the fall of lehman brothers

8/3/2019 The Fall of Lehman Brothers

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Chapter - 1

1.1 The History of Lehman Brothers

Like its most aggressive rival Goldman Sachs, Lehmans history traces back to a

German immigrant. Henry Lehman of Rimpar, northern Bavaria, settled in

Montgomery, Alabama in 1844 and opened a small general store. Only in 1850,

Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers,

which at this time was a cotton trading company. Until the late 19th century

Lehman Brothers remained focused on the cotton market. The Lehman brothers

moved the firm to New York after the civil war and were involved in the

foundation of the New York Cotton Exchange in 1870. Only in 1883 Lehman went

on to enter the coffee market, becoming a member of the Coffee Exchange.

Four years later, in 1887, Lehman became a member of the New York Stock

Exchange.

Lehman expanded into the profitable equity underwriting business which was

strongly linked to the rapid industrialization of the United States. In 1899, it

underwrote its first public offering, the preferred and common stock of the

International Steam Pump Company and subsequently developed to one of the

most active equity underwriters. While the firm prospered over the following

decades as the US economy grew into an international powerhouse, Lehman

had to contend with plenty of challenges over the years. Lehman survived them

all:

The railroad bankruptcies of the 1800s

The Great Depression of the 1930

Two world wars


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A capital shortage when it was spun off by American Express in 1994 and

losses had depleted shareholder equity to less than 2% of assets

The Long Term Capital Management collapse

The Russian debt default of 1998

And the 2001 attack on the World Trade Center where Lehman had 3 floors

of office space.

In 1975 the firm merged with Kuhn, Loeb and Company to form at the time the

4th largest investment bank. The merger didnt go quite as planned and strife

arose in the firm. The firm was sold to American Express. AMEX started to break

away from banking and brokerage operations and sold off operations to

Primerica which in 1994 was broken off as an IPO for the current Lehman

Brothers ticker. The firm did exceptionally well purchasing fixed income such asLincoln Capital Management and Neuberger Berman which still are profitable

today. Since the IPO in 1994 Lehman had steadily increased revenues and grew

in employees from 8,500 to approximately 28,000.

However, despite its ability to survive past disasters, the collapse of the US

housing market ultimately brought Lehman Brothers to its knees, as its headlong

rush into the subprime mortgage market proved to be a disastrous step. However,

even at the time of the bankruptcy most units of Lehman were profitable andLehmans last CEO, Richard Fuld, had spent most of his tenure with diversifying the

company, making sure it would have other businesses to depend on if one

collapsed.

1.2 Lehmans Big Man: Dick Fuld

The last CEO of Lehman Brothers was Richard S. Fuld, Jr. who joined the

company at the age of 23 and spent his entire 39-year career at Lehman, the

last 15 in the top job. Fuld was considered as a trader by nature and nurture and

was described as highly competitive and keeping a straight face.


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In 1993, he became CEO of what was then the Lehman Brothers unit of

American Express. When American Express spun off Lehman as a public

company in1994, Fuld became its first chief executive. That was widely

perceived as a signal of the rising power of traders on Wall Street.

1.3 Lehman and the Subprime Mortgage Market

In 2003 and 2004, with the US housing market soaring, Lehman acquired five

mortgage lenders, including:

Irvine, California-based subprime lender BNC Mortgage, which lent to

homeowners with poor credit or heavy debt loads.

Aurora Loan Services, which specialized in Alt-A loans (a notch above

subprime, to more-creditworthy borrowers who do not provide full

documentation for their assets).

Benefits of the Acquisitions

In the first quarter of 2006, BNC was lending more than $1 billion a month,

while Aurora was originating more than $3 billion a month of such loans in

the first half of 2007.

Lehmans acquisitions at first seemed prescient; record revenues from

Lehmans real estate businesses enabled revenues in the capital marketsunit to surge 56% from 2004 to 2006, a faster rate of growth than other

businesses in investment banking or asset management.


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The firm securitized $146 billion of mortgages in 2006, a 10% increase from

2005. Lehman reported record profits every year from 2005 to 2007. In 2007,

the firm reported net income of a record $4.2 billion on revenue of $19.3

billion.

At the time Lehman was the biggest underwriter of US bonds backed by

mortgages, accumulating an $85 billion portfolio, 44% more than Morgan

Stanley and almost four times the $22.5 billion of shareholder equity

Lehman had as a buffer against losses.

In February 2007, Lehmans stock reached a record $86.18, giving Lehman

a market capitalization of close to $60 billion.

Lehman's Colossal Miscalculation

However, by the first quarter of 2007, cracks in the US housing market were

already becoming apparent as defaults on subprime mortgages rose to a seven-

year high. On March 14, 2007, a day after the stock had its biggest one-day dropin five years on concerns that rising defaults would affect Lehmans profitability; the

firm reported record revenues and profit for its fiscal first quarter. In the post-

earnings conference call, Lehmans CFO saidthat the risks posed by rising home

delinquencies were well contained and would have little impact on the firms

earnings. He also said that he did not foresee problems in the subprime market

spreading to the rest of the housing market or hurting the US economy. Prices of

securities backed by their mortgages sank, ultimately forcing Bear Stearns,

Lehmans main competitor in subprime underwriting, to tell investors in two of its

hedge funds, which bet heavily on home loans, that their investments had beenwiped out.


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1.4 Causes of the financial turmoil

The US housing market

1. Creation of a housing bubble

US house prices rose dramatically from 1998 until late 2005, more than doubling

overthis period , and far faster than average wages. Further support for the

existence of a bubble came from the ratio of house prices to rentingcosts which rocketed upwards around 1999. Furthermore, Yale economist

Robert Schiller found that inflation-adjusted house prices had remained

relatively constant over the period 1899-1995. Pointing to the escalation in

house prices and marked regional disparities, Shiller correctly predicted the

imminent collapse of what he believed was a housing bubble

The rise in house prices reflected large increases in demand for housing and

happened despite a rise in the supply of housing. The significant increasein the demand for housing is attributed to a number of factors.

a. Low interest rates

Sustained low interest rates from 1999 until 2004 made adjustable-rate

mortgages (ARMs) appear very attractive to potential buyers. At least in part,

low interest rates were driven by the large current account deficit run by the

USA, mirrored by capital inflows from countries like China which avidlypurchased US Treasury bonds, but also the decision (justified by a new

economic paradigm) on the part of the Fed to keep interest rates lower than in

similar previous scenarios.The Fed - and many of the worlds otherleading

central banks - continued to pump liquidity into credit markets to ensure credit

would continue to flow at low rates of interest


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b. Speculation

The upward rise in house prices was accentuated by property speculation.In some markets, 10% to 15% of buyers were speculators, estimates Bruce

Karatz of KB Home. Harvard economist Robert Shiller adds: Home buyers

typically expect price appreciation of 10% [a year) Speculative activity was

exacerbated by the USs comparatively generous foreclosure rules: unlike in

the UK, where foreclosure is likely to result in personal bankruptcy, homeowners

in the US can generally just walk away from their home and mortgage.

