The market is of the opinion that Lehman Brothers, which has cut 1,400 more jobs at the beginning of the month, could be the next bank to “fall”.

On June 2, 2008, Standard and Poor’s downgraded its rating for the “A” bank group. A week later, Lehman Brothers posted a quarter-quarter loss of 2.8 billion USD. This was the first negative result of the bank since 1994. Its shares sharply depreciated.

The group is trying at all costs to make available money by finding a partner to buy back some of its assets.

On September 10, South Korean KDB Bank, which has shown interest, announced that it will no longer negotiate. That same day, Lehman Brothers posted catastrophic results.

Despite the US Treasury’s attempt to organize a revival operation, Lehman Brothers announces bankruptcy on September 15th because no one has injected fresh money. The US authorities refrain from throwing a life belt.


Contents

Under the Lehman family (1850–1969) Edit

In 1844, 23-year-old Henry Lehman, [16] the son of a Jewish cattle merchant, emigrated to the United States from Rimpar, Bavaria. [17] He settled in Montgomery, Alabama, [16] where he opened a dry-goods store, "H. Lehman". [18] In 1847, following the arrival of his brother Emanuel Lehman, the firm became "H. Lehman and Bro." [2] With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded. [18] [19]

During the 1850s, cotton was one of the most important crops in the United States, and was Alabama's highest-grossing cash crop. Until the U.S. Civil War, nearly all U.S. cotton was produced by slave labor, and by the 1860 census, slaves constituted nearly 45% of Alabama's total population. [20]

Capitalizing on cotton's high market value, the three brothers began to routinely accept raw cotton from slave plantations as payment for merchandise, eventually beginning a second business trading in cotton. Within a few years this business grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855, [18] [21] the remaining brothers continued to focus on their commodities-trading/brokerage operations.

The Lehman brothers, slave owners, were Confederate Army volunteers who grew their wealth profiteering during the Civil War, subverting the cotton blockade, buying cotton at a depressed price in the Confederacy and selling it overseas at a premium. [22]

By 1858, the center of cotton trading had shifted from the South to New York City, where factors and commission houses were based. Lehman opened its first branch office at 119 Liberty Street, [21] [23] and 32-year-old Emanuel relocated there to run the office. [18] In 1862, facing difficulties as a result of the Civil War, the firm teamed up with a cotton merchant named John Durr to form Lehman, Durr & Co. [24] [25] Following the war the company helped finance Alabama's reconstruction. The firm's headquarters were eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870, commodifying the slave crop [21] [26] Emanuel sat on the board of governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business. [27]

Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887. [21] [26] In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company. [28]

Despite the offering of International Steam, the firm's real shift from being a commodities house to a house of issue did not begin until 1906. [23] [29] In that year, under Emanuel's son Philip Lehman, the firm partnered with Goldman, Sachs & Co., [29] [30] [31] to bring the General Cigar Co. to market, [32] followed closely by Sears, Roebuck and Company. [32] Among these were F.W. Woolworth Company, [32] [33] May Department Stores Company, Gimbel Brothers, Inc., [34] R.H. Macy & Company, [34] The Studebaker Corporation, [33] the B.F. Goodrich Co., [27] and Endicott Johnson Corporation.

Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. [23] [35] [36] During Bobbie's tenure, the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered. [37]

In 1924, John M. Hancock became the first non-family member to join the firm, [30] [38] followed by Monroe C. Gutman and Paul Mazur, who became partners in 1927. [39] [40] By 1928, the firm had moved to its One William Street location. [41]

In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont Laboratories, and helped fund the Radio Corporation of America (RCA). [42] It also helped finance the rapidly growing oil industry, including the companies Halliburton and Kerr-McGee. In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation. [43] Later, it arranged the acquisition of Digital by Compaq.

An evolving partnership (1969–1984) Edit

Robert Lehman died in 1969 after 44 years in a leadership position for the firm, leaving no member of the Lehman family actively involved with the partnership. [23] At the same time, Lehman was facing strong headwinds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973, Pete Peterson, chairman and chief executive officer of the Bell & Howell Corporation, was brought in to save the firm. [44] [45]

Under Peterson's leadership as chairman and CEO, the firm acquired Abraham & Co. in 1975, and two years later merged with Kuhn, Loeb & Co., [45] to form Lehman Brothers, Kuhn, Loeb Inc., the country's fourth-largest investment bank, behind Salomon Brothers, Goldman Sachs and First Boston. [46] Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment-banking industry. [44] [47]

By the early 1980s, hostilities between the firm's investment bankers and traders prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. [48] Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO. [44] [49]

Upset bankers, who had soured over the power struggle, left the company. Stephen A. Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm. [44] [50]

Merger with American Express (1984–1994) Edit

Shearson/American Express, an American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. [51] On May 11, the combined firms became Shearson Lehman/American Express. [49] In 1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc. [52]

From 1983 to 1990, Peter A. Cohen was CEO and chairman of Shearson Lehman Brothers, [53] where he led the one billion dollar purchase of E.F. Hutton to form Shearson Lehman Hutton. [54] In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco, but were ultimately outbid by private equity firm Kohlberg Kravis Roberts, who was backed by Drexel Burnham Lambert. [55]

