bankruptcy of lehman brothersfrom wikipedia

7/27/2019 Bankruptcy of Lehman BrothersFrom Wikipedia

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bankruptcy of lehman

brothers

Lehman Brothers headquarters in New York CityFinancial

services firm Lehman Brothers filed for Chapter 11bankruptcy protection on September 15, 2008. The filing

remains the largest bankruptcy filing in U.S. history, with

Lehman holding over $600 billion in assets.[1]

Contents


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1 Background

1.1 Exposure to the mortgage market

1.2 Lehman's final months

2 Bankruptcy filing

2.1 Breakup process

3 Impact of bankruptcy filing

4 Neuberger Berman

5 Controversies

5.1 Controversy of executive pay during crisis

5.2 Accounting manipulation

5.3 Section 363 Sale

6 See also

7 References

8 External links

Background Main article: Subprime mortgage crisis


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Exposure to the mortgage market Lehman borrowedsignificant amounts to fund its investing in the years

leading to its bankruptcy in 2008, a process known as

leveraging or gearing. A significant portion of this

investing was in housing-related assets, making it

vulnerable to a downturn in that market. One measure ofthis risk-taking was its leverage ratio, a measure of the

ratio of assets to owners equity, which increased from

approximately 24:1 in 2003 to 31:1 by 2007.[2] While

generating tremendous profits during the boom, this

vulnerable position meant that just a 34% decline in the

value of its assets would entirely eliminate its book value

or equity.[3] Investment banks such as Lehman were not

subject to the same regulations applied to depository

banks to restrict their risk-taking.[4]


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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".[5]

Lehman's final months 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 otherlower-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.[6] In the first half of

2008 alone, Lehman stock lost 73% of its value as the


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credit market continued to tighten.[6] 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.[6]

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.[7]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."[8] 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.[9]

Investor confidence continued to erode as Lehman's

stock lost roughly half its value and pushed the S&P 500down 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.[10] The U.S. government


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did not announce any plans to assist with any possible

financial crisis that emerged at Lehman.[11]

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.[12][13] The stock slid 7% that

day.[13][14]

On September 13, 2008, Timothy F. Geithner, then

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.[15]Lehman reported that it had been in talks with Bank of

America and Barclays for the company's possible

sale.[15] 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 fromliquidation collapsed.[16] It emerged subsequently that a

deal had been vetoed by the Bank of England and the

UK's Financial Services Authority.[17] Leaders of major


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Wall Street banks continued to meet late that day to

prevent the bank's rapid failure.[16] Bank of America's

rumored involvement also appeared to end as federal

regulators resisted its request for government

involvement in Lehman's sale.[16]

[edit] Bankruptcy filing

Barclays acquired the investment banking business ofLehman Brothers in September 2008Lehman Brothers

filed for Chapter 11 bankruptcy protection on September

15, 2008. According to Bloomberg, reports filed with the

U.S. Bankruptcy Court, Southern District of New York

(Manhattan) on September 16 indicated that JPMorganChase & Co. provided Lehman Brothers with a total of

$138 billion in "Federal Reserve-backed advances." The

cash-advances by JPMorgan Chase were repaid by the

Federal Reserve Bank of New York for $87 billion on

September 15 and $51 billion on September 16.[18]

[edit] Breakup process On September 22, 2008, a revised

proposal to sell the brokerage part of Lehman Brothers


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holdings of the deal, was put before the bankruptcy

court, with a $1.3666 billion (700 million) plan for

Barclays to acquire the core business of Lehman Brothers

(mainly Lehman's $960 million Midtown Manhattan

office skyscraper), 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 tsunamithat 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."[19]

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."[citation needed] In the amended agreement,Barclays would absorb $ 47.4 billion in securities and

assume $ 45.5 billion in trading liabilities. Lehman's

attorney Harvey R. Miller of Weil, Gotshal & Manges, said


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"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."[citation needed] Further, Barclays will not

acquire Lehman's Eagle Energy unit, but will have entities

known as Lehman Brothers Canada Inc, Lehman BrothersSudamerica, 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.[20] Barclays had apotential liability of $2.5 billion to be paid as severance, if

it chooses not to retain some Lehman employees beyond

the guaranteed 90 days.[21][22]

On September 22, 2008, Nomura Holdings, Inc.announced it agreed to acquire Lehman Brothers'

franchise in the Asia Pacific region including Japan, Hong

Kong and Australia.[23] The following day, Nomura


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announced its 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

became legally effective on Monday, October 13.[24] In

2007, non-US subsidiaries of Lehman Brothers were

responsible for over 50% of global revenue

produced.[25]

Impact of bankruptcy filing The Dow Jones closed down

just over 500 points (4.4%) on September 15, 2008, at

the time the largest drop by points in a single day since

the days following the attacks on September 11,

2001.[26] (This drop was subsequently exceeded by an

even larger 7.0% plunge on September 29, 2008.)