Together, these factors created a huge housing bubble. By 2005-06, the

value of subprime mortgages relative to total new mortgages was estimated at

20% - as opposed to less than 7% in 2001.44 Subprime mortgage lending rose

from $180bn in 2001 to $625bn in 2005.45 New Alt-A mortgages, the risk level

between subprime and prime,46 had risen from 2% in 2001 to 14% by 2006.Dean

Baker, co-director of the Center for Economic and Policy Research, valued the

housing bubble at $8 trillion.

2. The collapse of the bubble

By 2006 a number of factors had conspired to burst the bubble.

First, average hourly wages in the US had remained stagnant or declined

since 2002 until 2009 in real terms this represented a decline. Consequently,prices could not continue to rise as housing became increasingly

unaffordable.


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Second, growth in housing supply tracked price rises.While prices were able to

withstand this downward pressure until 2005, once demand had subsided

excess supply exacerbated the sharp fall in prices.

Third, as interest rates rose to a peak of 5.25%, ARMs became less attractive

and effectively removed many non-prime prospective buyers from the market

- in the first half of 2006, the Mortgage Bankers Association found the value, and

total number, of subprime mortgages to be down 30% on the second half

of 2005.

Fourth, as personal saving from disposable income fell below zero, fewer

households had the requisite finance to support increases in debt.

The collapse in house prices affected the ability, and the willingness, of

mortgage-owners to meet their payments. In some cases, house-owners with

ARMs simply could not face the rise in their payments resulting from the steep

rise in the Fed funds rate. As house prices fell, the options of either selling the

property or re-financing the mortgage also diminished.This unfortunate position

was exacerbated by the decline in the net savings rate, which meant

homeowners had fewer financial reserves to help themselves. In other

cases, there existed an incentive to voluntarily foreclose where the value of the

house (and future gains associated with a stronger credit rating) was smaller

than the value of the outstanding mortgage because of generous

foreclosure legislation.

Consequently, 2007 and 2008 saw significant rises in delinquency and

foreclosures.Serious mortgage delinquency rates rose in both the prime and

subprime markets, although the latters rise from just over 6% in 2006 to 18% in

2008 was particularly salient. The number of properties subject to foreclosurefilings rose by 79% in 2006 to reach 1.3m in 2007, and increased by a further 81%

to 2.3m in 2008 (a 225% increase on 2006).


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1.5 The Beginning of the End

Toward the end of 2006, people familiar with Lehmans risk managementoperations say, executives at the firm started seeing trouble in the mortgage

market.

The securitization division raised rates on its bonds to reflect higher risk, which

meant higher interest on the loans Lehmans mortgage units made to home

owners. When that did not slow borrowing, lending standards were tightened, a

decision that was met with resistance by BNC and Aurora executives, whose fees

depended on volume, the people say. By the end of 2006, Lehman started

hedging against its mortgage exposure. Some traders were allowed to bet

against the prices of home loans by shorting indexes tied to mortgage securities.

Still, Lehman President Gregory did not move fast enough to reduce risk, the

people say.

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns

hedge funds, Lehmans stock fell sharply.

Lehman Brothers became the first firm on Wall Street to close its subprime-

lending unit and lay off 2500 employees of the BNC and other mortgage related

units. Against the statements of the CFO from March 2007, shuttering BNC

Mortgage LLC would cut third-quarter earnings by $52 million Lehman calculated

at the time.

BNC made about $2 billion of loans in the first quarter of 2007, already down

40% from a year earlier, according to industry newsletter National Mortgage

News. BNC had 23 offices in eight states of which all were closed. In addition, it

also closed offices of Alt-A lender Aurora in three states. Even as the correction

in the US housing market gained momentum, Lehman continued to be a major

player in the mortgage market.


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In the fourth quarter of 2007, Lehmans stock rebounded, as global equity markets

reached new highs and prices for fixed-income assets staged a temporary

rebound.

However, the firm did not take the opportunity to trim its massive mortgage

portfolio, which in retrospect, would turn out to be its last chance.

Some of Lehmans losses in that period were from leveraged loans, which are used

by private equity firms and others for buyouts. The firm was stuck with the loans,

which they had aimed to package and sell, when the leveraged buyout market

froze in the second half of 2007.Fuld used the temporary recovery of credit

markets in the first quarter of 2008 to offload one-fifth of the firms leveraged-

loan portfolio. Yet he also tried to gain market share by borrowing against the

firms capital to trade other fixed-income products for Lehmans clients, people

say. That increased Lehmans risk in the event of a renewed downturn, as did its

growing inventory of Alt-A loans. Fuld had bet the wrong way: In March, markets

tumbled as defaults by homeowners surged, housing prices fell further and the US

headed toward a recession.

Reversing course, he ordered his associates to hunker down, people say. Traders

were told to sell troubled assets or buy credit protection for further potential

losses, which meant that if prices were to recover, Lehman couldnt benefit. In other

words, things werent going to turn around anytime soon.

Before the bankruptcy, Lehman Brothers risk management department had

identified five specific risks inherent in their business.

Market risk represents the potential unfavorable change in the value of aportfolio of financial instruments due to changes in market rates, prices

and volatilities

Credit risk represents the possibility that a counterparty or obligor will be

unable or unwilling to honor its contractual obligations to Lehman

Brothers.


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Liquidity risk is the risk that Lehman brothers are unable to meet their

payment obligations, borrow funds in the market at a good price on a

regular basis, to fund actual or proposed commitments or to l iquidate

assets.

Operational risk is the risk of loss resulting from inadequate or failed

internal processes, people and systems, or from external events.

Reputational risk concerns the risk of losing confidence from the

customers, public and the government due to unfortunate decisions

about client selection and the conduct of their business.

In summary, the market, credit, liquidity, operational and reputational risks

constituted the total risk in Lehman Brothers business (Lehman Brothers Annual

Report, 2007). In order for successful and sustainable investment banking theymust be carefully managed and balanced. On the other hand, if treated with

disrespect they could have disastrous consequences and destroying whole

companies.


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It is hard to believe that only one year ago, this once behemoth of Wall Street

had a $47 billion market cap and now is filing for bankruptcy. As the troubles

mounted in late August rumors started piling on that a bailout from the Korea

Development Bank was in the works. This never materialized. On September 10

Lehman announced another stunning loss of $3.9 billion and made it clear thatthey were also in the works of selling off the prized jewel in Neuberger Berman to

raise capital. The rest we already know and weekend talks broke down and

Lehman was forced with no other option but to file for bankruptcy.


