Lehman Brothers collapse: A race down

Lehman Brothers collapse: A race down

updated

September 14, 2018 11:25:17

Before his demise, Lehman Brothers was one of the titans of Wall Street. It was the fourth largest investment bank behind Goldman Sachs, Morgan Stanley and Merrill Lynch, which led into the global financial crisis.

It still holds the record for the biggest bankruptcy in US history. By the time Lehman Brothers closed on September 15, 2008, the company had assets of $ 639 billion and liabilities of $ 619 billion.

She brought her story back to the 1850s, when the German brothers Henry, Emanuel and Mayer Lehman, turned their small shop in the deep south of Alabama into a bank.

Since the late 1990s, Lehman Brothers sought to capitalize on the US real estate boom and acquired five major mortgage lenders, including BNC Mortgage and Aurora Loan Services.

BNC and Aurora pioneered subprime lending and sold risky mortgages with little documentation.

It was a punt that would ultimately destroy Lehman Brothers, rock Wall Street over the precipice and trigger a global recession.

Real estate hedge funds

2003

The shift to real estate finance catapulted Lehman Brothers from a mere bond trader to a massive full-service investment bank.

She specializes in high-risk and highly rewarding bridging finance in large real estate transactions.

In 2006, the year before things began to dissipate, the real estate unit was responsible for around 20 percent of the banks' $ 4 billion in profits.

Many argued that it was no longer really a bank but a real estate hedge fund.

Cracks appear

February 2007

In February 2007, Lehman Brothers' stock reached a record high of $ 86, representing a market capitalization of approximately $ 60 billion. Everything was downhill from there.

A month later, the company acknowledged that $ 150 million in its securitized mortgage defaults could hurt profits, which was one of the major understatements in US corporate history.

Nevertheless, she continued to write more mortgage-backed securities than any other bank.

The beginning of the end

August 2007

While a precise starting point for the global financial crisis is hard to determine, 9 August 2007 is just as good a date as any other.

It was the day on which the major French bank BNP Paribas froze a number of mutual funds loaded with US mortgage-backed securities and collateralised debt obligations (CDOs) as defaults on subprime loans rose at an alarming rate.

BNP just could not figure out what they were worth, or indeed, if they were worth anything.

In the same month, Lehman Brothers closed BNC Mortgage and fired 1,200 people. At the time, the loss seemed to be limited to an impairment charge of $ 50 million.

Bear Stearns collapses

March 2008

The second-largest underwriter of subprime loans and the arch-rival of Lehman Brothers, Bear Stearns, finally capitulated on March 14, 2008 from its toxic debt burden.

With the New York Federal Reserve overcoming a planned bailout, Bearn Stearns was sold to JP Morgan Chase for $ 2 a share, a fraction of the value of its pre-crisis highs.

The market entry of Lehman Brothers would be the next big bank to fall, and the stock price was halved almost overnight.

Sinking fast, beach chairs thrown overboard

June 2008

Lehman Brothers went to its investors to raise another $ 6 billion in capital.

It reduced its exposure to real estate by 20 percent, divested assets of $ 150 million and reduced its debt burden. The bank also reported that it has lost nearly $ 3 billion over the last three months.

Soon, like Bearn Stearns, Lehman Brothers was looking for someone to buy.

For sale. No bids

August 2008

August started positively enough. George Soros, the legendary investor with a reputation for value, stepped in and bought a large portion of Lehman Brothers stock.

The stock price fluctuated and flowed into the news of various buyers who were hurting the bank's fast-moving and worn-out tires.

Singapore's government-owned investment vehicle Temasek has reportedly been touring. So also the Hong Kong giant HSBC. Also South Korean and Chinese banks.

The failed talks were catastrophic for the mood. The share price halved again, and the company's massive debt mount rose 66 percent.

Extreme unction

September 2008

The losses accelerated. In the fourth quarter, $ 4 billion was lost and another $ 5.6 billion was written off.

Remarkably, Lehman Brothers has gone down to its last billion dollars in cash. US Treasury Secretary and former Goldman Sachs banker Hank Paulson said there will be no government rescue of the troubled bank.

An emergency weekend on 13th September was organized. Mr. Paulson and the head of the New York Federal Reserve, Tim Geithner, have taken on a short-term takeover in a number of banks.

The bank bosses of Goldman Sachs, Morgan Stanley, JP Morgan Chase and Citigroup, all of whom had their own problems, did not want a bar.

Everyone left the meeting knowing that Lehman Brothers was dead and that life would be immeasurably harder for the rest of them.

path

September 15, 2008

Wall Street announced Monday morning that Lehman Brothers had filed for bankruptcy.

The market immediately lost more than 4 percent, the biggest decline since the 9/11 attacks.

The banks were hammered. The giant insurer AIG, which insured CDOs against default, went into freefall.

This time, the US government acted and confiscated AIG's assets to curb the bleeding within two days.

An emergency agreement to rescue Merrill Lynch was met with Bank of America.

Too big to fail

October 2008

The decline of Lehman Brothers led to a full-blown banking crisis in the US, Europe and much of Asia.

The Bush administration had the Troubled Assets Relief Program (TARP), a $ 70 billion slush fund, to buy toxic assets from the banks that developed them.

It helped to suppress the panic. In the end, banks chewed more than $ 400 billion in TARP money, which taxpayers squandered, even though the government made a small profit from the salvage.

Lehman Brothers was the only big bank that could collapse.

Their legacy for the survivors, or what is now known as systemically important banks, is that taxpayers have to stand behind them with the "too big to fail" guarantee.

Subjects:

Banking,

Industry,

Business Administration and Finance,

United States

First posted

September 14, 2018 11:10:55

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