Divestment and independence (1994–2008) Edit

In 1993, under newly appointed CEO Harvey Golub, American Express began to divest itself of its banking and brokerage operations. It sold its retail brokerage and asset management operations to Primerica [56] and in 1994 it spun off Lehman Brothers Kuhn Loeb in an initial public offering, as Lehman Brothers Holdings, Inc. [57] After being spun off, Richard S. Fuld, Jr. became CEO of the company. [58] Fuld steered Lehman through the 1997 Asian Financial Crisis, [59] and when the firm's Long Term Capital Management hedge fund collapsed in 1998. [60] During the subprime mortgage crisis, Fuld kept his job while CEOs of rivals like Bear Stearns, Merrill Lynch, and Citigroup were forced to resign. [61] In addition, Lehman's board of directors, which included retired CEOs like Vodafone's Christopher Gent and IBM's John Akers were reluctant to challenge Fuld as the firm's share price spiraled lower. [61]

In 2001, the firm acquired the private-client services, or "PCS", business of Cowen & Co. [62] and later, in 2003, aggressively re-entered the asset-management business, which it had exited in 1989. [63] Beginning with $2 billion in assets under management, the firm acquired the Crossroads Group, the fixed-income division of Lincoln Capital Management [63] and Neuberger Berman. [64] These businesses, together with the PCS business and Lehman's private-equity business, comprised the Investment Management Division, [65] which generated approximately $3.1 billion in net revenue. [66] In May 2008, prior to going bankrupt, the firm had $639 billion in assets. [67]

Response to September 11, 2001 attacks Edit

On September 11, 2001, Lehman occupied three floors of World Trade Center, where one of its employees was killed in the terrorist attacks of that day. [68] [69] Its global headquarters in Three World Financial Center were severely damaged and rendered unusable by falling debris, displacing over 6,500 employees. [68] Trading operations moved to Jersey City, New Jersey. [70] When stock markets reopened on September 17, 2001, Lehman's sales and trading capabilities were restored. [71]

In the ensuing months, the firm spread its operations across New York City in over 40 temporary locations. [72] The investment-banking division converted the first-floor lounges, restaurants, and all 665 guest rooms of the Sheraton Manhattan Hotel into office space. [72]

The bank also experimented with flextime (to share office space) and telecommuting via virtual private networking after the attacks. [73] [74] In October 2001, Lehman purchased a 32-story, 1,050,000-square-foot (98,000 m 2 ) office building for a reported sum of $700 million. [75] [76] The building, located at 745 Seventh Avenue, had recently been completed, and not yet occupied, by rival Morgan Stanley. [75] [76] Lehman began moving into the new facility in January and finished in March 2002. [77] The firm didn't return to Three World Financial Center as its structural integrity had not been given a clean bill of health, and that the company could not have waited for repairs to Three World Financial Center to conclude. [78] [79]

After the attacks, Lehman's management placed increased emphasis on business continuity planning. [80] Aside from its headquarters in Three World Financial Center, Lehman maintained operations-and-backoffice facilities in Jersey City, space that the firm considered leaving prior to 9/11. [74] The space was not only retained, but expanded, including the construction of a backup-trading facility. [74]

June 2003 SEC litigation Edit

In June 2003, the company was one of ten firms which simultaneously entered into a settlement with the U.S. Securities and Exchange Commission (SEC), the Office of the New York State Attorney General and various other securities regulators, regarding undue influence over each firm's research analysts by its investment-banking divisions. [81] [82] Regulators alleged that the firms had improperly associated analyst compensation with the firms' investment-banking revenues, and promised favorable, market-moving research coverage, in exchange for underwriting opportunities. [83] The settlement, known as the "global settlement", provided for total financial penalties of $1.4 billion, including $80 million against Lehman, and structural reforms, including a complete separation of investment banking departments from research departments, no analyst compensation, directly or indirectly, from investment-banking revenues, and the provision of free, independent, third-party, research to the firms' clients. [81] [82]

Lehman was one of the first Wall Street firms to move into the business of mortgage origination. In 1997, Lehman bought Colorado-based lender, Aurora Loan Services, an Alt-A lender. In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC. Lehman quickly became a force in the subprime market. By 2003 Lehman made $18.2 billion in loans and ranked third in lending. By 2004, this number topped $40 billion. By 2006, Aurora and BNC were lending almost $50 billion per month. [84] By 2008, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its risky commercial real estate holdings were thirty times greater than capital. In such a highly leveraged structure, a 3 to 5 percent decline in real estate values would wipe out all capital. [85]

Causes Edit

Malfeasance Edit

A March 2010 report by the court appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firm’s financial condition in late 2007 and 2008." [86]

Subprime Mortgage Crisis Edit

In 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." [87]

