Bankruptcy of Lehman Brothers


Bankruptcy of Lehman Brothers

Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers is the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets. [cite web |url=http://www.marketwatch.com/news/story/story.aspx?guid={2FE5AC05-597A-4E71-A2D5-9B9FCC290520}&siteid=rss |title=Lehman folds with record $613 billion debt|publisher=Marketwatch |date=2005-09-15 |accessdate=2008-09-15]

Background

In August 2007, Lehman closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took a $25-million after-tax charge and a $27-million reduction in goodwill. The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". [cite web |url=http://www.thestreet.com/story/10375812/1/lehman-brothers-amputates-mortgage-arm.html |title=Lehman Brothers Amputates Mortgage Arm |author=Kulikowski, Laura |date=2007-08-22 |accessdate=2008-03-18 |publisher=TheStreet.com]

In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated 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.cite news |url=http://www.nytimes.com/2008/08/29/business/29wall.html?em |title=Struggling Lehman Plans to Lay Off 1,500 |author=Jenny Anderson |coauthors=Eric Dash |work=The New York Times |date=2008-08-29 |accessdate=2008-08-29] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.

On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying Lehman. [New York Times, World Business, article by Jenny Anderson and Landon Thomas, 22 August 2008] 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." [cite web|url=http://www.marketwatch.com/News/Story/Story.aspx?guid={9E9BDC4C-06D1-4EBD-971B-FCD4A4249F24}&siteid=yhoof2 |title=Financials slip as Korea snags weigh on Lehman and Merrill - MarketWatch |publisher=Marketwatch.com |date= |accessdate=2008-09-14] It culminated on September 9, 2008, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold. [cite web|url=http://afp.google.com/article/ALeqM5iB5zn0q4MyPe4UpwVXIT03heWOEA |title=AFP: Lehman Brothers in freefall as hopes fade for new capital |publisher=Afp.google.com |author=5 days ago |date=5 days ago |accessdate=2008-09-14]

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, 2008. The Dow Jones lost nearly 300 points the same day on investors' concerns about the security of the bank.cite news |url=http://www.nola.com/business/index.ssf/2008/09/dow_plunges_nearly_300_points.html |title=Dow plunges nearly 300 points on concern about Lehman |publisher=Times-Picayune |date=2008-09-09 |accessdate=2008-09-09] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.cite news |url=http://www.nytimes.com/2008/09/10/business/10place.html?_r=1&hp&oref=slogin |title=Wall Street’s Fears on Lehman Bros. Batter Markets |publisher=The New York Times |date=2008-09-09 |accessdate-2008-09-09 |author=Jenny Anderson]

On September 10, 2008, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman.cite news |url=http://www.nytimes.com/2008/09/11/business/11lehman.html?_r=1&hp&oref=slogin |title=Lehman Sees $3.9 Billion Loss and Plans to Shed Assets |publisher=The New York Times |author=Ben White |date=2008-09-10 |accessdate=2008-09-10] The stock slid 7% that day.cite news |url=http://seattletimes.nwsource.com/html/businesstechnology/2008171076_weblehman10.html |title=Lehman shares slip on plans to auction off unit, consider sale of company |author=Joe Bel Bruno |publisher=The Associated Press |date=2008-09-10 |accessdate=2008-09-10] cite news |url=http://www.nytimes.com/2008/09/11/business/11lehman.html?hp |title=As Pressure Builds, Lehman Said to Be Looking for a Buyer |author=Jenny Anderson |couthors=Andrew Ross Sorkin |publisher=The New York Times |date=2008-09-11 |accessdate=2008-09-11]

On September 13, 2008, Timothy F. Geithner, 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.cite news |url=http://www.nytimes.com/2008/09/13/business/13rescue.html?_r=1&hp&oref=slogin |title=U.S. Gives Banks Urgent Warning to Solve Crisis |author=Jenny Anderson |coauthors=Eric Dash, Vikas Bajaj, Edmund Andrews |publisher=The New York Times |date=2008-09-13 |accessdate=2008-09-13] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. "The New York Times" reported on September 14, 2008, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed.cite news |url=http://www.nytimes.com/2008/09/15/business/15lehman.html?_r=1&hp&oref=slogin |title=Lehman Heads Toward Brink as Barclays Ends Talks |author=Ben White |coauthors=Jenny Anderson |publisher=The New York Times |date=2008-09-14 |accessdate=2008-09-14] Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure. Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.

