The Year In Bankruptcy: 2008 - Part 2 - Insolvency/Bankruptcy - United States This article is part of a series: Click The Year In Bankruptcy: 2008 - Part 1 for the previous article. Top 10 Bankruptcies of 2008 Nothing lasts forever, even in bankruptcy. The seemingly assured tenure of former telecommunications giant WorldCom Inc. atop the list of the largest bankruptcy cases ever filed in the U.S. lasted just over six years. The new titan among bankruptcy mega-filings was crowned on September 15, 2008, when 158-year-old international financial services conglomerate Lehman Brothers Holdings Inc. filed for chapter 11 protection in New York. The bankruptcy of Lehman Brothers is (by far) the largest bankruptcy filing in U.S. history, with Lehman holding nearly $700 billion in assets—nearly seven times the assets held by WorldCom when it filed for bankruptcy protection in 2002. Lehman's bankruptcy also represented the largest failure of an investment bank since the collapse of Drexel Burnham Lambert in 1990.

Lehman was founded in 1850 and was headquartered in New York, New York, with regional headquarters in London and Tokyo. At the time of the bankruptcy filings, Lehman had more than 25,000 employees worldwide and was the fourth-largest investment bank in the U.S. Lehman confronted unprecedented losses in 2008 due to the subprime-mortgage crisis that began in mid-2007, principally because it held approximately $4.3 billion in subprime and other lower-rated mortgage-backed securities. After discussions with several potential purchasers (including Bank of America and Barclays PLC) proved to be unsuccessful during the late summer of 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, called a meeting on September 12, 2008, to discuss Lehman's future, including the possibility of an emergency liquidation of the company's assets.

By the end of that day, any interest by potential suitors for all or part of Lehman's assets appeared to evaporate, and the federal government refused to offer any assistance in the form of a bailout or loan guaranties, which it had provided in the spring of 2008 to facilitate the acquisition by JPMorgan Chase & Co. of 85-year-old Wall Street icon Bear Stearns Cos., Inc., once the fifth-largest securities firm in the U.S., using up to $30 billion in Federal Reserve emergency financing. On the day that Lehman filed for bankruptcy, sometimes referred to as "Ugly Monday," the Dow Jones Industrial Average closed down just over 500 points, resulting in the SEC's prohibition of naked short selling and a three-week temporary ban on all short selling of financial stocks.

At the time, the decline represented the largest drop by points in a single day since the days following the September 11, 2001, terrorist attacks (it was subsequently eclipsed just two weeks later on "Dark Monday," September 29, when the Dow experienced its largest daily point drop ever (more than 770 points), after Congress failed (albeit temporarily) to approve a $700 billion bailout). Contemporaneous with Lehman's decision to seek bankruptcy protection, another pillar of Wall Street—94-year-old brokerage giant Merrill Lynch & Company Inc. (the largest brokerage firm in the U.S.)—announced that it had agreed to be purchased by Bank of America for just over $50 billion in stock, rather than hazard the risk of being pulled under by the maelstrom of failure that had already swallowed Bear Stearns and Lehman Brothers. Bankruptcy judge James M. Peck approved an emergency sale of Lehman's investment banking and brokerage operations, including Lehman's 32-story, Midtown Manhattan office tower, to Barclays Capital, Inc., for $1.35 billion in the early hours of September 20, 2008.

In connection with the sale, Lehman's brokerage subsidiary, Lehman Brothers Inc., which was not a chapter 11 debtor because it is a registered broker-dealer, agreed to the commencement of a liquidation proceeding against it under the Securities Investor Protection Act of 1970. Judge Peck later approved the sale of Lehman's Asia-Pacific, European, and Middle Eastern operations, which were collectively responsible for more than 50 percent of Lehman's global revenue in 2007, to Nomura Holdings, Inc., Japan's largest brokerage firm, for approximately $2 billion. The full impact of the Lehman bankruptcy on the U.S. and world financial markets, as well as the thousands of companies and individuals who traded with Lehman, remains to be seen. According to some estimates, Lehman's emergency bankruptcy filing wiped out as much as $75 billion of potential value for creditors. Lehman Brothers is a hard act to follow under any circumstances, but the company that took the second spot on the Top 10 List for public bankruptcy filings in 2008 is nearly as remarkable, even in a year of catastrophic failures. Logging in at No.

2 for 2008 was Washington Mutual, Inc., a savings bank holding company and the former owner of Washington Mutual Bank, which was once the largest savings and loan association in the U.S. (adding yet another ignominious superlative to the annals of U.S. bankruptcy history). On September 25, 2008, the U.S. Office of Thrift Supervision ("OTS") seized Washington Mutual Bank and placed it into receivership under the auspices of the Federal Deposit Insurance Corporation ("FDIC"), after $16.4 billion in deposits were withdrawn from the bank during a 10-day period. The FDIC immediately sold the banking subsidiaries for $1.9 billion to JPMorgan Chase, which reopened the bank the next day. The holding company, which was left with $33 billion in assets and $8 billion in debt, filed for chapter 11 protection the next day in Delaware. Washington Mutual's closure (and receivership) is the largest bank failure in U.S. history. It was once the sixth-largest bank in the U.S.

According to Washington Mutual, Inc.'s annual report for 2007, as of December 31, 2007, the company held assets valued at $327.9 billion. In its chapter 11 filings, however, Washington Mutual, Inc., listed assets of $33 billion and debt of $8 billion. Washington Mutual Bank operated 2,257 retail banking stores and 233 lending stores and centers in 36 states. It was one of the 25 federally insured banks that were shut down in 2008. The third-largest public bankruptcy filing of 2008 involved another banking giant, Pasadena, California-based IndyMac Bancorp, Inc., which, until July 11, 2008, was the holding company for hybrid thrift/mortgage bank IndyMac Bank, F.S.B. IndyMac Bank originated mortgages in all 50 states of the U.S. and was the seventh-largest savings and loan company nationwide. On July 11, 2008, citing liquidity concerns, the OTS placed IndyMac Bank into conservatorship with the FDIC.