In September 2007, Joe Gregory appointed Erin Callan as CFO. On March 16, 2008, after rival Bear Stearns was taken over by JP Morgan Chase in a fire sale, market analysts suggested that Lehman would be the next major investment bank to fall. Callan fielded Lehman's first quarter conference call, where the firm posted a profit of $489 million, compared to Citigroup's $5.1 billion and Merrill Lynch's $1.97 billion losses which was Lehman’s 55th consecutive profitable quarter. The firm's stock price leapt 46 percent after that announcement. [77] [88] [89] [90]

In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages it is unclear whether Lehman was simply unable to sell the lower-rated bonds or voluntarily kept them. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. [91] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. [91]

On June 9, 2008, Lehman Brothers announced US$2.8 billion second-quarter loss, its first since being spun off from American Express, as market volatility rendered many of its hedges ineffective during that time. Lehman also reported that it had raised a further $6 billion in capital. As a result, there was major management shakeup, in which Hugh "Skip" McGee III (head of investment banking) held a meeting with senior staff to strip CEO Richard Fuld and his lieutenants of their authority. Consequently, Joe Gregory agreed to resign as president and COO, and afterward he told Erin Callan that she had to resign as CFO. Callan was appointed CFO of Lehman in 2008 but served only for six months, before departing after her mentor Joe Gregory was demoted. [88] [89] [90] Bart McDade was named to succeed Gregory as president and COO, when several senior executives threatened to leave if he was not promoted. McDade took charge and brought back Michael Gelband and Alex Kirk, who had previously been pushed out of the firm by Gregory for not taking risks. Although Fuld remained CEO, he soon became isolated from McDade's team. [77] [92]

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. [91] 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. [93] 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." [94]

On September 9, Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold. [95] Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&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. [96] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman. [97]

The next day, Lehman announced a loss of $3.9 billion and its intent to sell off a majority stake in its investment-management business, which includes Neuberger Berman. [98] [99] The stock slid seven percent that day. [99] [100] 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. [100]

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 multimillion-dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance." [101] Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea 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." [101]

Short-selling allegations Edit

During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House Committee on Oversight and Government Reform, [102] former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman Henry Waxman said the committee received thousands of pages of internal documents from Lehman and these documents portray a company in which there was "no accountability for failure". [103] [104] [105]

An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to the demise of both Lehman and Bear Stearns. [106] A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Lehman Brothers and Bear Stearns, and found "no evidence that stock price declines were caused by naked short selling". [107]

Bankruptcy Edit

On Saturday, September 13, 2008, Timothy F. Geithner, then the president of the Federal Reserve Bank of New York, called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. [108] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale however, both Barclays and Bank of America ultimately declined to purchase the entire company, in the former case because the British government (in particular, the Chancellor of the Exchequer Alastair Darling and the CEO of the Financial Services Authority Hector Sants) refused to allow the transaction at the last minute, quoting stockholder regulations in the UK, despite a deal having apparently been completed. [108] [109]

The next day, Sunday, September 14, the International Swaps and Derivatives Association (ISDA) offered an exceptional trading session to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day. [110] Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session. [111]

Shortly before 1 am Monday morning (UTC−5), Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection [112] citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. [113] It further announced that its subsidiaries would continue to operate as normal. [112] A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government. [114] The morning witnessed scenes of Lehman employees removing files, items with the company logo, and other belongings from the world headquarters at 745 Seventh Avenue. The spectacle continued throughout the day and into the following day.

Brian Marsal, co-chief executive of the restructuring firm Alvarez and Marsal was appointed as Chief restructuring officer and subsequently Chief executive officer of the company. [115]

Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant after clearing-houses terminated contracts with the firm. [116] Lehman shares tumbled over 90% on September 15, 2008. [117] [118] The Dow Jones closed down just over 500 points on September 15, 2008, which was at the time the largest drop in a single day since the days following the attacks on September 11, 2001. [119]

In the United Kingdom, the investment bank went to administration with PricewaterhouseCoopers appointed as administrators. [120] In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding company filed for civil reorganization on September 16, 2008, in Tokyo District Court. [121] On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers. [122]

On March 16, 2011 some three years after filing for bankruptcy and following a filing in a Manhattan U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek creditor approval of its reorganization plan by October 14 followed by a confirmation hearing to follow on November 17. [123] [124]

Liquidation Edit

Barclays acquisition Edit

On September 16, 2008, Barclays PLC announced that they would acquire a "stripped clean" portion of Lehman for $1.75 billion, including most of Lehman's North America operations. [11] [125] On September 20, 2008, a revised version of the deal, a $1.35 billion (£700 million) plan for Barclays to acquire the core business of Lehman (mainly its $960-million headquarters, a 38-story office building [126] in Midtown Manhattan, with responsibility for 9,000 former employees), was approved. [127] [128] 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." [129]

Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, 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." [130] In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & 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." [ citation needed ] 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. [131] Barclays acquired 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. [132]

Nomura acquisition Edit

Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for $225 million [133] and parts of the European division for a nominal fee of $2. [134] [135] It would not take on any trading assets or liabilities in the European units. Nomura negotiated such a low price because it acquired only Lehman's employees in the regions, and not its stocks, bonds or other assets. The last Lehman Brothers Annual Report identified that these non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced. [136]

Sale of asset management businesses Edit

On September 29, 2008, Lehman agreed to sell Neuberger Berman, part of its investment management business, to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15 billion. [137] The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy Court, [138] but a competing bid was entered by the firm's management, who ultimately prevailed in a bankruptcy auction on December 3, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known as Neuberger Berman Group LLC. [139] In Europe, the Quantitative Asset Management Business has been acquired back by its employees on November 13, 2008 and has been renamed back to TOBAM.

