The Collapse of Lehman Brothers

PRESENTED BY: AAKASH JAISWAL

AKASH JAISWAL(2397)
AAKASH BAFNA DARPAN PALODA MANAN SHAH

Introduction

Lehman Brother was founded in 1844, by Henry Lehman emigrated from Germany to the US.

Emanuel Lehman joined the firm in 1847.

Another brother Mayer Lehman joined the firm in 1850. In 1860, its headquarters shifted to New York from Montgomery .

In 1994, it went to public.

Reported a loss of US$ 2.9 billion in 1st quarter and US$ 3.9 billion in 3rd quarter in 2008.

Continued

The Korean Development Bank which had earlier evinced an interest in purchasing a 25% equity stake in Lehman announced that it had withdrawn this offer. Lehmans shares plunged by 45% after KDBs announcement.

Lehman could not manage to restore confidence in the markets and had to file for bankruptcy.
Day before the Lehman filed for bankruptcy, J P Morgan Chase had Frozen Lehmans assets. Analysts claimed that Bankruptcy could have been avoided if J P Morgan had not frozen Lehmans assets.

The Losses
In August

2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. the second quarter of 2008, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. 2008, Lehman reported that it intended to release 6% of its work force, 1,500

In

In

In August

people.

On

September 10th 2008Lehman announced a loss of $3.9 billion

On

September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.

THE WHOLE CYCLE

Reasons behind the collapse

Subprime crisis
Decline in interest rates (Fed Fund rates had gone to as low as 1% and prime rate went down to 4.25%) Lending to subprime borrowers Real estate bubble Mortgage backed securities (MBS) Credit Default Swaps (CDS) Borrowers defaults on their mortgage payment.

Traditional and Subprime Model

Income Side Fall

4000 3000 2000 1000 0 663 489
29-02-2008

3070

-1000
-2000 -3000 -4000

31-05-2008

Gross Profit
31-08-2008

-1082

Operating Income

Net Income -2774

-4087 -3335 -3927 -5824

-5000
-6000

Cash Flow Side Fall

20000 15000 10000 5000 0 -5000 -10000 -15000 -20000 -17899 -321
6 months

17704 11237

-578 Operating Activites Investing Activities Financing Activities

3 months

-10638

Impact of the Collapse

Effect on Lehman Brothers assets and liabilities.

Double tragedy for the American Economy. Impact on Lehmans Subsidiaries.

Impact on Dow Jones.

Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate

Continued

Several money funds and institutional cash funds, The Bank of New York Mellon and the

Primary Reserve Fund, both falling below $1 per share

Lehman Brothers International held close to 40 billion dollars of clients assets when it filed

for Chapter 11 Bankruptcy. Of this, 22 billion had been re-hypothecated

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

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

Conclusion

Lehman's bankruptcy led to more than $46 billion of its market value being wiped out

Lehman Brothers failed for many reasons, corporate governance failures were the most important, especially risk management.

Subprime crisis acted as trigger for the collapse of Lehman Brothers

Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank
of America

Lehman Brother Takeover

Lehman Takeovers

North America

Asia Division