A bridge bank was established to assume control of IndyMac Bank's assets and secured liabilities (such as insured deposit accounts), and the bridge bank was also placed into conservatorship under the FDIC's control. The failure of IndyMac Bank is the seventh-largest bank failure in U.S. history and the second-largest failure of a regulated thrift. Its holding company, IndyMac Bancorp, Inc., filed for chapter 7 on August 1, 2008, in California to liquidate its remaining assets. IndyMac Bancorp reported more than $32 billion in assets in its annual report for 2007, but the holding company listed only between $50 million and $100 million in assets when it filed for chapter 7. Logging in at No. 4 on the Top 10 List for 2008 was yet another bank holding company, Newport Beach, California-based Downey Financial Corp., which operated as the holding company for Downey Savings and Loan Association, F.A., until November 21, 2008, when federal regulators seized the bank due to its failure to satisfy minimum capital requirements.

As of September 30, 2008, Downey Savings and Loan had 170 branches in California and five branches in Arizona. The bank lost $547.7 million in the first nine months of 2008, largely due to extensive holdings in subprime adjustable-rate mortgage loans. The banking operations of Downey Savings and Loan were immediately sold to U.S. Bank, N.A., in a transaction facilitated by the OTS and the FDIC. The sale transaction also involved the banking subsidiary of PFF Bancorp, Inc. (No. 10 on the Top 10 List for 2008), PFF Bank & Trust, which was also seized by federal regulators on November 21, 2008, after posting losses from subprime-mortgage loans aggregating nearly $290 million through the first three quarters of 2008. Downey Savings and Loan had total assets of $12.8 billion and total deposits of $9.7 billion as of September 30, 2008. On November 25, 2008, Downey Financial Corp.

filed a voluntary chapter 7 petition in Delaware to liquidate its remaining assets. Although Downey Financial reported $13.4 billion in assets as of September 30, 2008, the holding company's chapter 7 petition listed only between $10 million and $50 million in assets. Capturing the No. 5 spot was the first nonbanking or non-financial services company to appear in the Top 10 List for 2008. The Chicago-based Tribune Company, which through its subsidiaries operates as a U.S. media and entertainment company engaged in newspaper publishing, television and radio broadcasting, and entertainment operations, filed for chapter 11 protection in Delaware on December 8, 2008, listing more than $13 billion in assets. The debtor owns the Chicago Tribune, Los Angeles Times, and Baltimore Sun newspapers. Its broadcasting holdings include WPIX in New York, KTLA in Los Angeles, and WGN in Chicago. Other assets include the Chicago Cubs baseball team, Wrigley Field, a share in the Food Network cable channel, and stakes in various online entities.

The Cubs and Wrigley Field, both of which are for sale, were not included in the bankruptcy filing. The Tribune Company was a victim of declining revenue, the general economic malaise, and the credit crunch. Its enormous debt load—nearly $13 billion—coupled with an industrywide downturn in advertising and circulation revenue, made it impossible to stave off bankruptcy. Other newspaper publishers are struggling with the same confluence of bad news. The Tribune Company's bankruptcy filing is the largest (ranked by total pre-petition assets) publishing-industry bankruptcy of all time. The No. 6 spot on the Top 10 List for 2008 belongs to Brea, California-based Fremont General Corporation, a financial services holding company that, through its subsidiary Fremont General Credit Corporation, owned the California bank Fremont Investment & Loan. Fremont Investment & Loan operated 22 branches in California. Founded in 1963 as Lemac Corporation, Fremont General Corporation wrote nonprime and subprime home mortgages nationwide until 2007 and sold the loans into the secondary market, retaining the servicing. It was hit hard by the housing bust and sold its subprime-lending unit to various investors.

The company also sold its commercial real estate lending operations to iStar Financial in 2007 and sold the retail deposits and branches of Fremont Investment & Loan to CapitalSource Inc. for approximately $170 million in 2008. Fremont General Corporation filed for chapter 11 protection on June 18, 2008, in California. Although the company reported nearly $12.9 billion in assets in its most recent financial statements, it listed only $643 million in assets and debts exceeding $320 million in its bankruptcy filings. Seventh place on the list of the largest public bankruptcy filings in 2008 went to Tulsa, Oklahoma-based SemGroup, L.P., a privately held midstream service company with public operating subsidiaries that provide the energy industry with the means to move products from the wellhead to wholesale marketplaces located principally in the U.S., Canada, Mexico, and the United Kingdom. SemGroup, L.P., filed a chapter 11 petition in Delaware on July 22, 2008, after revealing that its traders, including cofounder Thomas L.

Kivisto, were responsible for $2.4 billion in losses on oil futures transactions and the company faced insurmountable liquidity problems. The company listed more than $6.1 billion in assets at the time of its bankruptcy filing. As of 2007, SemGroup, L.P., was the 18th-largest private company in the U.S. Houston, Texas-based Franklin Bank Corp., a savings and loan holding company that until November 7, 2008, provided community and commercial banking services, including single-family mortgage origination, through its wholly owned subsidiary, Franklin Bank, S.S.B., had the dubious distinction of being No. 8 on the Top 10 List for 2008. Ironically, the company, which was headed by Lewis Ranieri, who helped create the mortgage securities market in the 1980s while at Salomon Brothers Inc., was a victim of the current mortgage crisis, but on the commercial rather than residential side.