Financial fallout Edit

Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert collapsed in 1990 amid fraud allegations. [114] Immediately following the bankruptcy filing, an already distressed financial market began a period of extreme volatility, during which the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain. What followed was what many have called the "perfect storm" of economic distress factors and eventually a $700bn bailout package (Troubled Asset Relief Program) prepared by Henry Paulson, Secretary of the Treasury, and approved by Congress. The Dow eventually closed at a new six-year low of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year.

The fall of Lehman also had a strong effect on small private investors such as bond holders and holders of so-called Minibonds. In Germany, structured products, often based on an index, were sold mostly to private investors, elderly, retired persons, students and families. Most of those now worthless derivatives were sold by the German arm of Citigroup, the German Citibank now owned by Crédit Mutuel. [ citation needed ]

Ongoing litigation Edit

On March 11, 2010, Anton R. Valukas, a court-appointed examiner, published the results of its year-long investigation into the finances of Lehman Brothers. [140] This report revealed that Lehman Brothers used an accounting procedure termed repo 105 to temporarily exchange $50 billion of assets into cash just before publishing its financial statements. [141] The action could be seen to implicate both Ernst & Young, the bank's accountancy firm and Richard S. Fuld, Jr, the former CEO. [142] This could potentially lead to Ernst & Young being found guilty of financial malpractice and Fuld facing time in prison. [143] According to The Wall Street Journal, in March 2011, the SEC announced that they weren't confident that they could prove that Lehman Brothers violated US laws in its accounting practices. [144]

In October 2011 the administrators of Lehman Brothers Holding Inc. lost their appeal to overturn a court order forcing them to pay £148 million into their underfunded pensions plan. [145]

As of January 2016, Lehman has already paid more than $105 billion to its unsecured creditors. In addition, JPMorgan will pay $1.42 billion in cash to settle a lawsuit accusing JPMorgan of draining Lehman Brothers liquidity right before the crash. The settlement would permit another $1.496 billion to be paid to creditors and a separate $76 million deposit. [146]

The following is an illustration of the company's major mergers and acquisitions and historical predecessors (this is not a comprehensive list): [147]


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Great Recession

After Lehman Brothers declared bankruptcy in September 2008, approximately twenty-six thousand of the firm&rsquos employees worldwide lost their jobs, and investors suffered immense losses, fueling the country&rsquos greatest economic downturn since the crash of 1929. On September 16, 2008, one day after Lehman&rsquos collapse, the Federal Reserve Bank of New York lent $85 billion to the global insurance company American International Group (AIG), whose assets failed to cover its mounting credit default swap contracts. As confidence in the banks eroded, borrowing rates rose and home foreclosures continued to spike. Lawrence McDonald, author and a former vice-president at Lehman Brothers, reflects back on the devastating cost brought about by the collapse, recognizing that &ldquoevery fraction of every inch of those financial graphs represents hope or fear, confidence or dread, triumph or ruin, celebration or sorrow.&rdquo[22]

Investors in financial products related to Lehman Brothers protest in Hong Kong, October 31, 2008. Courtesy of AP Photo/Vincent Yu.

The Economist, October 2008. © The Economist Newspaper Limited, London (October 4, 2008).

The Economist, September 2018. © The Economist Newspaper Limited, London (September 8, 2018).

Workers embrace outside the offices of Lehman Brothers in Canary Wharf in London, Monday, September 15, 2008. Courtesy of AP Photo/Kirsty Wigglesworth.

On October 3, 2008, under the Troubled Asset Relief Program (TARP), the government addressed the mortgage crisis by infusing funds into U.S. banks and purchasing toxic assets and equity. In 2009, General Motors and the Chrysler Corporation declared bankruptcy. In March of that year, the Dow Jones plummeted its lowest level of 6,594, a decline of more than 50 percent since 2007, and the unemployment rate hit 10 percent. Retirement accounts tied to financial markets fell sharply. In 2010, Congress passed the Dodd-Frank Wall Street Reform Act, legislation increasing government regulation of the financial industry. While financial markets were ultimately stabilized by government policy, the economy still collapsed.

Global Impact

The collapse of Lehman Brothers followed by the close of its London office and other international subsidiaries sent shock waves through the global financial markets with a widespread ripple effect. Defaulted loans on houses in the United States, for example, could be linked to mortgage-backed securities issued to investors in Europe or Asia. Additionally, Lehman Brothers had been a major issuer of short-term debt in the form of commercial paper, and its collapse caused a credit freeze of this vital source of lending throughout the world. Decrease in both consumer spending and exports to the United States severely affected the flow of goods, manufacturing, and job growth in Europe and Asia. Stock markets plunged, resulting in the worst economic downturn in global markets since the Great Depression of the 1930s. Major debt crises ensued in Ireland, Spain, Greece, Portugal, and Cyprus. Stimulus packages enacted by China and by the G-20, the forum for the world&rsquos major economies, eventually began to stabilize the global markets.