Bankruptcy filing

Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008.

Breakup process

On September 20, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of the deal, was put before the bankrupcy court, with a $ 1.35 billion (£700 million) plan for Barclays Plc to acquire the core business of Lehman Brothers (mainly Lehman's $ 960 million Lehman's Midtown Manhattan office skyscraper, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7 hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency." [ [http://news.bbc.co.uk/2/hi/business/7626624.stm news.bbc.co.uk, Judge approves $1.3bn Lehman deal] ]

Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $ 47.4 billion in securities and assume $ 45.5 billion in trading liabilities. Lehman's attorney Harvey Miller of Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be $ 1.29 billion, including $960 million for Lehman's New York headquarters and $ 330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $ 1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays. [ [http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN1932554220080920 reuters.com, Judge approves Lehman, Barclays pact] ] Barclays had a potential liability of $ 2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days. [ [http://ap.google.com/article/ALeqM5hHts3gSHE_WcIZt-IgZWwYpgmeewD93ABG080 ap.google.com, Judge says Lehman can sell units to Barclays] ] [ [http://www.guardian.co.uk/business/feedarticle/7812904 guardian.co.uk, US judge approves Lehman's asset sale to Barclay] ]

On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan and Australia. [cite web | title=Nomura to acquire Lehman Brothers' Asia Pacific franchise | url=http://www.nomuraholdings.com/news/nr/holdings/20080922/20080922.html|] The following day, Nomura announced it's intentions to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. A few weeks later it was announced that conditions to the deal had been met, and the deal will become legally effective on Monday, 13 October. [cite web | title=Nomura to close acquisition of Lehman Brothers' Europe and Middle East investment banking and equities businesses on October 13 | url=http://www.nomuraholdings.com/news/nr/europe/20081006/20081006_a.html |] In 2007, Non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced. [cite web | title=Lehman Brothers 2007 Annual Report | url=http://www.lehman.com/annual/2007/div_regions/intro.htm |]