In addition to its corporate offices in Houston, the company had 38 community banking offices in Texas; seven regional commercial lending offices in Florida, Arizona, Michigan, Pennsylvania, Colorado, California, and Washington, D.C.; and mortgage origination offices in 19 states throughout the U.S. On November 7, 2008, Franklin Bank, S.S.B., was closed by the Texas Department of Savings and Mortgage Lending, and the FDIC was named receiver. The bank's deposits were immediately sold by the FDIC to Prosperity Bank of El Campo, Texas. Franklin Bank, S.S.B., reported total assets of more than $5.5 billion as of September 30, 2008, and total deposits of $3.7 billion. Franklin Bank Corp. filed a chapter 7 petition in Delaware on November 12, 2008, to liquidate its remaining assets. The penultimate spot on the Top 10 List for 2008 went to Philadelphia-based Luminent Mortgage Capital, Inc., a real estate investment trust investing primarily in both prime- and subprime-mortgage loans and mortgage-backed securities.

Luminent, which once invested in billions of dollars of mortgages, including many rated "triple-A," collapsed as investor demand for many fixed-income securities vanished and the company was crippled by liquidity problems as it was forced to sell many assets at a loss to meet margin calls and heavy write-downs. Luminent filed for chapter 11 protection on September 5, 2008, in Maryland, listing just $13.4 million in assets and $486.1 million in debt as of July 31, 2008. The company previously reported more than $4.7 billion in assets. Securing the final spot on the Top 10 List for public bankruptcy filings in 2008 was Rancho Cucamonga, California-based PFF Bancorp, Inc., the parent company of PFF Bank & Trust, which was seized by federal regulators on November 21, 2008, together with Downey Savings and Loan Association, F.A. (No. 4 on the Top 10 List), after posting losses from subprime-mortgage loans aggregating nearly $290 million through the first three quarters of 2008.

The banking operations of PFF Bank & Trust and Downey Savings and Loan were immediately sold to U.S. Bank, N.A., in a transaction facilitated by the OTS and the FDIC. PFF Bank, which had 30 branches in California, had assets of $3.7 billion and deposits of $2.4 billion at the time it was seized by regulators. PFF Bancorp filed for chapter 11 protection on December 5, 2008, in Delaware. At the time of the filing, the holding company listed only between $10 million and $50 million in assets, although it had previously reported more than $4.1 billion in assets in its most recent financial statements. Largest Public Bankruptcies of 2008 Company Lehman Brothers creditors meet in London - USATODAY.com Need help financing or refinancing a home? Click here Lehman Brothers creditors meet in London Posted E-mail | Print | By Jane Wardell, AP Business Writer LONDON  Administrators of the European arm of failed investment bank Lehman Brothers Holdings Inc.

said Friday that untangling its financial dealings will be a much bigger -- and far lengthier -- task than dealing with the fallout of the collapse of energy company Enron Corp. After meeting with more than 1,000 creditors of Lehman Brothers International (Europe), or LBIE, in London, administrators from accountancy firm PriceWaterhouseCoopers said that they had recovered around just $5 billion of a potential $550 billion of obligations to creditors on the bank's balance sheet. The PWC team is trying to unravel a complex web of tens of thousands of trades that amount to more than $1 trillion and expressed disappointment that two months into the job they are further behind than planned because they have yet to receive confirmation about LBIE funds held by third parties. "In scale, it is going to be 10 times as big and as complicated," PWC administrator Tony Lomas told journalists, referring to the Enron case and noting that he and several of his associates were still working on those files some seven years down the road. "I don't see this is going to be any quicker or any easier than that," he added.

Lomas said it was far too early to tell how much creditors would get once the assets and liabilites are unwound among third parties and other Lehman businesses around the world. "The balance sheet position will be north of $1 trillion and we've got a long way to go before knowing what the position is for creditors and, if there is a shortfall, just how short it will be," he said. Billions of dollars in bad debt forced Lehman Brothers, once the fourth-largest investment bank in the U.S., to file for bankruptcy in September amid the world's worst financial crisis in decades. The bank's collapse shocked many who thought the U.S. Treasury would step in to keep it afloat. Uncertainty over the consequences of the failure -- with thousands of counterparties on Lehmans' complex derivative contracts left potentially exposed -- dealt a severe shock to the financial system. PWC already has succeeded in negotiating a deal with Japanese brokerage Nomura Holdings Inc. for it to buy Lehman's European and Middle Eastern equities and investment banking operations. PWC declined to specify how many creditors there are to the European business, but said that details of Friday's meeting were sent out to around 11,500 individuals and businesses.

Around 100 creditors have applied for "hardship status" because of their own financial positions, which, if granted, would expedite their claims. Around 1,000 European workers lost their jobs as a result of the collapse and another 500 resigned. Around 2,500 staff, mostly at the European arm's London headquarters in the Canary Wharf financial district, were transferred to Nomura and another 1,100 are now on the books of PWC. Pearson said that staffing costs are now running at $8 million a week, while fees to engage PWC are racking up some 4 million pounds ($6 million) a week. Nomura is also purchasing the bank's franchise in the Asia Pacific region, including Japan and Australia. Barclays PLC, which walked away from a deal to buy the entire company before the collapse, has bought Lehman's North American investment banking and capital markets businesses as well as its New York headquarters. Deutsche Bank AG said this week that it has sued the bank to recover $72.5 million it says was accidentally transferred to Lehman after it had filed for bankruptcy.