Looking Back

Lehman Brothers transitioned from a general store in the 1850s to an investment banking house by the turn of the twentieth century. The firm advised on corporate mergers, the sale and acquisition of companies, and investment portfolios for individuals, foundations, endowments, and pension funds. Lehman Brothers underwrote securities to raise capital for a range of businesses, supporting established companies as well as smaller, emerging enterprises. Since its beginnings, the firm showed vision in its ability to foresee the potential of diverse industries, including transportation, retail, entertainment, advertising, manufacturing, utilities, communications, and high tech. By 1957, Fortune magazine observed that &ldquono firm can match Lehman for sheer virtuosity.&rdquo[23]

For over a century and a half, Lehman Brothers&rsquo ability to seek out new investment opportunities contributed to the country&rsquos economic growth, job creation, and standard of living. By the twenty-first century, with rising government deregulation of the financial sector, firms like Lehman Brothers became increasingly leveraged in speculative, short-term investments&mdashfailing to strike a balance between risk and return. Further, staring in the 1970s, income and wealth inequality in the United States began a steady rise with falling income mobility and middle- and lower-income households sinking into greater debt. The history of Lehman Brothers, author Peter Chapman writes, &ldquomirrored the ascent to wealth and world leadership of the United States. Its story, furthermore, would provide a precise reflection of the ebbs and flows, and the rises and falls, of the American Dream.&rdquo[24]

In 2008, the collapse of Lehman Brothers and crumbling financial system, built on short-term investing strategies and a failure of sound investment practices, reverberated with seismic intensity around the globe. The financial crisis &ldquoturbocharged today&rsquos populist surge, raising questions about income inequality, job insecurity, and globalization,&rdquo The Economist argues. &ldquoPolicymakers have made the economy safer, but they still have plenty of lessons to learn.&rdquo[25] Financial meltdowns have occurred repeatedly through history. A decade after Lehman Brothers failed, debates continue: What steps could Lehman Brothers have taken to prevent bankruptcy? What is the role of government and regulation in the financial industry? What ethical obligations do investment banks have to their clients and to the public at large? In considering the interdependence of world economies and fracturing geopolitics, in what ways can the past inform the future? And how can a future global financial collapse of this magnitude be prevented?


Lehman Brothers Bankruptcy : Seeded in LTCM’s Failure?

Lehman Brothers Bankruptcy : Seeded in LTCM’s Failure?

Long Term Capital Management LTCM : The fall of LTCM (Long Term Capital Management) and Lehman Brothers remain some of the most debated topics in modern financial history.https://www.youtube.com/embed/T4-oFQW6bIw?start=155&feature=oembed

Following the Russian financial crisis of 1998, LTCM, a new but prominent hedge fund, found itself on the edge of bankruptcy. However, the firm was saved, establishing the first instance in which a non-insured depository was bailed out by the Federal Reserve.

This high-profile management team generated massive hype behind LTCM leading to an initial investment of 1.3 billion dollars from various banks and other private funds [4].

LTCM provided impressive yields for investors with annual return rates up to 42.8 percent, growing to roughly 7.3 billion in capital and 120 billion in assets by the end of 1997 [6].

However, LTCM’s success didn’t last long and blew up in one of the most spectacular fashions in August of 1998.

LTCM primarily invested in convergence trades amongst various countries’ bonds [3]. The fund compared government bonds that were slightly mispriced relative to each other and took corresponding long or short positions. As such, LTCM had a large stake in global markets.

The devaluation of the Russian ruble and declared moratorium on Russian debts caused significant liquidity issues in several Asian economies which yielded a massive loss for LTCM.

With equity dropping to 600 million and an astronomical leverage ratio over 100 to 1, failure seemed imminent for LTCM and bailout procedures were underway [3].

LTCM initially received a private buyout offer by a group made up of Berkshire Hathaway, Goldman Sachs, and AIG [4]. The group proposed to buy out shareholders for 250 million and inject 3.75 billion in capital into LTCM [4].

But, LTCM refused the offer and eventually received a better rescue package from the Federal Reserve: 14 high-value banks invest 3.65 billion in capital for 90 percent of LTCM’s equity with shareholders retaining the other 10 percent [4].

The Fed’s package was ultimately better for both existing shareholders and management, but the necessity of Federal involvement is questionable, given the existence of a previous buyout offer.

A decade later saw one of the most harrowing financial collapses in modern history, the 2008 subprime mortgage crisis and the fall of Lehman Brothers. The firm was originally founded in 1844 as a dry goods store by brothers Mayer, Emanuel, and Henry Lehman before its expansion into commodities trading and brokerage services [9].

