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Bankruptcy of Lehman Brothers

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This is an old revision of this page, as edited by 68.173.2.68 (talk) at 02:31, 23 September 2008 (→‎Impact of bankruptcy filing: excise paragraph on Sotheby's auction of Hirst art; paragraph as presented provides no direct (or even indirect) relation to lehman debacle). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Lehman Brothers headquarters in New York City

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.[1]

Background

Main article: Subprime mortgage crisis

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". [2]

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.[3] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[3] 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.[3]

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. [4] 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."[5] 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.[6]

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.[7] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.[8]

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.[9][10] The stock slid 7% that day.[10][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.[12] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale.[12] 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.[13] Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure.[13] Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.[13]

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."[14]

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.[15] 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.[16][17]

Impact of bankruptcy filing

The Dow Jones closed down just over 500 points on September 15, 2008, the largest drop in a single day since the days following the attacks on September 11, 2001.[18]

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."[19]

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 "breaking the buck", 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.[20] This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital.[21]

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.[22]

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."[23] 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.[24]

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.[25]

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).[26][27][28]

See Also

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References

  1. ^ "Lehman folds with record $613 billion debt". Marketwatch. 2005-09-15. Retrieved 2008-09-15.
  2. ^ Kulikowski, Laura (2007-08-22). "Lehman Brothers Amputates Mortgage Arm". TheStreet.com. Retrieved 2008-03-18.
  3. ^ a b c Jenny Anderson (2008-08-29). "Struggling Lehman Plans to Lay Off 1,500". The New York Times. Retrieved 2008-08-29. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  4. ^ New York Times, World Business, article by Jenny Anderson and Landon Thomas, 22 August 2008
  5. ^ "Financials slip as Korea snags weigh on Lehman and Merrill - MarketWatch". Marketwatch.com. Retrieved 2008-09-14.
  6. ^ 5 days ago (5 days ago). "AFP: Lehman Brothers in freefall as hopes fade for new capital". Afp.google.com. Retrieved 2008-09-14. {{cite web}}: Check date values in: |date= (help)CS1 maint: numeric names: authors list (link)
  7. ^ "Dow plunges nearly 300 points on concern about Lehman". Times-Picayune. 2008-09-09. Retrieved 2008-09-09.
  8. ^ Jenny Anderson (2008-09-09). "Wall Street's Fears on Lehman Bros. Batter Markets". The New York Times. {{cite news}}: Text "accessdate-2008-09-09" ignored (help)
  9. ^ Ben White (2008-09-10). "Lehman Sees $3.9 Billion Loss and Plans to Shed Assets". The New York Times. Retrieved 2008-09-10.
  10. ^ a b Joe Bel Bruno (2008-09-10). "Lehman shares slip on plans to auction off unit, consider sale of company". The Associated Press. Retrieved 2008-09-10.
  11. ^ Jenny Anderson (2008-09-11). "As Pressure Builds, Lehman Said to Be Looking for a Buyer". The New York Times. Retrieved 2008-09-11. {{cite news}}: Unknown parameter |couthors= ignored (help)
  12. ^ a b Jenny Anderson (2008-09-13). "U.S. Gives Banks Urgent Warning to Solve Crisis". The New York Times. Retrieved 2008-09-13. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  13. ^ a b c Ben White (2008-09-14). "Lehman Heads Toward Brink as Barclays Ends Talks". The New York Times. Retrieved 2008-09-14. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  14. ^ news.bbc.co.uk, Judge approves $1.3bn Lehman deal
  15. ^ reuters.com, Judge approves Lehman, Barclays pact
  16. ^ ap.google.com, Judge says Lehman can sell units to Barclays
  17. ^ guardian.co.uk, US judge approves Lehman's asset sale to Barclay
  18. ^ Michael Grynbaum (2008-09-15). "Wall St.'s Turmoil Sends Stocks Reeling". The New York Times. Retrieved 2008-09-15.
  19. ^ "After Lehman, Banks Jettison Commercial-Property Debt". The Wall Street Journal. 2008-09-17. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  20. ^ "Bank of New York restructures cash fund on loss". Reuters. 2008-09-18. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  21. ^ "Wachovia tumbles on capital fears". Financial Times. 2008-09-18. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  22. ^ "Hedge funds' growth prospects hit by Lehman's demise". Financial Times. 2008-09-17. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  23. ^ "Japan Banks, Insurers Have $2.4 Billion Lehman Risk". Bloomberg. 2008-09-17. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  24. ^ "RBS sees Lehman claims at $1.5 bln-$1.8 billion: lawyer". Reuters. 2008-09-17. Retrieved 2008-09-18. {{cite news}}: Check date values in: |date= (help)
  25. ^ Bullock, Nicole (2008-09-19). Financial Times http://www.ft.com/cms/s/0/9bbd2a58-85dd-11dd-a1ac-0000779fd18c.html. Retrieved 2008-09-19. {{cite news}}: Check date values in: |date= (help); Missing or empty |title= (help)
  26. ^ Desmond, Maurna (2008-09-17). "Lehman Ties Dim Constellation". Forbes. Retrieved 2008-09-19. {{cite news}}: Check date values in: |date= (help)
  27. ^ Thomson, Victoria (2008-09-19). "Power deal delivers new star to Buffett's energy constellation". The Scotsman. Retrieved 2008-09-19. {{cite news}}: Check date values in: |date= (help)
  28. ^ Gaffen, David (2008-09-18). "Buffett Shoots for Falling Constellation". The Wall Street Journal. Retrieved 2008-09-19. {{cite news}}: Check date values in: |date= (help)
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