PWC associate Steven Pearson said Friday that Lehman Brothers Bankhaus AG in Germany, which is in moratorium and likely to be given insolvency protection, has $1 billion in deposits owned by LBIE. Lehman's liquidation is the biggest bankruptcy filing in U.S. history. It filed with assets of $639 billion and debt of $613 billion. Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Posted E-mail | Print | To report corrections and clarifications, contact Reader Editor Brent Jones . For publication consideration in the newspaper, send comments to letters@usatoday.com . Include name, phone number, city and state for verification. Guidelines: You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. Read more . The Fourth Largest Investment Bank Accounting Essay The Fourth Largest Investment Bank Accounting Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Before its collapse, Lehman Brothers was the fourth largest investment bank in the US. Founded by three German immigrants in 1850, the investment bank experienced heady growth over its 158-year history, culminating in its record performance in 2007 when it recorded its highest ever profits, its share price hit an unprecedented value of $86, its market capitalization breached the $60 billion mark. This was not to be long-lived however, as the firm, overburdened by debts amounting to $619 billion, filed for Chapter 11 bankruptcy protection on Sep 15 2008 (Economic Times, 2010). This paper takes the position that while the sub prime mortgage crisis contributed in large part to the collapse of this once venerable bank, it is its financial policies (defined by a very aggressive leverage and excessive financing of debt by short-term borrowing) that delivered the ultimate death blow. It traces the origin and growth of the bank, evaluates its position relative to other players in the US and global markets before its collapse, and analyses its financial policy and the role such policies played in the bank's collapse.

Finally, it evaluates the impact of the bank's collapse and makes recommendations which can help forestall the recurrence of such events in future. 2. History: a) History and Rise: Lehman Brothers traced its roots to a dry goods store started by Henry Lehman, a German immigrant in 1844. In 1850, Henry was joined by his two brothers Emanuel and Mayer, with whom they founded Lehman Brothers (Investopedia, 2010). Initially, Lehman Brothers traded in cotton, a major cash crop at the time, accepting it for the settlement of accounts from farmers. Buoyed by the transition of the American economy from an agrarian economy to an industrial one and the rapid expansion of the American economy in the latter half of the 19th century, the firm would venture into the purchase and sale of securities, merchant banking, and into financial advisory. In 1887, Lehman Brothers became members of the New York Stock Exchange, having shifted base to New York in 1858 (Economic Times, 2010). With time, Lehman Brothers expanded internationally to meet the needs of an increasingly global clientele.

It opened an office in Paris in 1960, in London in 1972, and in Tokyo in 1973. It enhanced its international footprint by merging with Kuhn Loeb. In 1975, it acquired Abraham and Co, but was itself acquired by Amex in 1984 and became part of Shearson. In the nineties, American Express would divest from Shearson, and the firm would once again become known as Lehman Brothers (Economic Times, 2010). It would become an independent company in 1994 through an initial public offer, and its shares would begin trading on the New York Stock Exchange and the Pacific Stock Exchange. Lehman Brothers would open additional offices in Tel Aviv and Mumbai. It joined the S&P Index and became a member of the Amsterdam Stock Exchange. Other acquisitions which the firm undertook include Lincoln Capital Management's fixed income business and Neumann Burger (Economic Times, 2010). As Lehman Brothers' history illustrates, its growth has been through a combination of organic and M&A strategies.

The organic growth has been made possible through an accurate assessment of the growth potential of the industries financed (railroad industry in the latter half of the 19th centuries, TV and radio in the 1930's, the computer industry, and the biotech industry). Additionally, the firm's growth has been underscored by innovation of financial solutions (such as private placements in the wake of the credit crunch following immediately after the stock market crash of 1929 and the underwriting of corporate debt over the internet). This innovative streak is perhaps what inspired Lehman Brothers to get heavily involved in securitization and become a leader in the sub-prime mortgage financing market, eventually leading to its collapse on September 15th 2008 (Swedberg, 2009). 3. Analysis: a) Position in the home and international markets: Before it filed for bankruptcy protection on 15th September 2008, Lehman Brothers was the fourth largest investment bank in the US, behind Merrill Lynch, Goldman Sachs, and Morgan Stanley (CNN Money 2008a, 2008b, 2008c).

Among other accolades, Lehman Brothers had been ranked first in Barron's 500 annual survey in corporate performance for the leading firms in the US and Canada. It had also been named the "Most Admired Securities Firm" by Fortune in 2007, and the "Best Investment Bank" by Euromoney in 2005. Lehman Brothers also boasted of the distinction of having handled the largest ever M&A transaction (the $98 billion acquisition of ABN AMRO by a consortium led by the Royal Bank of Scotland) (Economic Times, 2010, p.1). With some 25,000 employees just before its collapse, it was ranked eleventh among the top fifty investment banks in the world in a 2000 Euromoney Poll of Polls.

The top investment banks in the world, as per that survey, are shown in the table below: b) Milestones (share price): The firm's share price rose steadily from the time the bank was listed in 1994 to reach its peak in of $86.18 in February 2007, before plunging downwards to just $0.22 as Lehman Brothers began its descent downwards (Yahoo Finance, 2010). The movement in the firm's share price since its listing in 1994 is depicted in the graph below: c) Financial Policies: Before its collapse, Lehman maintained a very high leverage (asset to equity ratio). It also placed a very strong reliance on short term borrowing to finance debts. The firm's financial statements in the period leading up to its demise, from which its leverage and short term borrowing positions can be ascertained, are shown below: d) Causes of Lehman's Collapse: The collapse of Lehman Brothers has been attributed to the sub prime mortgage crisis, of which it was the market leader in 2005 and 2006.

The subprime mortgage crisis resulted when banks and other financial institutions, spurred on by a protracted low-interest regime and rising house prices made out loans to the sub prime segment of the market. Zingales (2008, p.3) writes that for example, "From March 1997 to June 2006 the Case and Shiller national index of real estate prices increased every month, except for two. During the same period the average increase in real estate prices was 12.4% per year." This increase was driven by a sustained upward tempo in the price of real estate. Correspondingly, the average T-bill rate between 2002 and 2004 stood at just 1.3%, a stark contrast to the 6.1% average for the preceding forty years. These are depicted in the graphs below: This environment of rising house prices and low interest rates created the illusion among many prospective and actual home owners that the upward rise in home prices would continue for a long time to come.