Unlike LTCM, Lehman Brothers was a firm with decades of experience, overcoming some of the world’s worst financial situations including the Great Depression. In the early 2000’s, Lehman invested in mortgage backed securities, acquiring multiple prominent mortgage lenders.

As a large player in the mortgage industry, Lehman incurred significant losses due to the 2007 credit crisis and subsequent collapse of mortgage backed securities. Unable to finance its losses, Lehman’s stock plummeted and the firm was headed for bankruptcy [9].

The weekend before the bankruptcy, Bank of America and Barclays attempted to settle a takeover with Lehman, but talks ultimately fell through [9]. The Federal Reserve refused to assist Lehman on the basis of legality and consequently forced the firm into bankruptcy.

However, the Fed had just bailed several large financial institutions including Bear Stearns, Freddie Mac, and Fannie Mae [7]. The case of Lehman Brothers is by no means cut and dry with economists and financial experts arguing for both sides of the lack of federal intervention.

Although LTCM and Lehman Brothers suffered problems with different financial assets, issues with risk management and over leveraging were consistent with both firms’ downfalls. Several of the mistakes made by LTCM were replicated in 2008 by Lehman Brothers and other financial entities.

Perhaps the biggest takeaway from LTCM’s near fall is how dangerous over leveraged assets can be. LTCM’s high leverage ratio of over 25 to 1 is seen as a significant cause of its downfall [8]. The same pattern was observed with Lehman which had a leverage ratio of 30 to 1 before its bankruptcy [9].

However, over leveraging is a commonly observed trend in the financial industry. From before LTCM’s rescue to after Lehman’s fall, many banks and hedge funds created a culture of over leveraging by pursuing a high-leverage, high-risk, but high-reward strategy.

Another factor consistent with each firm’s downfall lies in extensive investment of unregulated OTC’s (over the counter derivatives).

LTCM had OTC derivatives worth an estimated one trillion dollars [6]. OTC trades are set in a way that they offset each other for the purpose of hedging and risk management [6]. While the purpose of derivatives lies in risk management and hedging, when used for speculation, they have an enormous amount of risk. [6].

Lehman Brothers and other prominent brokers involved in the 2008 crisis also invested in a large amount of OTC’s, specifically credit default swaps, which were inadequately hedged and thus contributed to significant losses [6]. If regulation occurred on overexposure in derivatives following 1998, perhaps Lehman’s losses could have been limited in 2008.

“Too big to Fail” & Politics

The saving of LTCM—which created the “too big to fall” ideology in non-insured financial entities—is partially responsible for the fall of Lehman. Despite receiving a private buyout offer, the Federal Reserve intervened and facilitated a more generous bailout package for LTCM.

While this action may have prevented contagion in the short run, it strongly implied that large financial institutions are supported by the Fed. This action encouraged extreme risk taking and over leveraging in large hedge funds.

Perhaps if the 1998 crisis was taken as an example to define more explicit policy and good practice, Lehman and other banks would have been on better footing to deal with 2008.

Lehmans’s fall remains one of the most controversial decisions in Wall Street history. The decision to let Lehman collapse was supposedly based on limitations of the law.

But, according to Phil Angledies, the crisis commission chairman, the Fed did not provide any notes on analysis stating that “if you look at the record, there is no legal stopper” [7].

Furthermore, Henry Paulson, the secretary of the treasury, is quoted in emails as saying “I can’t do it again. I can’t be Mr. Bailout” after heavy scrutiny for bailing Bear Stearns months prior [2]. However, Paulson and the Fed bailed out AIG just a week after Lehman’s fall [7].

How does this relate to LTCM?

Lehman Brothers was actually one of the few Wall Street goliaths to not participate in LTCM’s bailout.

Paulson, who was the CEO of Goldman Sachs at the time of LTCM’s fall, played a significant part in the bailout and may have expected Dick Fuld, CEO of Lehman, to do the same. If Paulson was willing to take negative press on AIG, perhaps other factors influenced the decision against Lehman.

While it’s largely speculative, Paulson and Fuld’s rivalry going back to LTCM may have played a part in the Fed’s decision. However the contagion effects from AIG were perceived to be much worse, thus necessitating the bailout with Lehman brothers. Bailing out Lehman was the rational move, yet Paulson declined.

Similarities and differences aside, the cases of LTCM and Lehman combined, ultimately reveal misguided judgement on the part of the Federal Reserve. Not bailing out Lehman resulted in contagion which amplified the 2008 crisis.

On the other hand, LTCM may not have needed a bailout at all considering they had received a private buyout offer. By forcing LTCM to go with Berkshire’s offer, the Federal Reserve might have avoided extending the “too big to fall” ideology to hedge funds. While each case is indeed different, analysis of Lehman and LTCM suggests a need for more consistency in Federal Reserve bailout procedures.