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Chapter -2

The Bankruptcy of Lehman Brothers

My goodness, Ive been in the business 35 years, and these are theMost extraordinary events Ive ever seen

Peter G. Peterson, co-founder of Blackstone Group, and former head of Lehman


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The difficulties the financial services industry was facing during the year 2008,

which were mainly caused by the subprime crisis, hit Lehman particularly hard:

Pulling out BNC Mortgage of business and thus eliminating 2500 jobs in August

2007 was just part of Lehmans decline, which should reach its nadir at the

weekend of September 14, 2008. Lehmans high degree of leverage - the ratio of

total assets to shareholders equity was 31 in 2007, and its huge portfolio of

mortgage securities made it increasingly vulnerable to deteriorating market

conditions. On March 17, 2008, following the near-collapse of Bear Stearns - the

second-largest underwriter of mortgage-backed securities Lehman shares fell as

much as 48% on concern it would be the next Wall Street firm to fail.

Confidence in the company returned to some extent in April, after it raised $4

billion through an issue of preferred stock that was convertible into Lehman

shares at a 32% premium to its price at the time. However, the stock resumed its

decline as hedge fund managers began questioning the valuation of Lehmans

mortgage portfolio.

Throughout the year 2008 Lehman had to suffer bigger and bigger losses caused

by lower-rated mortgage-backed securities, culminating in $2.8 billion losses and

a decline of its stock value of 73% at the end of the second fiscal year,

announced on June 9.

Lehmans second-quarter losses, four times more than the worst analyst estimate

and its first loss since being spun off by American Express. It also arranged a $6 billion

share sale.

As painful as this quarterly loss has been, now is the time to look forward,

Fuld wrote to employees.In past down cycles, the firm has always emerged

stronger. We have done it before, and we will do it again. The firm also said

that it had boosted its liquidity pool to an estimated $45 billion, decreased gross

assets by $147 billion, reduced its exposure to residential and commercialmortgages by 20%, and cut down leverage from a factor of 32 to about 25.

However, selling $147 billion of assets in a jittery market meant taking significant

losses. On top of that, people familiar with the transactions say, some of the

hedges did not work. For example, Lehman bet against the CMBX index, a

gauge of bonds backed by commercial mortgage bonds, to hedge its residential

mortgage portfolio. In the second quarter, the index improved - the cost of


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protecting against losses on commercial mortgage bonds narrowed to 100 basis

points from 150 while the prices of residential mortgages continued to drop,

resulting in losses on both sides of the trade.

However, the above described measures were perceived as being too little and

too late. Over the summer of 2008, Lehmans management made unsuccessful

overtures to a number of potential partners.

a) The stock plunged 77% in the first week of September 2008, amid

plummeting equity markets worldwide, as investors questioned CEO

Richard Fulds plan to keep the firm independent by selling part of its asset

management unit and spinning off commercial real estate assets.

b) In August 2008, shortly before the third-quarter announcements in mid-

September, Lehman made public to lay off 1500 jobs, being 6% of its

workforce. Having already laid off more than 6000 workers since June

2007, this round of Lehmans head-count reductions should not only affect

its mortgage origination and securitization businesses. Now, as business was

stumbling from one somber quarter to the next, jobs in investment banking

and trading were also in jeopardy.

In August 22, 2008 investors confidence in Lehman reached a small peak after the

state-run South Korean firm Korea Development Bank announced it was

considering buying Lehman. On that day Lehmans stock value appreciated by

5% and 16% over the week. After this short moment of euphoria Lehmans shares

finally fell sharply by 45% to mediocre $7.79 on September 9, when the Korean

bank had to report to hold the negotiations due todifficulties pleasing

regulators and attracting partners for the deal On that day the fresh concerns

over Lehmans stability and investors worries that Lehman could have major

difficulties in finding new sources of capital pulled down the Dow Jones by 300

points and the S&P by 3.4%.

This decline more than wiped out the markets revival on the day before, after

the Bush administration rescued the mortgage giants Fannie Mae and Freddie

Mac.


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The outlook and fear that the government might not come to rescue Lehman and

that it may have to solve its problems on its own finally lead to the market decline

on that day.

The news was a deathblow to Lehman, leading to a 45% plunge in the

stock and a 66% spike in credit-default swaps on the companys debt.

The companys hedge fund clients began pulling out, while its short-term

creditors cut credit lines.

On September 10, Lehmans share further dropped by 41% to $4.22, as it

had to announce a loss of $3.9 billion and indicated its intention to sell its

prized investment managing division, including Neuberger Berman.

Among the potential buyers were Barclays of Britain, the Bank of America

and private equity firms. As the potential buyers were seeking assistance

from the Federal Reserve in form of assurances guaranteeing a part of

Lehmans troubled assets, it was still unclear whether the Fed would help.

The same day, Moodys Investor Service announced that it was reviewing

Lehmans credit ratings, and also said that Lehman would have to sell a

majority stake to a strategic partner in order to avoid a rating downgrade.

These developments led to a 42% plunge in the stock on September11.

On Friday September 12, the New York Federal Reserves president Timothy F.Geithner summoned the heads of major Wall Street firms, so they could review

their financial exposures to Lehman and work out plans over the possibility that

the government had to co-ordinate an orderly liquidation of Lehmans assets

the next Monday. The meeting was very reminiscent to the meeting held ten years

ago before the collapse of Long Term Capital Management (LTCM), a hedge

fund firm that dealt with esoteric securities, when Bear Stearns, the hedge funds

clearing broker, refused to contribute in an investment saving the fund.

The Wall Street banks involved in this meeting argued that Lehman overreached

and brought its troubles on itself. If a buyer of Lehman could not be found, they

could collect their collateral and liquidate Lehmans assets. Finally, after nervous

around-the-clock negotiations over the weekend, on Sunday September 14,

Merrill Lynch agreed to sell itself to Bank of America. Lehman announced


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Barclays has ended the bid to buy all or part of Lehman and a deal to

rescue the bank could not be settled. Bank of America, also rumored to be

involved in bidding for Lehman, had to reject its interests, too, as the regulators

declined a governmental involvement in Lehmans sale. It was finally on that

day when Lehman announced to file for bankruptcy protection on MondaySeptember 15.

2.1 THE THREE LS THAT KILLED LEHMAN

Leverage

During the good times, the best way to enhance your returns is to 'gear up' by

borrowing money to invest in assets which are rising in value. This enables you to

'leverage' (magnify) your returns, which is particularly useful when interest rates

are low. However, leverage cuts both ways, as it also magnifies your losses when

asset prices fall. (Witness the recent return of negative equity to the UK property

market.)

A sensibly run retail bank would have leverage of, say, 12 times. In other words, for

every 1 of cash and other readily available capital, it would lend 12. In 2004,

Lehman's leverage was running at 20. Later, it rose past the twenties and thirties

before peaking at an incredible 44 in 2007.