With innovative financing tools such as interest-only amortization, negative amortization and mortgage options, many sub prime mortgage borrowers were encouraged to take up loans which they were ill equipped to pay (Zingales, 2008). The borrowers expected that with rising home values and low interest rates, they would be able to refinance their home purchases at low rates and take out their equity for use in other purchases. When the real estate bubble burst, against all expectations, Lehman Brothers was left holding billions of assets in the form of bad debts (Zingales, 2008). However, while the sub prime mortgage crisis played a very instrumental role in the collapse of Lehman Brothers, Lehman Brothers' own financial policies accelerated its demise. As shown in the financial statements, Lehman Brothers maintained a very aggressive leverage (which hovered at around 30:1 in 2007). Einhorn (2008) estimated the firm's leverage to be 44:1. What this basically means is that for every $100 it held as loans, it had only $3.3 as equity.

Therefore, if the value of its assets declined by just 3.3%, its entire equity would be wiped out and Lehman would become technically bankrupt. Indeed, by the time Lehman Brothers was filing for bankruptcy, it had debts worth $619 billion, and assets worth only $639 billion, making it the largest bankruptcy filing in the history of the US (Investopedia, 2010). Looked at against the background of the sub prime mortgage crisis where the value of the securitized assets was declining, this policy subjected the bank to a lot of instability. The problem was however made much worse by the bank's excessive use of short term debt to finance its assets. As illustrated above, more than 50% of the bank's assets were financed by short term debt. While this can work very well for the firm in a low-interest rate regime, it exposes the firm to a very high risk of experiencing runs on its deposits.

Should the market lose confidence in the bank (due to for example rumors about the bank's solvency), many short term lenders would refuse to renew their lending and many of them would rush to withdraw their funds, further worsening the liquidity problem (Zingales, 2008). This was the case with Lehman Brothers, where its stocks plunged downwards as investors became jittery about its prospects, massive credit-default swaps on its debts took place, hedge fund clients withdrew, and short-term creditors cut their credit lines. By the last week leading to its folding up, the bank had only $1 billion cash left (Investopedia, 2010). At first, Fuld (Lehman's CEO) was indifferent to suggestions that he get a buyer for the troubled investment bank (rejecting for example offers from Warren Buffet, among others) (Story and White, 2008), and believing that by investing in commercial real estate and assets outside the US rather than in the declining housing market Lehman would be able to shore up its financial position. This worsened rather than helped Lehman's position and as 2008 progressed, the bank's financial condition worsened.

When the gravity of the situation sunk and Fuld began approaching prospective suitors with a view of either raising additional capital or getting a buyer (Citigroup, Korea Development Bank, and Barclays), the potential suitors chickened out after taking a look as the bank's books. e) Effects of Lehman's Collapse: The collapse of Lehman Brothers had a huge impact: It caused a rise in the cost of insuring cash invested in junk bonds (from $4.50 to over $6 for every $100 invested) (Zingales, 2008). It brought about a lot of uncertainty in the money markets and triggered a dramatic loss of confidence in the financial sector (Zingales, 2008) as evidenced by the 500 point drop (a 4.4% drop) of the Dow Jones, and the dramatic drop in the value of the share prices of other investment banks. As a result of the loss in confidence, jittery investors withdrew close to $400 billion.

The confidence crisis also affected interbank borrowing (evidenced by the hike in the LIBER-OIS spread), and froze the corporate paper and repo markets, while occasioning a credit crunch that paralyzed the consumer and industrial borrowing (Swedberg, 2009). It caused massive losses in investor funds around the world. For example, Japanese banks and insurance firms with close ties to the fallen bank announced losses worth $2.4 billion while the Royal Bank of Scotland announced losses of up $1.8 billion. Pension funds and local governments in the US lost close to $1.7bn, while the Sachsen Bank in Germany lost up to half a billion euros (Swedberg, 2009). It occasioned a dramatic hike in the price of CDS's (Swedberg, 2009) as shown in the graph below: It has led to massive consolidation in the investment banking sector. Consequently, the remaining few investment banks are likely to wield enormous power over other players such as credit rating agencies to the further detriment of the financial sector and the consumer (Swedberg, 2009). 4.

Conclusion: The collapse of Lehman Brothers triggered a massive loss of confidence in the US financial industry, caused a loss of billions of dollars of investor funds, a rise in the cost of insuring cash invested in junk bonds, rising CDSs prices, and widespread loss of employment for Lehman staff. It also hit hard the repo and corporate paper markets, and led to a crippling credit crunch. While the subprime mortgage crisis played a role in the collapse of Lehman Brothers, Lehman Brothers' financial policy of maintaining an aggressive leverage and of excessive use of short term borrowing to finance debts accelerated the firm's descent into bankruptcy. To avert similar occurrences, several things need to be done: Proper oversight of the investment banks needs to be carried out. For example, while banks are not allowed to have a leverage ratio of more than 15:1, Lehman's leverage stood at 30:1, thanks to the SEC relaxing pre-existing leverage limits for the big five investment banks in 2004 and which resulted in increased liquidity among the banks and worsened Lehman's position. This rule needs to be revised.