Wrtitten by Amrith Kumaar

Edited by Professor Paul Borochin, Jimei Shen, Hantong Wu, Ryan Cunningham, Jules Hirschkorn, Michael Pena & Alexander Fleiss

[1] Amadeo, Kimberly. “How a 1998 Bailout Led to the 2008 Financial Crisis.” The Balance, December 26, 2020. https://www.thebalance.com/long-term-capital-crisis-3306240#:

[2] Ball, Laurence M. “Ten Years on, the Fed’s Failings on Lehman Brothers Are All Too Clear | Laurence M Ball.” The Guardian. Guardian News and Media, September 3, 2018. https://www.theguardian.com/commentisfree/2018/sep/03/federal-reserve-lehman-brothers-collapse.

[3] C. T. Bauer College of Business at the University of Houston. Accessed February 2, 2021. https://www.bauer.uh.edu/rsusmel/7386/ltcm-2.htm.

[4] Dowad, Kevin. “Too Big to Fail? Long-Term Capital Management and the Federal Reserve.” Cato.org, September 23, 1999. https://www.cato.org/sites/cato.org/files/pubs/pdf/bp52.pdf.

[5] Doren, Peter Van, About the Author Peter Van Doren Senior Fellow and Editor, Peter Van Doren Senior


Wall Street shudders under Lehman collapse

America's financial institutions were sent reeling Monday, after the country's fourth-largest investment bank, Lehman Brothers Holdings, filed for bankruptcy .

When takeover talks by Barclays Plc and Bank of America were abandoned yesterday, the 158-year-old bank collapsed under the subprime mortgage crisis it helped to shape. Lehman had become the biggest underwriter of mortgaged-backed securities in the US real estate market. The bank's failure is the biggest bankruptcy filing in history with more than $613bn of debt listed.

Lehman joins more than 10 financial institutions over the past 12 months to be battered by the credit crunch, including Bear Stearns, AIG, Countrywide, Wachovia, WaMu, and others.

Government officials wanted to avoid a bailout similar to Bear Stearns, which saw the Federal Reserve loan nearly $29bn as part of JPMorgan Chase's takeover. Lehman's fate was ultimately sealed over the weekend when Bank of America and Britain's Barclay Bank - the two "white knight" investors leading rescue talks - left the negotiating table.

Bank of America instead announced it would acquire Merrill Lynch in a distress sale of $50bn in shares. Merrill's financials had also been rocked by US credit troubles, having written down more than $40bn worth of assets over the past year.

Immediate effects of the bankruptcy are being felt both in the US and abroad. UK operations of Lehman were placed in administration under the accounting firm PriceWaterHouseCoopers while the company attempts to reorganize. Over 5,000 workers in the UK lost their job today after the collapse.

PriceWaterHouseCoopers said in a news conference today that liquidating Lehman's assets are more complex than the company's experience disposing of Enron's European assets, which took over six years to slog through.

What happens next is somewhat uncertain, but its likely to involve Lehman's assets being devalued and sold as quickly as possible. That, in theory, would contribute to the vicious cycle hitting the US economy. Devalued assets would have a negative impact those that relied on Lehman for financing as well as other banks. Credit gets tighter, which makes it more difficult for people to get a home loan. That in turn makes it harder sell houses, further depressing home values, which then damages mortgage assets of other banks — and the cycle continues.

The US Federal Reserve hopes to keep bank borrowing costs low by adding $70bn in reserves to the banking system.

Follow more on the fallout of Lehman's bankruptcy at Bloomberg and The Times . ®


Latest Updates

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to save the firm, a person close to the matter said.

A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise $40 billion by Monday morning, a step that would cripple the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The message marked a major change in strategy but it remained unclear until at least Friday what would happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.


The 2008 Financial Crisis Taught Us This Valuable Lesson

Today is a big day — yet most people might not realize it.

See, today is the 10-year anniversary of when the financial crisis went haywire. Exactly a decade ago, a credit crunch slammed the world further into crisis when Lehman Brothers collapsed.
tun
The 158-year-old firm was on its own. England wouldn’t let Barclays buy Lehman and absorb its financial woes. Bank of America refused to save it without support from the government. And Uncle Sam decided maybe it wasn’t such a great idea to hand out another hated bailout.

So on September 15, 2008 — at precisely 1:45 a.m. — Lehman declared bankruptcy, unleashing the scariest economic storm in American history since the Great Depression.

Panic flooded the markets. The Dow Jones Industrial Average plunged 508 points (which is equal to about 1,300 points these days). The S&P 500 Index closed down 4.7%.

The headlines declared things like this from the New York Times:

We all remember the global recession that followed — and the personal struggles we faced as a result.

However, a decade later, I wonder if the Lehman Brothers lesson is starting to fade.

I sometimes sense that “can’t fail” mentality bleeding back into Wall Street’s consciousness. Bankers are once again getting bonuses the likes of which they saw before the Great Recession.

At $184,220, the average bonus for Wall Street employees is the highest since 2006. Commercial banks are raking in record-high profits.

We’re now in the longest bull market in history, and it seems like the party might never end.

Deregulation and tax cuts are making many businesses ecstatic. And last week, the government reported that wages shot up at their fastest pace since the end of the recession. Plus our job creation streak notched up to 95 months.

All seems golden in the land of America.