Thus, Lehman was leveraged 44 to 1 when asset prices began heading south.

Think of it this way: it's a bit like someone on a wage of 10,000 buying a house

using a 440,000 mortgage. If property prices started to slide, or interest ratesmoved up, then this borrower would be doomed. Thanks to its sky-high leverage,

Lehman was in a similar pickle.


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Liquidity

Most businesses fail not because of lack of profits but because of cash-flowproblems. Like all banks, Lehman was an upturned pyramid balanced on a small

sliver of cash. Although it had a massive asset base (and equally impressive

liabilities), Lehman didn't have enough in the way of liquidity. In other words, it

lacked ready cash and other easily sold assets.

As markets fell, other banks started to worry about Lehman's shaky finances, so

they moved to protect their own interests by pulling Lehman's lines of credit. This

meant that Lehman was losing liquidity fast, which is a dangerous state for anybank. Only six months earlier, in March 2008, Lehman rival Bear Stearns faced a

similar loss of liquidity before JPMorgan Chase rode to its rescue.

Believing that Lehman did not have enough liquidity at hand, other banks refused

to trade with it. Once a bank loses market confidence, it loses everything. Being

unable to trade meant that Lehman and its business ceased to exist in other

banks' eyes.

Losses

After the terrorist attacks of 11 September 2001, US interest rates plummeted,

causing a five-year boom in domestic and commercial property prices. This

boom ended in 2006 and US housing prices have since fallen for three years in a

row.

Lehman was heavily exposed to the US real-estate market, having been the

largest underwriter of property loans in 2007. By the end of that year, Lehman had

over $60 billion invested in commercial real estate (CRE) and was very big in

subprime mortgages (loans to risky homebuyers).


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Also, it had huge exposure to innovative yet arcane investments such as

collateralized debt obligations (CDO) and credit default swaps (CDS).

As property prices crashed and repossessions and arrears sky-rocketed, Lehman

was caught in a perfect storm. In its third-quarter results, Lehman announced a

$2.5 billion write-down due to its exposure to commercial real estate. Lehman's

total announced losses in 2008 came to $6.5 billion, but there was far more 'toxic

waste' waiting to be unearthed.

2.2 The Bankruptcy Law in the United States

Bankruptcy in the United States of America is permitted by the US Constitution

and codified in Title 11 of the United States Code, commonly known as The

Bankruptcy Code. The Code has been amended several times, especially in

2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act,

BAPCPA, which has particular significance for the financial industry.

Bankruptcy cases are filed in US Bankruptcy Courts and governed under federal

law, but state laws play usually a major role in bankruptcy cases, because these

are often applied in property rights issues.

Chapters of the Bankruptcy Code:

Chapter 7: Liquidation

Liquidation under this chapter involves the selling of non-exempt property of the

debtor and the distribution of the proceedings to his creditors. Most Chapter 7

cases are no-asset cases, i.e. the debtor keeps all his essential property.


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Chapter 9: Reorganization for municipalities

This chapter is only available to municipalities and is a form of reorganization,

e.g. Orange County in 1994.

Chapter 11: Reorganization

Chapter 11 of the Bankruptcy Code allows reorganization of any business, with

the basic rationale behind, that a reorganized business is more valuable as a

going-concern than the value of its parts in case of liquidation. In most cases the

debtor remains in control of its business operations as a debtor in possession and

is subject to the oversight of a jurisdiction of the court. The rights and interests of

the owners of companies filing under Chapter 11 with debts exceeding its assetsare ended and the creditors are left with ownership of the newly reorganized

company.

Chapter 11 features tools and mechanisms to facilitate the debtor to restructure

its business.

The debtor in possession may acquire financing and loans on a favorable basis,

providing the lender first priority on the earnings obtained by his advances. Thepriority scheme in Chapter 11 is the same as in the other chapters of Title 11, i.e.

giving secured creditors (with security interest or collateral in the debtors

property) higher priority than unsecured creditors, e.g. giving then employees

higher priority than others.

Each priority level has to be paid off in full before the next lower one can be

served. The debtor can also obtain the permit to cancel or reject executory

contracts, such as labour union contracts, supply/operating contracts or real

estate leases, in case it would be favorable to the company and its creditors. The

Chapter 11 plan for reorganization, with the goal to emerge debtors from the

bankruptcy within months or years, is voted upon by the interested creditors. A

confirmed plan becomes binding and identifies the treatment of debts and

business operations. Debtors have the exclusive right to propose a plan for a

specific duration (in most cases 120 days), after which creditors may also propose

a plan.


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In case the involved parties cannot confirm a plan, the bankruptcy case may be

converted into Chapter 7 liquidation or dismissed to return to the status quo

before the bankruptcy filing, allowing the creditors to claim their rights by use of

non-bankruptcy law.

If a publicly listed company files under Chapter 11, its stocks are immediately

de-listed from the stock exchange, but remain very often listed as over-the-

counter (OTC) stock, or in many cases the confirmed Chapter 11 plans render the

shares of the company valueless.

Chapter 12: Reorganization for family farmers/fishermen

This chapter is very similar to Chapter 13, but only available in certain situations.

Chapter 13: Reorganization for consumers

Bankruptcy under Chapters 11-13 is a complex form of reorganization and allows

the debtor to keep part or all of his property and use future earnings to pay off

his creditors.

Chapter 15: Cross-border insolvency

BAPCPA added this chapter to deal with foreign companies with US debts.

Bankruptcy cases are either voluntary, where debtors petition the court, or

involuntary, where creditors file the petition, e.g. To force a company into

bankruptcy to enforce their rights. Voluntary cases are by far the majority of all

bankruptcy cases.


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All bankruptcy cases commence with the establishment of the debtors estate,

which consists of all property interests at the time of the case commencement,

subject to certain exclusions. The bankruptcy estate of a company, partnership

and other collective entities is for federal income tax purposes not a separate

taxable entity from the debtor, contrary to individuals filing under Chapters 7 or 11,where the estate is separate. In particular, the estate is the net worth of an

individual or company, being the sum of the assets (legal rights, interests and

entitlements to property of any kind available for distribution to the creditors) less

all liabilities, and is administered by a trustee in bankruptcy. The moment the

petition for bankruptcy is filed, an automatic stay is imposed. An automatic stay

is an injunction, which prohibits the commencement, enforcement and appeal

of actions and judgments by creditors against the debtor for the collection of a

claim. Actions and proceedings towards the estate itself are prohibited, too.

Violations of the automatic stay are treated as void ab initio or voidable,depending on the circuit.