Lehman's bankruptcy is expected to cause some

depreciation in the price of commercial real estate. Theprospect for Lehman's $4.3 billion in mortgage securities

getting liquidated sparked a selloff in the commercial

mortgage-backed securities (CMBS) market. Additional


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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 onpricing."[27]

Several money funds and institutional cash funds had

significant exposure to Lehman with the institutional

cash fund run by The Bank of New York Mellon and thePrimary 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


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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-WestLifeco, 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.[28]

This move to cover $494 million of Lehman assets in the

funds also raised fears about Wachovia's ability to raise

capital.[29]

Close to 100 hedge funds used Lehman as their primebroker and relied largely on the firm for financing. In an

attempt to meet their own credit needs, Lehman

Brothers International routinely re-hypothecated[30] the


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assets of their hedge funds clients that utilized their

prime brokerage services. 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.[31] 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 balancesinhibiting chances at further growth.[32] This in turn

created further market dislocation and overall systemic

risk, resulting in a 737 billion dollar decline in collateral

outstanding in the securities lending market.[33]

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 ofJapan 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


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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."[34] 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.[35]

Lehman was a counter party 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 thetransactions" and warned that "actual losses could

materially exceed current estimates." Freddie was still in


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the process of evaluating its exposure to Lehman and its

affiliates under other business relationships.[36]

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 stockplummeted 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

lectricit 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).[37][38][39]

The Federal Agricultural Mortgage Corporation or FarmerMac said it would have to write off $48 million in Lehman

debt it owned as a result of the bankruptcy. Farmer Mac


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said it may not be in compliance with its minimum capital

requirements at the end of September.[40]

In Hong Kong more than 43,700 individuals in the city

have invested in HK$15.7 billion of "guaranteed mini-

bonds" () from Lehman.[41][42][43] Many

claim that banks and brokers mis-sold them as low-risk.

Conversely, bankers note that mini bonds are indeedlow-risk instruments since they were backed by Lehman

Brothers, which until just months before its collapse was

a venerable member of Wall Street with high credit and

investment ratings. The default of Lehman Brothers was

a low probability event, which was totally unexpected.

Indeed, many banks accepted mini bonds as collateral for

loans and credit facilities. Another HK$3 billion has been

invested in similar like derivatives. The Hong Kong

government proposed a plan to buy back the

investments at their current estimated value, which will

allow investors to partially recover some of their loss bythe end of the year.[44] HK chief executive Donald Tsang

insisted the local banks respond swiftly to the

government buy-back proposal as the Monetary


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Authority received more than 16,000

complaints.[41][43][44] On October 17 He Guangbe,

chairman of the Hong Kong Association of Banks, agreed

to buy back the bonds, which will be priced using an

agreed upon methodology based on its estimated

current value.[45] This episode has deep repercussions

on the banking industry, where misguided investor

sentiments have become hostile to both wealth

management products as well as the banking industry asa whole. Under intense pressure from the public, all

political parties have come out in support of the

investors, further fanning distrust towards the banking

industry.

[edit] Neuberger Berman 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 thatfollowed, 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


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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 trustcompanies, the firm became able to offer trust and

fiduciary services. Today the firm has approximately $130

billion in assets under management.

Neuberger Berman's New York City headquarters on

Third Avenue. 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


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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 assetsunder management.[46]

An article in The Wall Street Journal on September 15,

2008, announcing that Lehman Brothers Holdings filed

for Chapter 11 bankruptcy protection, quoted Lehmanofficials 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 operatingfunctions 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


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claims of Lehman Brothers Holdings' creditors, Lehman

said."[47]

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 thatmanagement is not shirking accountability for recent

performance."

Lehman Brothers Investment Management Director

George Herbert Walker IV dismissed the proposal, goingso 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 Iapologize."[48]


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Controversies Controversy of executive pay during

crisisRichard Fuld, head of Lehman Brothers, faced

questioning from the U.S. House of Representatives'

Committee on Oversight and Government Reform. Rep.

Henry Waxman (D-CA) 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?"[49] Fuld said that he had in fact

taken about $300 million (173 million) in pay andbonuses over the past eight years.[49] Despite Fuld's

defense on his high pay, Lehman Brothers executive pay

was reported to have increased significantly before filing

for bankruptcy.[50] On October 17, 2008, CNBC reported

that several Lehman executives, including Richard Fuld,have been subpoenaed in a case relating to securities

fraud.[51]

[edit] Accounting manipulation In March 2010, the report

of Anton R. Valukas, the Bankruptcy Examiner, drewattention to the use of Repo 105 transactions to boost

the bank's apparent financial position around the date of

the year-end balance sheet. The attorney general later


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Andrew Cuomo filed charges against the bank's auditors

Ernst & Young in December 2010, alleging that the firm

"substantially assisted... a massive accounting fraud" by

approving the accounting treatment.[52]

On April 12, 2010, a New York Times story revealed that

Lehman had used a small company, Hudson Castle, to

move a number of transactions and assets off Lehman'sbooks as a means of manipulating accounting numbers of

Lehman's finances and risks. One Lehman executive

described Hudson Castle as an "alter ego" of Lehman.

According to the story, Lehman owned one quarter of

Hudson; Hudson's board was controlled by Lehman, most

Hudson staff members were former Lehman

employees.[53]

[edit] Section 363 Sale On February 22, 2011, Judge

James M. Peck of the U.S. Bankruptcy Court in theSouthern District of New York rejected claims by lawyers

for the Lehman estate that Barclays had improperly

reaped a windfall from the section 363 sale. "The sale


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process may have been imperfect, but it was still

adequate under the exceptional circumstances of

Lehman Week."

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