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Zingales L, 2008, Causes and effects of the Lehman Brothers bankruptcy, University of Chicago Graduate School of Business: Chicago. BBC - Newsnight: From the web team: Monday 15th September, 2008 Monday 15th September, 2008 ADMIN USE ONLY | 17:51 UK time, Monday, 15 September 2008 Here are the details of what's coming up in tonight's programme: Wall St wobble We're live from Wall Street tonight on a dramatic day for the financial markets. The financial news overnight was grim - Lehman Brothers, the fourth-largest US investment bank, has filed for bankruptcy; Merrill Lynch has agreed to be taken over by Bank of America; insurer AIG is trying to raise funds to save itself from collapse. The effect on the markets has been predictable: stocks have tumbled in value, and banking shares have been hardest hit. A few weeks ago the US financial authorities stepped in to save mortgage giants Freddie Mac and Fannie Mae - no such help has been forthcoming this time. Were they right to let Lehman Brothers go under? Our Economics Editor Paul Mason will be reporting from Wall Street on the day's historic events.

And in the studio, Newsnight is assembling a panel of experts to discuss what went wrong and, crucially, who might be next? Labour Margaret Beckett is the latest MP to call for Labour rebels to get behind Gordon Brown or risk paying a heavy price at the next election. David Grossman will have the latest on the leadership issue and the talk behind the scenes. Zimbabwe An historic power-sharing deal was signed and sealed today in Zimbabwe. But will bitter rivals Robert Mugabe and Morgan Tsvangirai really be able to work together and how will they combat the country's colossal inflation problem? Lib Dems change their spots Conference season kicks off with the Liberal Democrats in Bournemouth and leader Nick Clegg has already scored a hit - members have backed his plans to promise tax cuts for people on low and middle incomes. Is this a bid to win over Tory voters? Our Political Editor Michael Crick is at the conference and we'll be speaking to Nick Clegg about the direction his party is taking. Study On The Bankruptcy Of The Lehman Brothers Finance Essay Study On The Bankruptcy Of The Lehman Brothers Finance Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student.

This is not an example of the work written by our professional essay writers. The fact that Lehman Brothers, the fourth-largest United States (US) investment bank, has filed for bankruptcy protection, dealing a blow to the fragile global financial system in September of 2008. The financial market turmoil has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy. Lehman Brothers was a global financial services firm (4th largest investment bank in the USA behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) and a primary dealer in the US which participated in business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. The offices of the firm which worldwide headquarters were in New York City and regional headquarters in London and Tokyo located throughout the world. This essay reveals that the largest bankruptcy in US history and particularly focuses on the Lehman Brothers Investment Bank.

2 Corporate profile of Lehman Brother Bank 2.1 Corporate Profile and Business 2.1.1 History of Lehman Brothers Lehman Brothers was founded as a dry-goods store in Montgomery, Alabama by Henry Lehman, Emanuel Lehman and Mayer Lehman in 1850, which focused on commodities-trading and brokerage operations in the beginning. The company' became a member of New York Stock Exchange after the movement to New York, where it dealt in the emerging market for railroad bonds and entered the financial-advisory business after the Civil War. There existed an evolving partnership from a family-only partnership to complicated acquisitions and mergers, which lead to Lehman Brothers became the country's fourth-largest investment bank created five consecutive years of record profits with a return on equity among the highest in the investment-banking industry. 2.1.2 Lehman Brothers Investment Bank Lehman Brothers aggressively re-entered the asset-management business, acquired the private-client services (PCS), Crossroads Group, the fixed-income division of Lincoln Capital Management and Neuberger Berman.

These businesses, together with Lehman's private-equity business, comprised the Investment Management Division, which generated approximately $3.1 billion in net revenue and almost $800 million in pretax income in 2007. Before the firm bankrupted, they had more than $275 billion in assets under management. What's more, the firm had increased net revenues over 600% from $2.73 billion to $19.2 billion and had increased employee headcount over 230% from 8,500 to almost 28,600 since they went public in 1994. 2.2 Forces of Change and Competition 2.2.1 Change in Lehman Brother's Business Strategy In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld's aggressive leadership, the company flourished and became the 4th largest investment bank in the United States.

Crossley-Holland (2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market. 2.2.2 Financial Competiveness Knowledge @ Wharton (2007) stated that although the company's stock rose 19% in 2006, it still trailed behind its competitors with Goldman Sachs up 55%, Morgan Stanley, 39% and Merrill Lynch, 32%. Lehman Brothers faced stiff competition from other banks such as the above-mentioned Morgan Stanley, Goldman Sachs and Merrill Lynch. This competitive atmosphere caused Lehman Brothers to embrace the culture of risk.

2.3 Financial System and Bank Management Attitudes 2.3.1 Deregulation of United States Financial System Khoo and Wee (2010) explained that from 2000 to 2003, the US Federal Reserve had lowered their interest rates from 6.5% to 1% to stimulate the economy and soften the effects of the 2000 dotcom crisis. This cheap credit fueled by the low interest rate and lenient credit conditions drove the US property boom from 2003 to 2007. In addition, the Security and Exchange Commission relaxed the pre-existing limits on leverage in April 2004. Hence, investment banks such as Lehman Brothers started taking advantage of this new ruling and increased their leverage. The lack of regulation spurred the creation and injection of toxic financial products into the financial system. The US government neglected to check these toxic products and failed to anticipate the damage that these products would cause if the housing bubble were to burst. 2.3.2 Bank's Lending Policies Meanwhile, lending policies by bank were spiraling out of control.

Lehman Brothers did not only gamble with risky products such as CDS and MBS but they also loaned money to sub-prime customers. The company also borrowed heavily and used this borrowed money to play the property market. By 2007, it was investing $60 billion in commercial properties, hotels, shopping centres and residential properties around the world. For example, Lehman Brothers loaned $78 million to develop McAllister Ranch. The bank invested aggressively in the property market at its peak but could not get out before the crash. It did not have the money to hold on to theses assets for a longer period of time. 2.3.3 Culture of Risk Hutchinson (2008) reported that the maximum leverage the Wall Street dealers usually held was 20 to 1. A 20-to-1 ratio is recommended if assets can be easily valued are liquid. Commercial paper, bonds and shares are more liquid when compared with assets combined investment real estate, private equity stakes, hedge fund positions, credit default swaps and other derivatives positions that do not appear on the balance sheet.