But it’s during these moments that it pays to start thinking ahead — to be cautious while others are still in la-la land.

After all, economist Ann Pettifor, who predicted the financial crisis in 2006, is now ringing the alarm bells. She says that thanks to huge corporate debt and the prospect of rising U.S. interest rates, the global economy is in danger once again.

Global debt is now more than triple the level of global gross domestic product.

So, today, on the 10-year anniversary of Lehman Brothers’ bankruptcy, I urge caution.

Start looking into ways to increase and protect your wealth now while there’s still plenty of time. One way to do that is by learning as much as possible about successful trading strategies — the ones proven to win no matter what the market is doing.

You can easily do that by tuning into Banyan Hill’s Total Wealth Symposium next week. From September 20 to 22, all of our experts are gathering in Las Vegas for our biggest event of the year. There, they’ll give presentations geared toward putting $1 million in your pocket in the next year.

For example, Wall Street legend Paul Mampilly is recommending his top stock pick for 2019. That’s significant considering he’s recommended stocks that are up 127%, 139%, 147%, 151%, 176% and even 524% in the past year.

If you’re not able to join us in person, that’s perfectly fine! I know everyone can’t make it. So we’re livestreaming the event for your convenience.

To those who can make it, I look forward to seeing you! Be sure to say hello if you see me. I’ll be the one running around taking notes at the presentations.

I want to make sure to get all of our experts’ advice down so I can start preparing my portfolio for the storm ahead.

Managing Editor, Banyan Hill Publishing

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The last time the United States declared bankruptcy

For the past week, the news making the headlines in the world economy is whether the United States will default as a result of the debt ceiling not being raised. I surveyed a number of my friends on this topic to see how many think that the United States will default on debt obligations this month. All of them believed that the debt ceiling will be raised and a default will be avoided.

When asked to explain their outlook, the common theme in their explanations is that to raise the debt ceiling is the simple thing to do to avoid the disastrous outcome of a default. After all, the United States has raised the debt ceiling 74 times since 1962. What is one more?

It seems that everyone wants the debt ceiling raised because no one has fully comprehended the magnitude of a United States default should it happen. Warren Buffet said that a default would be catastrophic and others said that it would dwarf the collapse of Lehman Brothers in 2008. When the 158-year old bank filed for bankruptcy, it owed $517 billion. The debt owed by the United States government is at least 23 times that of Lehman Brothers.

The prospect of a default is certainly unthinkable. However, the United States has defaulted on its obligations before. It happened in 1971 when then president, Richard Nixon, closed the gold convertibility window and severed the link of the US dollar to gold. This act as described in Ron Paul&rsquos book, The Case For Gold, was tantamount to &lsquodeclaring international bankruptcy&rsquo.

Back then, the world was on a monetary system known as the Bretton-Woods system. Under this agreement, foreigners (and later foreign governments) were able to convert the US dollar to gold at $35 an ounce. All other currencies were in turn pegged to the dollar. These countries were told that the dollar was &lsquoas good as gold&rsquo. Moreover, foreign holders of the US dollar were told that they could present the American currency to the US Treasury at any time and redeem an ounce of gold for $35 dollars.

Unfortunately, the US government inflated the supply of US dollars in the 1960s when it committed the nation to the Vietnam War and a slew of domestic programs known as the Great Society. More US dollars had to be printed to pay for such expenditures.

It did not help that the United States was registering severe trade deficits &ndash it was paying for more of its imports with the dollar. Other countries began to question if the United States had the gold to back up its rapidly inflating currency. Countries like France and Switzerland began to redeem their dollars for gold. This drained the gold reserves of the United States.

The situation was complicated by rumours that the gold convertibility window was about to shut. The run on United States gold accelerated. In the first 7 months of 1971, only a paltry $300 million in gold left the United States. In August 1971, the drain of gold reached into the billions of dollars. This caused the US dollar to decline since many foreign governments were turning in the dollars at the US Treasury.

Unable to halt the dollar&rsquos decline, President Nixon declared that the convertibility of dollars into gold would be suspended &lsquotemporarily&rsquo on August 15, 1971. (This temporary suspension has since lasted for 42 years.) Nixon blamed &lsquounfair exchange rates&rsquo for the closure of the gold window. Of course, he avoided mentioning the US government&rsquos erroneous ways of inflating the US dollar and running perpetual trade deficits. With the closure of the gold window, the US government essentially declared to foreign holders of its currency that they have no more gold for them to redeem and that they can hold paper only.

The default on paying gold for dollars by the United States led the world to experiment with the current fiat monetary system. Paper currency is not backed by something of value such as gold. The value of currencies today is supported only by confidence that the government issuing the currency will continue to guarantee its value.

As the issuer of the world reserve currency struggles from the prospect of defaulting, foreign holders of US dollars are once again facing the the risk of holding a paper currency that may be further devalued. It is no wonder that foreign central banks are now net buyers of gold. The yellow metal has a characteristic that paper currencies does not have &ndash it is a store of value.


Watch the video: The Collapse of Lehman Brothers - A Simple Overview