cene outside Lehman Headquarters

Impact of bankruptcy filing

The Dow Jones closed down just over 500 points on September 15, 2008, the second largest drop by points in a single day since the days following the attacks on September 11, 2001. [cite news |url=http://www.nytimes.com/2008/09/16/business/worldbusiness/16markets.html?hp |title=Wall St.’s Turmoil Sends Stocks Reeling |author=Michael Grynbaum |publisher=The New York Times |date=2008-09-15 |accessdate=2008-09-15] (Largest drop by points being on September 29th, 2008) Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate. The prospect for Lehman's $4.3 billion in mortgage securities getting liquidated sparked a selloff in the commercial mortgage-backed securities (CMBS) market. Additional pressure to sell securities in commercial real estate is feared as Lehman gets closer to liquidating its assets. 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, the third-largest United States Real Estate Investment Trust (REIT). Archstone's core business is the ownership and management of residential apartment buildings in major metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at UBS said that in markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, adding "Every day that goes by there will be more pressure on pricing." [cite news|url=http://online.wsj.comarticleSB122161549909246211.html?mod=residential_real_estate|title=After Lehman, Banks Jettison Commercial-Property Debt|publisher=The Wall Street Journal|date=2008-09-17|accessdate=2008-09-18] Several money-market 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, a money-market fund, both falling below $1 per share, called "", following losses on their holdings of Lehman assets. In a statement The Bank of New York Mellon said its fund had isolated the Lehman assets in a separate structure. It said the assets accounted for 1.13% of its fund. 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.
Putnam Investments, a unit of Canada's Great-West Lifeco, shut a $12.3 billion money-market fund as it faced "significant redemption pressure" on September 17, 2008. Evergreen Investments said its parent Wachovia Corporation would "support" three Evergreen money-market funds to prevent their shares from falling. [cite news |url=http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN1838451820080918|title=Bank of New York restructures cash fund on loss|publisher=Reuters|date=2008-09-18|accessdate=2008-09-18] This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital. [cite news|url=http://www.ft.com/cms/s/0/b3c93b42-8519-11dd-b148-0000779fd18c.html|title=Wachovia tumbles on capital fears|publisher=Financial Times|date=2008-09-18|accessdate=2008-09-18] About 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. As administrators took charge of the London business and the U. S. holding company filed for bankruptcy, positions held by those hedge funds at Lehman were frozen. As a result the hedge funds are being forced to de-lever and sit on large cash balances inhibiting chances at further growth. [ cite news|url=http://www.ft.com/cms/s/0/37e85018-845f-11dd-adc7-0000779fd18c.html|title=Hedge funds' growth prospects hit by Lehman's demise|publisher=Financial Times|date=2008-09-17|accessdate=2008-09-18 ] In Japan, banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied to the collapse of Lehman. Mizuho Trust & Banking Co. cut its profit forecast by more than half, citing 11.8 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, and their possible losses seem to be within the levels that can be covered by their profits," adding "There is no concern that the latest events will threaten the stability of Japan's financial system." [ cite news|url=http://www.bloomberg.com/apps/news?pid=20601101&sid=a3mSQ9tXT.5w&refer=japan|title=Japan Banks, Insurers Have $2.4 Billion Lehman Risk|publisher=Bloomberg|date=2008-09-17|accessdate=2008-09-18] During bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is facing between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries, Martin Bienenstock. [ cite news|url=http://www.reuters.com/article/fundsFundsNews/idUSN1751719120080918|title=RBS sees Lehman claims at $1.5 bln-$1.8 billion: lawyer|publisher=Reuters|date=2008-09-17|accessdate=2008-09-18 ] Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15, 2008. Freddie said it had not received principal payments of $1.2 billion plus accrued interest. Freddie said it had further potential exposure to Lehman of about $400 million related to the servicing of single-family home loans, 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 was still in the process of evaluating its exposure to Lehman and its affiliates under other business relationships. [ cite news|url=http://www.ft.com/cms/s/0/9bbd2a58-85dd-11dd-a1ac-0000779fd18c.html|last=Bullock|first=Nicole|publisher=Financial Times|date=2008-09-19|accessdate=2008-09-19 ] After Constellation Energy was reported to have exposure to Lehman, its stock went down 56% in the first day of trading having started at $67.87. The massive drop in stocks led to the New York Stock Exchange halting trade of Constellation. The next day, as the stock plummeted as low as $13 per share, Constellation announced it was hiring Morgan Stanley and UBS to advise it on "strategic alternatives" suggesting a