2.3 Lehmans Bankruptcy Filing

Lehman filed on Monday September 15, 2008 for bankruptcy protection under

Chapter 11 of Title 11 of the United States Code. The case is in re Lehman

Brothers Holdings Inc. (LBHI), US Bankruptcy Court, Southern District of New York

(Manhattan), being by far the largest corporate bankruptcy in history, listing a

total of $639 billion in assets, $613 billion in bank debt and $155 billion in bond

debt. As only the holding filed, Lehman further announced that its subsidiaries

would continue to operate business as usual.

The way that Lehman filed for Chapter 11 shows that its executives hired

the bankruptcy attorney as late as possible to avoid hints to its employees and to

the markets, that bankruptcy was in consideration. Hence, there was no well-planned contingency plan to allow a seamless transition to the Chapter 11 state

and to avoid a financial meltdown during the first days after the bankruptcy

filing.


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But possibly a better plan wouldnt have changed much since the BAPCPA

added provisions that affected Lehman in a per se unfortunate manner.

Actually, Lehman filed only three, non-substantial motions to open the

bankruptcy case:

First motion asks the court to enforce the automatic stay provisions.

Second motion asks the court to extend the time to file required lists and

schedules.

Third motion asks the court to waive the requirement that a filing include the

list of creditors.

Major Asset Dispositions

On September 20, 2008, a revised proposal to sell the brokerage part of Lehman

was approved by the bankruptcy court. Barclays was to acquire the Manhattan

core business of Lehman for $1.35 billion, with the responsibility of around 9000

employees. With the deal, Barclays absorbed assumed $47.4 billion in securities

and $45.5 billion in trading liabilities.

The fact that only the real estate, which was acquired with the deal, was worth

$1.29 billion (including the Manhattan headquarters skyscraper) shows the

exceptional nature of the deal.

Finally, on September 22 and 23, Nomuras agreement to buy Lehmans

franchise in Japan, Hong Kong and Australia and its intentions to buy Lehmans

investment banking and equities businesses in Europe and Middle East were

announced, and the deal became legally effective on October 13.


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2.4 Conclusion

Lehmans collapse roiled global financial markets for weeks, given the size of the

company and its status as a major player in the US and internationally.

Many questioned the US governments decision to let Lehman fail, as compared

to its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in

March 2008. Lehmans bankruptcy led to more than $46 billion of its market value

being wiped out. Its collapse also served as the catalyst for the purchase of

Merrill Lynch by Bank of America.

Less than a week later, on September 21, the Wall Street that had shaped the

financial world for two decades ended, when Goldman Sachs Group Inc. andMorgan Stanley became bank .Holding companies concluding that there was no

future in remaining investment banks as investors had determined the model is

broken.

When analyzing Lehman Brothers risk management one can conclude that

Lehmans Management countless times exceeded their own risk limits, ultimately

exceeding their risk polices by margins of 70% as to commercial real estate and

by 100% as to leverage loans. One explanation of this rather dangerousbehavior is the compensation system. In order to attract and keep the sharpest

minds in the industry, investment banks normally rewarded their most revenue

generating employees with big monetary bonuses.


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2.5 The significance of Lehman Brothers bankruptcy

Key issues arising from Lehman Brothers bankruptcy continue to challengeindustry participants. Firms on both the buy- and sell-sides of the market are

beginning to identify and implement risk mitigation measures to reduce the

likelihood of future credit and liquidity-based losses.

1. Market participants, in particular large and complex financial institutions,

continue to address the challenges of accurately quantifying,

aggregating, monitoring, and reporting market, credit, and liquidity risks.

2. Clients have placed increased scrutiny on selecting and monitoring

derivative and other counterparties, including their prime brokerage

relationships.

3. This focus includes evaluating risks inherent in contractual agreements

and the legal rights and remedies afforded by such arrangements.

4. Investors and counterparties are requiring added assurance that their

assets and trade obligations are adequately safeguarded, moving

business and assets away from arrangements and institutions perceived as

less secure, or seeking to modify existing contractual arrangements.

Lehman Brothers global footprint meant that thousands of financial market

participants were directly impacted by its collapse. In addition, numerous

aftershocks were felt throughout the world resulting from numerous cross-border

and cross-entity interdependencies. Lehmans insolvency has resulted in more

than 75 separate and distinct bankruptcy proceedings.


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2.6 Lehman Specific Events

2007

13th Mar Announced investments to 20% of D. E. Shaw group.

22th Aug Announced closure of BNC Mortgage, Subprime-loanoriginator.

2008

17th Jan Announced reduction of retail mortgage and suspend wholesalemortgage lending business in U.S

9th Jun Announced to raise USD 6 bl. in common and preferred stock.

16th Jun Posts USD 2.8 bl. in losses for 2Q results.

22nd Aug Report says S. Korea's KDB having interest in acquiring Lehman


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9th Sep Report says KDB's negotiation failed, strong plunge in stock prices.

10th Sep Announces USD 6.9 bl. for 3Q results, further plunge in stock prices amid

reform strategies

15th Sep Lehman files Chapter 11

17th Sep Barclays Plc announces acquisition of Lehman's North American

business.

22nd Sep Nomura Holdings announces agreement on acquisition of Lehman's

Asia Pacific franchise.

23rd Sep Nomura Holdings announces agreement on acquisition of

Lehman's European equities and Investment Banking businesses.

29th Sep Bain Capital and Hellman & Friedman agrees in acquisition of asset

management business (Neuberger Berman)


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Chapter 3

The Nomura Group has been founded in 1919 in Osaka by Tokushichi Nomura II,

a wealthy Japanese stock broking tycoon. Everything begun much earlier with

Tokushichi IIs father, Tokushich Nomura. His father created a money changer

business in Osaka in 1872, the Nomura Shoten. His son first helped him in his

business and then went on to start in a new business in Japan at that time, stock

brokering. This led Tokushichi Nomura II to found the nowadays called Nomura

Group based on the idea that a long and sound customer relationship is the key to

a successful business.

3.1 The History of Nomura

The Nomura Group is the financial institution of a wider conglomerate named

Nomura Holding. This conglomerate is based on the Japanese business model

Keiretsu. Companies in a Keiretsu have strong and interwoven relationships but

stay independent in their management. Those business groups are usually

organized around a bank which lent to Keiretsu companies, hold equities in them

and bail Keiretsu members out if needed. Nomura Holding is a horizontal Keiretsu

with companies present in many industries from oil and gas to construction,

chemicals and foodstuff. The bank in this case is Nomura Group with a

noteworthy group member named Nomura Securities (NSC).

NSC is Japans most internationally famous stock brokerage firm. It has been

established in 1925 in Osaka, when it spun off from Nomura Group.

It was first a bond trading firm and became famous for inventing the conduit

commercial mortgage.


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NSC has managed throughout the 20th century to take advantage of political

and economical difficult situations like the end of the Second World War, the

1965 Japanese recession or the oil shocks. This was made possible by the visionary

company beliefs, always one step ahead of the industry competitors.

