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bankruptcy of lehman brothers

Lehman Brothers headquarters in New York CityFinancial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The filing remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets.[1]

Contents

1 Background 1.1 Exposure to the mortgage market 1.2 Lehman's final months 2 Bankruptcy filing 2.1 Breakup process 3 Impact of bankruptcy filing 4 Neuberger Berman 5 Controversies 5.1 Controversy of executive pay during crisis 5.2 Accounting manipulation 5.3 Section 363 Sale 6 See also 7 References 8 External links

Background Main article: Subprime mortgage crisis

[2] While generating tremendous profits during the boom. which increased from approximately 24:1 in 2003 to 31:1 by 2007. A significant portion of this investing was in housing-related assets. a process known as leveraging or gearing.[4] . One measure of this risk-taking was its leverage ratio. a measure of the ratio of assets to owners equity. this vulnerable position meant that just a 3–4% decline in the value of its assets would entirely eliminate its book value or equity.[3] Investment banks such as Lehman were not subject to the same regulations applied to depository banks to restrict their risk-taking. making it vulnerable to a downturn in that market.Exposure to the mortgage market Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008.

Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages. Lehman reported losses of $2. In the second fiscal quarter. or made a conscious decision to hold them. BNC Mortgage. The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". Lehman stock lost 73% of its value as the . In any event. and took a $25-million after-tax charge and a $27-million reduction in goodwill.[6] In the first half of 2008 alone. Whether Lehman did this because it was simply unable to sell the lower-rated bonds. is unclear. Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. eliminating 1. huge losses accrued in lower-rated mortgagebacked securities throughout 2008.200 positions in 23 locations.8 billion and was forced to sell off $6 billion in assets. Lehman closed its subprime lender.In August 2007.[5] Lehman's final months In 2008.

credit market continued to tighten.[6] In August 2008.[7] Most of those gains were quickly eroded as news emerged that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal.79. shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying Lehman.[10] The U. government ."[8] It culminated on September 9. 1. after it was reported that the state-run South Korean firm had put talks on hold.[6] On August 22.500 people. The Dow Jones lost nearly 300 points the same day on investors' concerns about the security of the bank.[9] Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3. 2008. when Lehman's shares plunged 45% to $7.4% on September 9. Lehman reported that it intended to release 6% of its work force. just ahead of its third-quarterreporting deadline in September. 2008. 2008.S.

which included the possibility of an emergency liquidation of its assets.[16] It emerged subsequently that a deal had been vetoed by the Bank of England and the UK's Financial Services Authority. then president of the Federal Reserve Bank of New York called a meeting on the future of Lehman. that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed. Lehman announced a loss of $3. 2008. which includes Neuberger Berman.[13][14] On September 13.[17] Leaders of major .[12][13] The stock slid 7% that day. 2008. Timothy F. Geithner.[15] The New York Times reported on September 14.[11] On September 10.did not announce any plans to assist with any possible financial crisis that emerged at Lehman. 2008.9 billion and their intent to sell off a majority stake in their investment-management business.[15] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale.

Bankruptcy Court. a revised proposal to sell the brokerage part of Lehman Brothers . 2008.[16] [edit] Bankruptcy filing Barclays acquired the investment banking business of Lehman Brothers in September 2008Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15. 2008. Southern District of New York (Manhattan) on September 16 indicated that JPMorgan Chase & Co." The cash-advances by JPMorgan Chase were repaid by the Federal Reserve Bank of New York for $87 billion on September 15 and $51 billion on September 16.[16] Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale. provided Lehman Brothers with a total of $138 billion in "Federal Reserve-backed advances. According to Bloomberg.[18] [edit] Breakup process On September 22.Wall Street banks continued to meet late that day to prevent the bank's rapid failure.S. reports filed with the U.

It's hard for me to imagine a similar emergency. with a $1. was put before the bankruptcy court. was approved."[citation needed] In the amended agreement. Lehman's attorney Harvey R. Manhattan court bankruptcy Judge James Peck.holdings of the deal. Miller of Weil. after a 7 hour hearing.4 billion in securities and assume $ 45. We did not support the transaction because there had not been enough time to properly review it. It can never be deemed precedent for future cases. Lehman Brothers became a victim. Barclays would absorb $ 47. in effect the only true icon to fall in a tsunami that has befallen the credit markets.3666 billion (£700 million) plan for Barclays to acquire the core business of Lehman Brothers (mainly Lehman's $960 million Midtown Manhattan office skyscraper). This is the most momentous bankruptcy hearing I've ever sat through.5 billion in trading liabilities. Gotshal & Manges. said: "The reason we're not objecting is really based on the lack of a viable alternative. said ."[19] Luc Despins. ruled: "I have to approve this transaction because it is the only available transaction. the creditors committee counsel.