buyout. While rumors suggested French power company Électricité de France would buy the company or increase its stake, Constellation ultimately agreed to a buyout by MidAmerican Energy, part of Berkshire Hathaway (headed by billionaire Warren Buffett). [ cite news|url=http://www.forbes.com/markets/economy/2008/09/17/constellation-energy-lehman-markets-equity-cx_md_0917markets22.html|title=Lehman Ties Dim Constellation|last=Desmond|first=Maurna|publisher=Forbes|date=2008-09-17|accessdate=2008-09-19] [cite news|url=http://business.scotsman.com/energyutilities/Power-deal-delivers--new.4508490.jp|last=Thomson|first=Victoria|title=Power deal delivers new star to Buffett's energy constellation|publisher=The Scotsman|date=2008-09-19|accessdate=2008-09-19 ] [ cite news|url=http://blogs.wsj.com/marketbeat/2008/09/18/buffett-shoots-for-falling-constellation/|title=Buffett Shoots for Falling Constellation|last=Gaffen|first=David|publisher=The Wall Street Journal|date=2008-09-18|accessdate=2008-09-19 ] 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. Farmer Mac said it may not be in compliance with its minimum capital requirements at the end of September. [ cite news|url=http://www.farmfutures.com/ME2/dirmod.asp?sid=CD26BEDECA4A4946A1283CC7786AEB5A&nm=News&type=news&mod=News&mid=9A02E3B96F2A415ABC72CB5F516B4C10&tier=3&nid=47A70C6D6B2F41C3A37A1CAC2FDB362C|title=Wall Street Mess Trickles Down To The Farm|last=Knorr|first=Bryce|publisher=Farm Futures|date=2008-09-23|accessdate=2008-09-26 ] Neuberger Berman Inc., through its subsidiaries, primarily Neuberger Berman, LLC, is an investment-advisory firm founded in 1939 by Roy R. Neuberger and Robert Berman, to manage money for high-net-worth individuals. In the decades that followed, the firm's growth mirrored that of the asset-management industry as a whole. In 1950, it introduced one of the first no-load mutual funds in the United States, the Guardian Fund, and also began to manage the assets of pension plans and other institutions. Historically known for its value-investing style, in the 1990s the firm began to diversify its competencies to include additional value and growth investing, across the entire capitalization spectrum, as well as new investment categories, such as international, real-estate investment trusts and high-yield investments. In addition, with the creation of a nationally and several state-chartered trust companies, the firm became able to offer trust and fiduciary services. Today the firm has approximately $130 billion in assets under management. In October 1999, the firm conducted an initial public offering of its shares and commenced trading on the New York Stock Exchange, under the ticker symbol "NEU". In July 2003, shortly after the retired Mr. Neuberger's 100th birthday, the company announced that it was in merger discussions with Lehman Brothers Holdings Inc. These discussions ultimately resulted in the firm's acquisition by Lehman on October 31, 2003, for approximately $2.63 billion in cash and securities. On November 20, 2006, Lehman announced its Neuberger Berman subsidiary would acquire H.A. Schupf & Co., a money-management firm targeted at wealthy individuals. Its $2.5 billion of assets would join Neuberger's $50 billion in high-net-worth client assets under management. [ [http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyID=2006-11-20T154504Z_01_N20427604_RTRIDST_0_BUSINESSPRO-FINANCIAL-LEHMAN-SCHUPF-DC.XML&WTmodLoc=BizArt-C2-NextArticle-1"] Lehman to acquire H.A. Schupf" Reuters, November 20, 2006] An article in the The Wall Street Journal on September 15, 2008, announcing that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection, 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, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said." [http://online.wsj.com/article/SB122145492097035549.html Original WSJ article here] Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance." Lehman Brothers Investment Management Director George Herbert Walker IV, second cousin to U. S. President George Walker Bush, dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize." [http://news.yahoo.com/s/ap/20081007/ap_on_bi_ge/meltdown_lehman]

Controversy of Executive Pay during Crisis

Richard Fuld, head of Lehman Brothers faced angry questioning from the committee's members. Henry Waxman, a Democrat, asked: "Your company is now bankrupt, our economy is in crisis, but you get to keep $480 million (£276 million). I have a very basic question for you, is this fair?"

Mr Fuld said that he had in fact taken about $300 million (£173 million) in pay and bonuses over the past eight years. [http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3150319/Richard-Fuld-punched-in-face-in-Lehman-Brothers-gym.html]

Despite Mr Fuld's defense on his high pay, Lehman Brothers executive pay was reported to have increased significantly before filing for bankruptcy [http://story.malaysiasun.com/index.php/ct/9/cid/3a8a80d6f705f8cc/id/415432/cs/1/]

ee also

*Bear Stearns
*List of entities involved in 2007-2008 financial crises
*Subprime crisis impact timeline
*United States housing market correction
*Federal takeover of Fannie Mae and Freddie Mac

References

External links

* [http://www.lehman.com Lehman Brothers] - official website


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