An Economist once wroteWhat Nomura does this morning, the rest of the

Japanese securities industry will do after lunch. For example in 1965, guided by

the belief that economics and technology would be closely intertwined in the

future, NSC founded an independent research institute to serve Nomuras needs

but those of Japan as well. Today Nomura Research Institute is one of the leading

research organizations in Japan and the companys belief at that time has

been proved to be correct. During the 1980s, a cutting edge computer system

was one of the competitive advantages Nomura had on the market.

NSC was the first Japanese company to be listed on an American stock

exchange (Boston) in 1969 and the first Japanese company to be listed on the

New York Stock Exchange in 1981. However they never really succeeded in

taking a significant part on the American securities market. They founded the

very successful European branch in the 1970s with its headquarters in Frankfurt.

At the beginning of the 1990s during the Japanese economy crash, things

started to get nasty. NSC faced many scandals and market troubles. However,they managed to stay financially sound and took the crisis as an opportunity to

restructure their business and management model to become competitive again.


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3.2 Nomuras Acquisition of Lehman Brothers

Nomura started to move to acquire Lehman Brothers after the company

filing for bankruptcy. After one week of decision, on September 22, Nomura

declared the acquisition of Lehman Brothers franchise in the Asia Pacific region,

including Japan and Australia. On September 23, Nomura acquired Lehmans

European and Middle Eastern equities and investment banking divisions.

On October 7, Nomura moved further to hire former Lehman Brothers fixed

income staff. Then on October 14, Nomura completely integrated the acquisition

of three companies in Lehmans eleven services platform in India which are LB

Services India, LB Financial Services (India), and LB Structured Financial Services.

The acquisition of Lehman will help Nomura to increase the number ofinternational investors. While Nomura holds a top share of JGB underwriting for

domestic investors, Lehman holds a top rank for international investors.

Furthermore, the Lehman investment banking branches in Asia and Europe will

complement the client base, since Lehman is a top player in this market. Nomura

can still maintain a top share in Japan and emerging markets such as India and

Eastern Europe.

The person who broke the status quo and boldly led the acquisition of Lehman

was Kenichi Watanabe, who was appointed CEO in April 2008. Nomuras

previous top management was also aware of the need forglobalization, but

conservative attitudes failed to deliver meaningful results. Watanabe is known

for putting particular emphasis on speed in management, and his appointment as

CEO reflected Nomuras strong desire for change. Joining Watanabe on as

chief operating officer on Nomuras top management was Takumi Shibata,

who would later go on to lead the actual negotiations in the Lehman

deal.Along with Watanabe and Shibata, Sadeq Sayeed, the long time head of

Nomuras overseas operations, was recognized as being a key contributor in the

Lehman deal. Sayeed is said to have extolled his colleagues to dare to be

bold in pushing ahead with the Lehman deal, and is considered by some as

the architect of the plan to acquire Lehmans Europe and Middle East

operations. From the summer of 2008, Watanabe and Shibata began to keep a

close eye on market movements related to Lehman and developed

acquisition plans.


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When it became evident, on September 16, that Lehmans US operations would

go to Barclays Plc., Watanabe and Shibata quickly shifted their focus to Lehmans

Asia-Pacific, Europe, and Middle East operations.

Nomura succeeded in winning the deal for Lehmans Asia-Pacific business,

outbidding its competitors with a price of $225 million. On October 6, Nomura

additionally announced the acquisition of Lehmans India offices and IT services

units.

Lehmans India operations would provide a support platform for Nomuras global

business, as well as upgrade its IT capabilities, such as adding a high frequency

trading engine.

Given the low overlap of their existing business portfolios, there was high

potential for creating synergy between Nomura and Lehman. In 2008, only 20% or

so of Nomuras revenues came from overseas, while for Lehman its Europe, Middle

East, and Africa (EMEA, 35%) and Asia-Pacific (17%) units accounted for 52% of

revenues. In terms of core customers, Nomuras primary base was domestic

mutual funds and institutional investors, while Lehman had a global client list,

especially among hedge funds. Also, while Nomuras equity capital markets

business overseas only occupied a niche market position, Lehman was one of the

leading players globally.


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Nomura to acquire Lehman Brothers' Asia Pacific franchise

Tokyo, September 22, 2008Nomura Holdings, Inc. today announced it has

agreed to acquire Lehman Brothers' franchise in the Asia Pacific region

including Japan and Australia. The transaction is subject to a number of

conditions.

The deal includes all of Lehman Brothers' franchises and approximately 3,000

employees in multiple locations in the Asia-Pacific region. Lehman has been a

strong player in the investment banking field, particularly M&A, executionservices, non-cash business including derivatives, electronic trading and prime

brokerage. By combining two strong client franchises, the partnership will enable

Nomura to strengthen its wholesale business and to further realize its strategy of

delivering Asia to the world.

Under the terms of the transaction all employees in Asia Pacific will be offered

employment with Nomura. The deal does not include any trading assets or

trading liabilities.

Kenichi Watanabe, Nomura's President and CEO, said: "This is a transformational

deal that allows us to bring together the strengths of Nomura and Lehman

Brothers to further deliver value to our clients. It will significantly extend our reach

in Asia. We see immediate strategic benefits, delivering the scale and scope to

realize our vision to be a world-class investment bank.

"The businesses we are acquiring are hugely successful with excellent

management and staff. This is a once in a generation opportunity and we are

delighted to be able to partner with Lehman Brothers' talented people to create

one of the biggest independent global financial institutions that provides world-

class investment banking services to clients across the globe. Our ability to

capitalize on this opportunity in spite of such volatile markets reflects ourfinancial strength and demonstrates how well we have managed the credit

crisis. This deal is validation for our strategy," said Mr. Watanabe.

Jesse Bhattal, CEO of Lehman Brothers Asia, added: "To partner with such a

reputable firm as Nomura is truly a remarkable opportunity for both firms, as it

creates a completely complementary platform across an expanded range


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3.3 Lehmanization of Nomura

Since its acquisition of Lehmans Asia, Europe, and India operations, Nomura has

undergone changes in its human resources, business, and governance structure,

in what can be described as the Lehmanization of Nomura. While many of

these may have been planned from the outset, some key changes were

responses to unexpected turn of events. The case of Nomuras acquisition and

post merger integration of Lehman provides important lessons for cross-border

M&As, including the importance of early involvement by top management,

flexibility in response to unexpected events, and management of divergent

corporate cultures

3.3.1 The New Workforce Resources

The new world-class human capital came from the former Lehman employees,

which were around 8,000 people. Approximately 2,650 employees worked in

equities, investment banking and fixed income in Europe. Approximately 1,100

people worked in the former Japan franchise. Approximately 1,500 people

worked in Asia Pacific (ex-Japan), and around 2,900 worked in the subsidiary in

India.