Barclays will not acquire Lehman's Eagle Energy unit. 2008. Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays.[20] Barclays had a potential liability of $2.29 billion."the purchase price for the real estate components of the deal would be $ 1.5 billion to be paid as severance. if it chooses not to retain some Lehman employees beyond the guaranteed 90 days. Lehman Brothers Sudamerica. Finally.[21][22] On September 22.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million. Hong Kong and Australia. Inc. including $960 million for Lehman's New York headquarters and $ 330 million for two New Jersey data centers. Nomura . announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan. Lehman's original estimate valued its headquarters at $ 1."[citation needed] Further. Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals.[23] The following day. but will have entities known as Lehman Brothers Canada Inc. Nomura Holdings.

2008. A few weeks later it was announced that conditions to the deal had been met. 2008.0% plunge on September 29. Additional .) Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate.[26] (This drop was subsequently exceeded by an even larger −7. The prospect for Lehman's $4.[25] Impact of bankruptcy filing The Dow Jones closed down just over 500 points (−4.announced its intentions to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East.[24] In 2007. and the deal became legally effective on Monday. October 13. 2001.4%) on September 15.3 billion in mortgage securities getting liquidated sparked a selloff in the commercial mortgage-backed securities (CMBS) market. at the time the largest drop by points in a single day since the days following the attacks on September 11. non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.

"there is no question that if you need to sell assets. In a statement . Archstone's core business is the ownership and management of residential apartment buildings in major metropolitan areas of the United States.pressure to sell securities in commercial real estate is feared as Lehman gets closer to liquidating its assets. a money-market fund. called "breaking the buck". Jeffrey Spector. the thirdlargest United States Real Estate Investment Trust (REIT). both falling below $1 per share. following losses on their holdings of Lehman assets. you will try to get ahead" of the Lehman selloff."[27] Several money funds and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by The Bank of New York Mellon and the Primary Reserve Fund. adding "Every day that goes by there will be more pressure on pricing. Apartment-building investors are also expected to feel pressure to sell as Lehman unloads its debt and equity pieces of the $22 billion purchase of Archstone. a real-estate analyst at UBS said that in markets with apartment buildings that compete with Archstone.

3 billion money-market fund as it faced "significant redemption pressure" on September 17.[28] This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital.[29] Close to 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. Putnam Investments. Evergreen Investments said its parent Wachovia Corporation would "support" three Evergreen moneymarket funds to prevent their shares from falling.13% of its fund. In an attempt to meet their own credit needs. It said the assets accounted for 1. a unit of Canada's Great-West Lifeco.The Bank of New York Mellon said its fund had isolated the Lehman assets in a separate structure. The drop in the Primary Reserve Fund was the first time since 1994 that a money-market fund had dropped below the $1-per-share level. 2008. shut a $12. Lehman Brothers International routinely re-hypothecated[30] the .

holding company filed for bankruptcy.[31] As administrators took charge of the London business and the U. the hedge funds are being forced to de-lever and sit on large cash balances inhibiting chances at further growth. positions held by those hedge funds at Lehman were frozen. As a result. Of this. cut its profit forecast by more than half. resulting in a 737 billion dollar decline in collateral outstanding in the securities lending market. Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter 11 Bankruptcy. and their possible losses seem to be within the levels . banks and insurers announced a combined 249 billion yen ($2.assets of their hedge funds clients that utilized their prime brokerage services.8 billion yen in losses on bonds and loans linked to Lehman. The Bank of Japan Governor Masaaki Shirakawa said "Most lending to Lehman Brothers was made by major Japanese banks. Mizuho Trust & Banking Co. 22 billion had been re-hypothecated.[32] This in turn created further market dislocation and overall systemic risk.S.[33] In Japan. citing 11.4 billion) in potential losses tied to the collapse of Lehman.

8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries. 2008.5 billion and $1. including repurchasing obligations. Freddie also said it "does not know whether and to what extent it will sustain a loss relating to the transactions" and warned that "actual losses could materially exceed current estimates. Freddie said it had not received principal payments of $1.that can be covered by their profits." Freddie was still in . Martin Bienenstock. Freddie said it had further potential exposure to Lehman of about $400 million related to the servicing of single-family home loans."[34] During bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is facing between $1.[35] Lehman was a counter party to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15." adding "There is no concern that the latest events will threaten the stability of Japan's financial system.2 billion plus accrued interest.

While rumors suggested French power company Électricité de France would buy the company or increase its stake. part of Berkshire Hathaway (headed by billionaire Warren Buffett).[37][38][39] The Federal Agricultural Mortgage Corporation or Farmer Mac said it would have to write off $48 million in Lehman debt it owned as a result of the bankruptcy. Constellation announced it was hiring Morgan Stanley and UBS to advise it on "strategic alternatives" suggesting a buyout. Constellation ultimately agreed to a buyout by MidAmerican Energy.the process of evaluating its exposure to Lehman and its affiliates under other business relationships. The massive drop in stocks led to the New York Stock Exchange halting trade of Constellation. as the stock plummeted as low as $13 per share. The next day.87.[36] After Constellation Energy was reported to have exposure to Lehman. Farmer Mac . its stock went down 56% in the first day of trading having started at $67.