Hence, if an investment bank had a leverage ratio of 30:1, a decline of merely 3.3% in its assets value will cause insolvency. By August 2007, for every $1 Lehman Brothers owned, they borrowed $44. Lehman Brothers' leverage ratio was much higher than other investment banks. 3 Causes of Lehman Brothers Failure 3.1 Background, causes, consequences of subprime mortgage lending 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 mortgages when securing the underlying mortgages. Initially, a low interest rate environment led to the housing bubble in the U.S. At the same time, the banking system underwent an important transformation from traditional banking model, in which the issuing banks hold loans until they are repaid, to the "originate and distribute" banking model, in which loans are pooled and then resold as securitization.

"However, increased securitization led to a decline in credit quality." Keys, Mukherjee, Seru, and Vig (2008) offer empirical evidence that mortgage brokers offered teaser rates, no-documentation mortgages and piggyback mortgages loans. All these mortgages were granted under the premise that background checks are unnecessary because house prices could only rise, and a borrower could thus always refinance a loan using the increased value of the house. The subprime mortgage defaults is based on the price of credit default swaps. As this price index declines, the cost of insuring mortgages of a certain rating against default increases. Subprime deals on "downgrade review," led to a deterioration of the prices of mortgage-related products and unnerved the credit markets in June and July 2007. From then through late in 2008, house prices and sales continued to drop. When Lehman's share price eroded, the state-controlled Korea Development Bank would not buy the firm, Lehman's shares plunged. What's worse, Barclays and Bank of America refused to take over Lehman without a government guarantee. Consequently, Lehman had to declare bankruptcy. 3.2 Why leverage so high?

The bankrupt of Lehman Brothers demonstrated how shocks can get amplified to a full-blown financial crisis when liquidity evaporates. The interaction of market liquidity and funding liquidity that explain why liquidity can suddenly evaporate operate. Typically, when a leveraged trader, such as a dealer, hedge fund, or investment bank, purchases an asset, the trader uses the purchased asset as collateral and borrows against it. However, the trader cannot borrow the entire price. The difference between the security's price and its value as collateral must be financed by the trader's own equity capital. Margin lending is short term since margins and haircuts can be adapted to market conditions on a daily basis. As a consequence, traders tend not to carry much excess capital and thus increasing margins and haircuts force traders to sell part of their assets. Lehman Brothers that relied substantially on short-term (commercial) paper or repo contracts had to roll over their debt. An inability to roll over this debt was equivalent to margins increasing to 100 percent, because they were unable to use the asset as a basis for raising funds. Similarly, withdrawals of demand deposits or capital redemptions from an investment fund have the same effect as an increase in margins.

Funding liquidity risk are detrimental when market liquidity is low so that difficult to raise money by selling the asset. In other words, market liquidity is low when selling the asset depresses the sale price and hence it becomes very costly to shrink the balance sheet. After the Housing Bubble, huge losses raised for Lehman Brothers because a decline in the value of assets erodes the firm' net worth much faster than their gross worth due to their leverage and the amount that they can borrow falls. 3.3 Deterioration of Balance Sheet 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." Lehman Brothers Investment Bank was heavily exposed to maturity mismatch both through granting liquidity backstops to their off-balance sheet vehicles and through their increased reliance on repo financing.

Most investors prefer assets with short maturities, such as short-term money market funds. It allows them to withdraw funds at short notice to accommodate their own funding needs or it can serve as a commitment device to discipline banks with the threat of possible withdrawals. Funds might also opt for short-term financing to signal their confidence in their ability to perform (Stein, 2005). On the other hand, most investment projects and mortgages have maturities measured in years or even decades. The strategy of off-balance-sheet vehicles-investing in long-term assets and borrowing with short-term paper-exposes the banks to funding liquidity risk. As a result, the banking system still bears the liquidity risk from holding long-term assets and making short-term loans even though it does not appear on the banks' balance sheets. Another important trend was an increase in the maturity mismatch on the balance sheet of investment banks. This change was the result of a move towards financing balance sheets with short-term repurchase agreements, or "repos." In a repo contract, a firm borrows funds by selling a collateral asset today and promising to repurchase it at a later date.

The growth in repo financing as a fraction of investment banks' total assets is mostly due to an increase in overnight repos. The fraction of total investment bank assets financed by overnight repos roughly doubled from 2000 to 2007. Term repos with a maturity of up to three months have stayed roughly constant at as a fraction of total assets. This greater reliance on overnight financing required investment banks to roll over a large part of their funding on a daily basis. 4 Consequences/Impacts of Lehman Brother's Failure to United States and World Economy 4.1 Consequences of Defective Bank Management of Financial Markets 4.1.1 Bankruptcy On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection, marking it the largest bankruptcy in American history. Following this, Lehman Brothers lost its clients, its stock prices plummeted and its assets were devalued by the credit rating agencies. Other banks that had borrowed from Lehman brothers also came to light. The Financial Times (2008) reported that Japan's Aozora owed Lehman Brothers $463m in unsecured bank loans, while Mizuho owed $289m.

4.1.2 Loss of Savings The consequences of Lehman Brothers bankruptcy did not spare Asia. Many retirees in Singapore had invested their savings in Lehman Minibonds and recuperated very little amount of their initial investment. Popatlal (2010) mentioned that from 12 February 2010, Singaporean investors only got back between 21.5 % and 70.8 % of the original amount invested. This was not the case for patient Hong Kong investors who will recoup up to 96.5% of their investments, according to Law (2011). During the Lehman collapse, many minibond investors in both Hong Kong and Singapore publicly expressed their frustrations and anguish from minibond losses. 4.1.3 Unemployment The global economic crisis of 2008 caused millions of people not only to lose their savings and homes but their jobs as well. Harper (2007) stated that the year before the crisis, in 2007, Lehman Brothers gave$9.5 billion payout for its staff. The following year, the company filed for bankruptcy and 25,000 of its employees worldwide became unemployed.