The acquisition gave access to a broad range of clients and be complimentary

in the business areas. Through the India acquisition, Nomura gained the strength

of Lehmans IT platform, being a crucial element for global business operations,

i.e. one of Lehmans strengths was the high-velocity trading engine, which

allowed Lehman to trade the stocks and bonds significantly fast. This is highly

beneficial to the customers such as hedge funds.

3.3.2 Nomuras Key Strategy

The key strategy behind the acquisition was to quickly overhaul the wholesale

business by enhancing the product and service delivery as well as significantly

expanding the international franchise and client base. Nomura also aimed to

create substantial value to the customers by investing in the infrastructure system.


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Another strategy was to reduce the cost of operation due to the acquisition and

powerful infrastructure model. The last key strategy is to promote the world-class

management structure in terms of organization, management bodies, and

corporate systems.

3.3.3 Transition: The Road to Revenue

There were four phases which Nomura aimed to follow to integrate Lehman.

The first phase was to acquire Lehman and offer the former Lehman employees

to join Nomura.

The second phase is to start the joint operations, integrate infrastructure and run

up the business.

The third phase is to promote the efficiency in the combined operation and

infrastructure.

The last phase Nomura can expect revenues generated from the synergies in

the next fiscal year.

In addition, in the management structure, Nomura allowed increase in the

diverse pool of management. This enhanced the performance of managementto support the sophisticated nature of financial business. Furthermore, Nomura

tries to promote the right persons for each job and not only Japanese bankers.


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In the medium to long term, Nomura wants to become a world class player in

investment banking. The benefit from the acquisition will dramatically help

Nomura in many ways such as having world-class human resources, world-class

services and solutions, and a world-class client base. In addition, a well structured

synergy and the integration of infrastructure will provide Nomura to become aworld-class investment bank in the near future.

3.4 Post Merger Integration Process

While differences between Nomura and Lehman in terms of business portfoliobode well for creating synergies, the differences in culture worked in the

opposite direction. Nomura set up a transition team immediately after the

acquisition and dispatched them to all the overseas offices to aid the

integration process. There was a formidable set of challenges, and Nomura

ran into trouble from the onset. Episodes of culture shock were quickly

reported by the media: Teams of Nomura traders singing company songs

each morning to kick off the day; the unilateral decision by the Nomura HRdepartment to change former Lehman female employees e-mail

addresses to their married names without asking which they used

professionally; the new employees training session where the women were

taught how to wear their hair and serve tea, just to name a few. While

these problems may simply be chalked up to differences in customs

between the East and West, the more fundamental issues stemmed from

the differences in corporate culture.

Lehmans corporate culture was in large part an embodiment of the

personality of its former CEO, Richard Fuld. He was a trader by nature, and

during his tenure as CEO, he instilled an aggressive and bold attitude

among his employees. Lehman bankers were used to a culture of high

risk tolerance, frequent use of leverage, and swift decision making.


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Nomuras corporate personality, on the other hand, was more hierarchical,

conservative, and favored more stable revenues based on moderate levels

or risk taking.

The difference in corporate culture between the two firms also was

evident in their approach to client prioritization. Lehman used to place

more emphasis on fee generation as a determinant of which client to

serve, while Nomura tended to place more weight on factors such as

length of relationship and loyalty in regards to client relations.

Consequently, conflicts arose between former Lehman and Nomura

bankers regarding which client deals to take on. The former complained

that Nomuras overly conservative attitudes were costing themopportunities to make money, while the latter looked down upon the

formers all too willingness to abandon long term clients for the sake of a

quick buck.

Watanabes plan to remedy the gap between Nomura and Lehman was to

establish a new hybrid corporate culture.

1. He envisioned a situation where the Lehman system of pay-for-

performance and low job security and the Nomura system of moderate pay

with high job guarantees co-existed in the same organization. The results,

however, looked closer to a Lehmanization of Nomura with some even

describing it as a case of a reverse takeover of Nomura by Lehman.

Lehmans influence became evident on many fronts. As the interaction

between Nomura and former Lehman bankers increased in frequency,

the main language of communication within Nomura, even in its Tokyo

headquarters, quickly became English. According to one Nomura

executive, more than half of conversations and 70% of e-mails are in

English.

2. Nomuras HR system also changed.


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Nomura employees were also offered a choice between the existing

compensation scheme and a Lehman style performance based system with

lower employment guarantees, and 45% chose the Lehman style package. In

addition, the method of career development changed from Nomuras old

generalist system, where employees rotated across different departments, to aLehman style specialist system, where employees remained in one department to

build up expertise. Also, many Lehman bankers were given key posts as heads of

overseas business units. This may not have been a hard decision, given that

those Lehman bankers had a track record of solid performance, while Nomuras

past overseas achievements were mediocre at best. The heads of EMEA and

Asia-Pacific equity markets, fixed income and investment banking all were

occupied by former Lehman banker.

Nomura, however, did not accede to full control of the overseas business to the

former Lehman bankers, opting to maintain the positions of global business unit

chiefs with senior Nomura personnel. Instead, to help the globalization process,

the business unit chiefs, who traditionally resided in Japan, were sent to the local

foreign offices. Hiromi Yamaji, the global head of investment banking moved to

London, and Naoki Matsuba, global head of equity capital markets relocated to

New York. Despite the high titles and responsibilities given, the former Lehman

bankers were not awarded commensurate levels of independence and

decision making authority that they were accustomed to. In major deals, theyoften had to get approval from the Nomura global unit chiefs and frustrations

began to mount regarding the slow and conservative pace of decision making.

Despite the high titles and responsibilities given, the former Lehman bankers were

not awarded commensurate levels of independence and decision making

authority that they were accustomed to. In major deals, they often had to get

approval from the Nomura global unit chiefs and frustrations began to mount

regarding the slow and conservative pace of decision making. Another majorpoint of contention among ex-Lehman bankers was the lack of representation at

the highest level of Nomuras management. One who felt such frustrations was

Bhattal who, in July 2009, announced that he would be resigning within a years

time. With Bhattals announcement the tension between the Nomura and former

Lehman bankers reached a new level.


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Things came to a head on March 2010, when the last of the guaranteed

bonuses was paid out. Within a span of a month, 12 high level former Lehman

bankers resigned. Nomuras top brass had anticipated a certain amount of

defections with the end of guaranteed pay, but they were caught by surprise at

the level and speed with which ex-Lehman talent began to leave. Soon they

began to fear that, with the looming departure of Bhattal as well, the trickle

would turn into a flood, resulting in a mass exodus of ex-Lehman personnel

In order to subdue a potential crisis, Nomuras top management made a major

announcement on April 2010. Jasjit Bhattal was appointed a seat on Nomuras

executive management board, responsible for setting the groups strategy and

budget, the first foreigner to take such a position in Nomuras history. In addition,

Nomura also announced that Bhattal would be in charge, as president and

COO, of the newly created wholesale division that encompassed all of the

overseas operations


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Chapter -4

Re-entry into the US Market

Recently, Nomura has been making a strong push into re-establishing its US

operations. Having lost out to Barclays Plc. in its bid for Lehmans US units, Nomura

has been organically building up its US business since 2008.