Another HK$3 billion has been invested in similar like derivatives. The default of Lehman Brothers was a low probability event. many banks accepted mini bonds as collateral for loans and credit facilities. which until just months before its collapse was a venerable member of Wall Street with high credit and investment ratings.said it may not be in compliance with its minimum capital requirements at the end of September.7 billion of "guaranteed minibonds" (迷你債券) from Lehman.[41][42][43] Many claim that banks and brokers mis-sold them as low-risk.[40] In Hong Kong more than 43.[44] HK chief executive Donald Tsang insisted the local banks respond swiftly to the government buy-back proposal as the Monetary . which was totally unexpected. which will allow investors to partially recover some of their loss by the end of the year.700 individuals in the city have invested in HK$15. The Hong Kong government proposed a plan to buy back the investments at their current estimated value. Conversely. Indeed. bankers note that mini bonds are indeed low-risk instruments since they were backed by Lehman Brothers.

Neuberger and Robert Berman. agreed to buy back the bonds.000 complaints. all political parties have come out in support of the investors. the firm's growth mirrored that of the assetmanagement industry as a whole. primarily Neuberger Berman. where misguided investor sentiments have become hostile to both wealth management products as well as the banking industry as a whole. LLC. is an investment-advisory firm founded in 1939 by Roy R. In the decades that followed.[45] This episode has deep repercussions on the banking industry. it introduced one of the first no-load mutual funds in the United . [edit] Neuberger Berman Neuberger Berman Inc.[41][43][44] On October 17 He Guangbe..Authority received more than 16. further fanning distrust towards the banking industry. chairman of the Hong Kong Association of Banks. In 1950. to manage money for high-net-worth individuals. which will be priced using an agreed upon methodology based on its estimated current value. Under intense pressure from the public. through its subsidiaries.

the firm conducted an initial public offering of its shares and commenced trading on the New York Stock Exchange. across the entire capitalization spectrum. and also began to manage the assets of pension plans and other institutions.States. the Guardian Fund. real-estate investment trusts and high-yield investments. such as international. Neuberger's 100th birthday. in the 1990s the firm began to diversify its competencies to include additional value and growth investing. under the ticker symbol "NEU". In July 2003. In October 1999. as well as new investment categories. with the creation of a nationally and several state-chartered trust companies. Today the firm has approximately $130 billion in assets under management. Historically known for its value-investing style. the firm became able to offer trust and fiduciary services. In addition. These discussions ultimately resulted in the . the company announced that it was in merger discussions with Lehman Brothers Holdings Inc. Neuberger Berman's New York City headquarters on Third Avenue. shortly after the retired Mr.

a money-management firm targeted at wealthy individuals. for approximately $2. 2008. fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the .63 billion in cash and securities. quoted Lehman officials regarding Neuberger Berman: "Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company. In addition. 2006. research and operating functions remain intact. On November 20. Its $2.. announcing that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection. A. Schupf & Co. Lehman announced its Neuberger Berman subsidiary would acquire H.firm's acquisition by Lehman on October 31. and its portfolio management. 2003.[46] An article in The Wall Street Journal on September 15.5 billion of assets would join Neuberger's $50 billion in high-net-worth client assets under management.

executives at Neuberger Berman sent e-mail memos suggesting. that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."[48] . He wrote. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize. among other things. "Sorry team. Lehman said. going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested.claims of Lehman Brothers Holdings' creditors." Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal."[47] Just before the collapse of Lehman Brothers.

the Bankruptcy Examiner. House of Representatives' Committee on Oversight and Government Reform. Valukas. Rep.Controversies Controversy of executive pay during crisisRichard Fuld. The attorney general later . the report of Anton R.[50] On October 17. Henry Waxman (D-CA) asked: "Your company is now bankrupt. but you get to keep $480 million (£276 million). including Richard Fuld. is this fair?"[49] Fuld said that he had in fact taken about $300 million (£173 million) in pay and bonuses over the past eight years. CNBC reported that several Lehman executives. 2008. Lehman Brothers executive pay was reported to have increased significantly before filing for bankruptcy. faced questioning from the U. I have a very basic question for you. our economy is in crisis. have been subpoenaed in a case relating to securities fraud.[49] Despite Fuld's defense on his high pay. drew attention to the use of Repo 105 transactions to boost the bank's apparent financial position around the date of the year-end balance sheet. head of Lehman Brothers.S.[51] [edit] Accounting manipulation In March 2010.

Andrew Cuomo filed charges against the bank's auditors Ernst & Young in December 2010. One Lehman executive described Hudson Castle as an "alter ego" of Lehman.. According to the story.[52] On April 12. Lehman owned one quarter of Hudson.S. alleging that the firm "substantially assisted. Hudson's board was controlled by Lehman. a New York Times story revealed that Lehman had used a small company. a massive accounting fraud" by approving the accounting treatment.. to move a number of transactions and assets off Lehman's books as a means of manipulating accounting numbers of Lehman's finances and risks. Hudson Castle. Peck of the U. Judge James M. 2010.[53] [edit] Section 363 Sale On February 22. most Hudson staff members were former Lehman employees. 2011. "The sale . Bankruptcy Court in the Southern District of New York rejected claims by lawyers for the Lehman estate that Barclays had improperly reaped a windfall from the section 363 sale.

but it was still adequate under the exceptional circumstances of Lehman Week.process may have been imperfect." .