On a broader scale, along with the collapse of other banks, the global financial crisis increased worldwide unemployment. According to a press release on 20th October 2008 by International Labour Organization, it estimated a worldwide unemployment of almost 20 million people. 4.1.4 Market Crash On the day of that Lehman Brothers filed for bankruptcy, according to Labaton (2008), the Dow Jones fell 504.48 points, marking it to be the biggest 1-day point drop since the 9/11 terror attacks. Investors that held shares in Lehman Brothers were worthless now. This was the beginning of the 2008 stock market crash. 4.2 Should they be allowed to fail? 4.2.1 The Big Bank Theory There always had been this perception that the Central Bank would never allow a big bank to collapse because such an event will have a colossal impact on the economy. This was called the Big Bank Theory. Big banks in America had a false confidence that they were too big to fail and if anything were to happen, they were confident that the government would come to the rescue.

4.2.2 No Government Bailout Unfortunately, this " too big to fail" perception was challenged during the Lehman Brothers crisis. The financial problems at Lehman Brothers were too grave to be even rescued. Therefor no government bailout was offered to the Lehman Brothers. The US Federal Reserve Chairman Ben Bernake said in a press release that "There was just a huge, $40 [billion], $50 billion hole that we had no way to fill and no money, no authorization, no way to do it, so we had to let it fail," The US financial system that did not have enough capital to take on the losses. Even if they had bailed out the Lehman Brothers, they would have only delayed the financial meltdown but it would have eventually caught up and the financial damage might have been greater. 4.2.3 The Troubled Asset Relief Program In October 2008, the legislation, The Troubled Asset Relief Program was passed, giving the Treasury to use as much as $700 billion to inject into and stabilize the financial system.

If the government had continued to hand out bailouts for every bank that collapsed, the public would have been outraged and it would have been difficult to introduce The Troubled Asset Relief Program. The Fall of Lehman Brothers Essay - 13532 Words Please sign up to read full document. Text Preview The fall of Lehman Brothers Lehman Brothers Inc (Lehman Brothers) once the 4th largest Investment bank in the world filed for chapter 11 of bankruptcy on September 15th 2008. It started its journey as a small dry goods store to one of the leading investment banks in the US. Refer Annexure 1 for the history of Lehman Brothers. Lehman had a particularly strong history in fixed-income products, later it diversified into other areas of finance such as investment banking and investment and asset management. Refer Annexure 2 for the business overview. Until the 2007, Lehman generated a significant portion of its revenue through the issuance of mortgage-backed and asset-backed securities. When the collapse of the U.S.

subprime mortgage industry started resulting credit crisis & the mortgage default rates began to rise and the demand for these securities began to disappear, Lehman was left with billions of dollars of rapidly depreciating securities on its balance sheet, forcing it to take large write downs and write-offs. Eventually, the company's efforts to shed risky assets proved unsuccessful, and investors sold off shares of Lehman in the fear that it wouldn't have enough capital to continue business as usual. Refer Annexure 3 for Lehman’s failure. On September 2nd 2008, the state-owned Korean Development Bank confirmed that it was in talks to buy up to a 25% stake in Lehman, though the deal eventually fell through. The following weekend, Lehman put itself up for sale, and the U.S. Federal Reserve called an emergency meeting of Wall Street executives to aide in the sale. The two main bidders, Bank of America (BAC) and Barclays (BCS), dropped out on Sunday after the federal government refused to absorb Lehman's future losses with taxpayer dollars.

Left with no potential buyers, Lehman's board of directors decided to file for Chapter 11 bankruptcy protection on the morning of Monday, September 15, ending the firm's 158-year history and claiming the title of the largest bankruptcy filing on record. Refer Annexure 4 for Lehman Brothers Business Update Call Transcript So what led to the failure of the organization which was considered as too big to fall? The case study examines in detail the reasons that led to the subprime crisis since the year 2007 in the US and how it led to the collapse of 158 year old Lehman Brothers. The case highlights the role of several stake holders in the mortgage business that contributed to the crisis. It examines the various factors that contributed to the fall of Lehman Brothers including leadership issues, excessive leverage, failure of risk measures employed like ‘Value at Risk' and poor regulation of the investment banking industry. It also explains the role of certain OTC derivative instruments that led to the collapse of the company. Following issues to be discussed in this case study’s context: * Understand the reasons that led to the subprime crisis in the US and its impact on financial institutions.

* Analyze the aggressive strategies that Lehman Brothers followed in the mortgage business. * Study the role of leadership at Lehman Brothers behind the company's rise and subsequent collapse. * Appreciate the significance of risk management and the drawbacks of excessive leverage. * Examine the innovations in financial instruments primarily derivatives. * Analyze the consequences of lack of supervision on OTC derivatives and mortgage lending mechanism in the US. * Debate on the role played by the US policy makers for adopting liberal credit driven economic growth policy that eventually led to the subprime crisis. Annexure 1: History of Lehman Brothers The story of Lehman Brothers takes us back to 1844 when a 23 year old Henry Lehman emigrated to the United States from Bavaria. He decided to settle in all places Montgomery Alabama where he decided to open a dry-goods store. In 1847 another brother arrived and in 1850 yet another. ... Please sign up to read full document. YOU MAY ALSO FIND THESE DOCUMENTS HELPFUL

Question: Which bank, the fourth largest investment bank in the USA, filed for bankruptcy on September 15th 2008?
Answer: Lehman Brothers