Lehman Brothers was the largest bankruptcy in the history of United states.It was the the fourth biggest investment bank in United States until it filed for the bankruptcy in September 2008.The size of the bankruptcy was as much as the five subsequently largest bankruptcies combined and more than one and a half time the gross domestic product of Sweden in 2009.
2. • Henry Lehman, an immigrant from Germany, opens a
small dry goods store in Montgomery, Alabama, in 1844.
• In 1850, Henry Lehman and his brothers, Emanuel and
Mayer, founded Lehman Brothers.
• Lehman Brothers was global financial service firm. It
was the the fourth biggest investment bank in United
States until it filed for the bankruptcy in September
2008.
• The company operates in three divisions: Investment
Banking, Capital Markets and Client Services.
3. Lehman Brothers Bankruptcy
Lehman Brothers was the largest bankruptcy in the
history of United states.
The bank had assets of $639 billion and debt of
$619 billion.
The size of the bankruptcy was as much as the
five subsequently largest bankruptcies combined
and more than one and a half time the gross
domestic product of Sweden in 2009.
(Investopedia Staff, 2010)
Worldwide 25,000 employees lost jobs.
4. Lehman survived them all –
The railroad bankruptcies of the 1800,s
The great depression of 1930,s
Two world wars
The long term Capital Management collapse
Russian debt default of 1998
But collapsed of the U.S. housing market ultimately brought
Lehman Brothers to its knees.
5.
6. Risky investment strategy for faster growth
Subprime loans
Inefficient Corporate risk management
Board of Directors
Remuneration scheme
Technical causes
Rejection from US treasury for bailout, and from other independent
lenders for providing financial assistance
7. To overtake its rivals, Lehman Brothers set an annual
revenue growth rate of 15 %.
From 2000 to 2006, the firm’s revenue growth of 130%
outpaced that of its rivals.
Altered from a lower risk brokerage model to a higher
risk and more capital intensive investment banking
model.
Expanded its portfolio and included more risky and
complex financial products.
It aggressively pursued opportunities in proprietary
trading, derivatives, securitization, asset management,
and real estate .
8. Heavily involved in different kinds
of subprime loans and mortgages
Issued those loan without or with
little security
Earned a record net income of $4.2
billion on revenue of $19.3 billion.
In February 2007, the stock reached
a record $86.18
But this condition not last for long
9. Cracks in the U.S. housing market.
Interest rate started to climb and an
increasing number obligors started
to default.
Defaults on subprime mortgages
rose to a seven-year high.
March 14, 2007, the stock had its
biggest one-day drop in five years.
10. •Weak corporate governance
•Failed to safeguard against excessive risk
• Blame for the economic crisis.
•Such failures remained hidden in a prosperous market
• The downturn has revealed a number of flaws.
Inefficient risk management
11. •Lehman Brothers had six committees.
•One of them was a Finance and Risk Committee,
consists of the Firm’s Executive Committee.
The CRO and the CFO, should meet weekly to
discuss all risk exposures, position concentrations
and risk taking activities, but it only met twice in
both 2006 and 2007.
Inefficient risk management
12. •Company plunged into High-risk business
• Breached its own risk concentration limits
• Exceeded its own internal risk limits and controls
• Wide range of bad calls by its management
• Chief Executive, approved misleading statements and used
accounting gimmicks to hide the truth from investors and the
public
• Auditors knew of potential accounting irregularities, but the
company did not react
• Company’s new strategy had vague prospects and were less
liquid than its usual investments
Treasury Secretary Tim Geithn
Inefficient risk management
13. The House of Representatives Committee offered
the following observations on the composition of
the board:
•Nine are retired.
•Four of them are over 75 years old.
•One is a theater producer, another a former Navy
admiral.
•Only two have direct experience in the financial
services industry”.
Board of Directors
14. • Board of directors at Lehman Brothers were paid well for their
services in fees that range from $325,000 to $397,000.
• Independent directors may lack the incentive and the time to
take care of the corporation, because, most of them were very
busy and had many responsibilities.
Board of Directors
15. A study from researchers at Harvard University, “The Wages of Failure:
Executive Compensation at Bear Stearns and Lehman 2000-2008,” shows
that
•The top executive managers received about $1 billion respectively from
cash bonuses and equity sales between 2000 and 2008.
•Lehman Brothers awarded total remuneration of close to $500 million to
Chairman Fuld, whereas the firm lost almost $4 billion in the third quarter
just four days before its collapse.
Remuneration Scheme
16. •Extensive use of accounting manipulations that sheds light on the
systematic use of a balance sheet window-dressing technique called
Repo 105
•Lehman employed creative but deceitful accounting practices known
Repo 105 is an aggressive and deceitful accounting off-balance sheet
device
•It was used to temporarily remove securities and troubled liabilities
from Lehman’s balance sheet while reporting its quarterly financial
results to the public.
How Lehman Used Repo 105
17. • One of the main failure cases in Lehman Brothers was the manipulation of top
executives and the inaction of both the board and the auditing firm (Ernst & Young).
• Lehman’s long-term assets were being funded by short-term debt (e.g., repo
agreements and commercial paper).
• Rating institutes started to downgrade Lehman and Brothers.
• Lehman stuck with unsellable assets with constantly falling values.
• Lehman was unable to retain the confidence of its lenders and clients, because it did
not have sufficient liquidity to meet its current obligations.
Technical Causes of
Lehman Brothers failure
18. Rejection from US treasury and
Independent lenders
• Lost confidence in the bank which lead to increasing capital costs and
difficulties in getting short-term funding to maintain liquidity.
• The market didn't believe in Lehman Brothers and the firm became unable
to borrow enough money
• Due to their reckless behavior and disregard of risk awareness, the US
government ,Lenders and other interdependent parties, had lost confidence
in the bank
• Deny to provide financial assistance and chose not to intervene in the
inevitable end of Lehman Brothers
19. Consequences:
• Almost 6 million lost jobs.
• A 5,000-point Dow plunge.
• General Motors and Chrysler declaring Chapter 11.
• The government bailed out cash-starved banks.
• Talk of a 1930s-style depression.
• Housing prices in the nation's 20 biggest cities have fallen
31% since the July 2006 peak and 12% since Lehman's
bankruptcy
22. Consequences (cont)
• The consumer savings rate, which turned negative in the years
leading up to the financial crisis, shot up to almost 7%.
• A 57% drop in stock prices from the 2007 peak
23. Consequences (cont)
• Almost $9.3 trillion sitting in cash or cash-
equivalent accounts despite the average yield of
0.98% on a one-year CD and 0.06% on money
market funds.
• It's not as easy to get a loan these days.
24. •Large bonuses are now paid in shares for CEO’s and CFO’s.
• The biggest change is that risk management is taken much more seriously
than it was in the past
• Short-term lending rates begin to spike. Whole trade system collapsed.
• In Japan, exports have fallen 57 percent
• In Germany, exports in July 2009 were 25 percent below the level of July
2008.
• China's exports have fallen, too, although less dramatically.
Consequences (cont)
25. On September 20, 2008, Barclays acquired core business of Lehman at
$1.35 billion
Japan's top brokerage firm agreed to buy the Asian division of Lehman
Brothers for $225 million and parts of the European division for a
nominal fee of $2.
Consequences (cont)