It is scheduled to invest up to $2.5 billion towards this effort, and in 2009, it

increased its

US workforce by more than 1,200 persons. A solid US presence is necessary, in

Nomura's

view, to maximize the synergies from the talent and product capabilities gained

through the Lehman acquisition, as well as to attract and maintain top class

talent.

In 2010 raised $3 billion, through a US bond offering, to fund its endeavors. Also, it

has increased its US workforce from 650 in 2008 to 1,900 in 2010. Nomura has beensuccessful in recruiting from its rivals, such as Bank of America and Deutsche Bank.

In particular, many of those joining Nomura in the US are former Lehman bankers,

who are reuniting with their colleagues in Europe and Asia. The chief risk officer,

chief economist, fixed income head, and many traders and sales personnel of

Nomuras US operations are former Lehman bankers.

Nomura considers the expansion of its US operations as a key piece of the puzzle of

its overall global strategy for several reasons.

First, the US is attractive, in and of itself, as the worlds largest financial market.

Second, a US presence is needed to attract and maintain top level talent.


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Third, the US component is required in order to be able to provide customers

global solutions and maximize the synergies with the Europe and Asia parts of the

business acquired through the Lehman deal.


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Chapter - 5

Financial Performance

Nomuras financial performance, since its acquisition of Lehman, has been

turbulent.

In FY2008, Nomura recorded a net loss of 708.2 billion yen, the worst notonly in its own but in the history of all public Japanese companies, for

which Watanabe had to apologize to shareholders.

While the financial crisis and disposal of distressed assets were the main

contributors to the loss, the cost associated with absorbing the Lehman

workforce also played a significant part. According to Nomuras 2009

Annual Report, of the net loss in FY2008, around 120 billion yen (16.9%) was

attributable to the cost of integrating Lehmans operations.

Recovery began from the second quarter of 2009, and for FY2009 Nomura

recorded

a net profit of 67.8 billion yen. In addition to the rise in the Japanese stock

market, gains

from Nomuras European units contributed to the turnaround.

Recently, Nomura has posted seven consecutive quarters in the black, up

to the fourth quarter of 2010.

In addition to returning to profitability, Nomuras standing in the global financial

markets is also rising. For example, Nomura was the leading equities trader on

the London Stock Exchange for six months running in the second half of 2009, a

position previously held by Lehman before its collapse.


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It is also participating in deals that were previously out of reach, such as being the

sole M&A adviser in KKRs $1.5 billion bid for UKs Pets at Home. Also, helped by the

acquisition of Lehman, Nomura has succeeded in regional revenue

diversification, with its overseas revenue share rising to 43% in the first quarter of

2010. Overseas revenue even surpassed domestic revenue at one time, with theforeign share of revenue reaching 53% in the second quarter of 2009.

However, not all is positive.

Nomuras pace of recovery lags behind those of its global investmentbank competitors. In the first quarter of 2010, when Nomura posted a net

gain of $207 million, Goldman Sachs recorded $3.46 billion, Morgan Stanley

$1.78 billion, and Citigroup $4.43 billion in profits during the same period.

Nomuras ROE (Return on Equity) also falls short of its competitors.

For the third quarter of fiscal year 2009, Nomuras ROE was3.6%, a low level

when compared to past performances as well as against Goldman Sachs32% and Barclays Capitals 24%. Also, in terms of revenue per employee,

Nomura garnered $137,000 per head, while Goldman Sachs employees

made $434,000, and Morgan Stanley employees brought in $168,000 each.

These figures are an indication that Nomura has yet to fully realize the

synergy potential from its Lehman acquisition, while, despite efforts at

reducing redundancies in head count in 2009, the cost of compensation andbenefits remains a financial burden.


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Chapter6

Conclusion

Following the acquisition of Lehmans operations, Watanabe said he plans to

complete the integration of Lehmans employees within three years. To this end,

Nomura has made significant inroads, along various dimensions, and Shibata

assesses the post merger integration process to be 50% complete at this point.

The merger of Nomura and Lehman is still a work in progress and it is too early to

impart a final verdict on its success or failure. However, the case of Nomurasacquisition of Lehman provides meaningful lessons relevant to successful M&As,

as much in the process as in the final outcome.

Lessons relevant to successful Mergers & Acquisitions

The Nomura case highlights the importance of early interest and involvement by

the top management in the M&A process. The acquisition of Lehmans operations

was planned and executed in a top down manner, with Watanabe himself

taking the lead. As such, the deal was a high priority agenda from the get go

and Nomura was able to act swiftly when the opportunity presented itself. Also,

there was a clear top management division of labor allowing for efficient

decision making: Watanabe at home communicating with regulatory authorities

and board members, and Shibata on the ground negotiating the deal.

Nomuras case shows the importance of flexibility and room to move in the

event of unexpected occurrences. Employee defections was a scenario

anticipated by Nomura, however, they were caught off guard at the level and

speed with which it occurred following the payment of the last bonuses.


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In cross-border M&As, a typical dilemma is the issue of how much authority and

independence to give foreign operations, as well as how much trust to have in

the personnel of the target firm, whom there is a natural tendency to view as

foreigners. Acquiring firms should consider honestly what forms and to what

extent they are willing to empower the target firms employees as part of an

M&A process

Nomuras post merger integration process reaffirms the importance of culture

as a key component of successful M&As. As expected, the biggest issue in the

integration of Lehman was the conflict arising from the divergent corporate

cultures of the two firms. To remedy the situation, Nomura has tried to mesh the

two cultures, but the result, so far, has looked closer to a Lehmanization of

Nomura.

A key factorcommon to all successful M&As is the level of open mindedness of

the acquiring firm, and when the merger is between two firms of different

nationalities, it becomes even more important. Thus, for those Korean firms that

are seriously contemplating cross-border M&As as a means to overseas

expansion, an open mindset towards foreign cultures is a prerequisite. And such

a mindset is best developed beforehand, rather than waiting until after the

acquisition.


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Bibliography

1. Britannica Online Encyclopedia.

2. Wikipedia.

3. Funding Universe, Nomura Securities Company, Limited.

4. Laura Kulikowski, Lehman Brothers Amputates Mortgage Arm,TheStreet.com (August 22, 2007).

5. Wall Street Journal, Nomura Stumbles In New Global Push, 2009 (July 29).

6. Wall Street Journal, Nomura Turns to a Foreigner from Lehman, 2010

(March 17).

7. Bankruptcy Litigation Blog

8. Forbes.com, Nomura Profit Vindicates Lehman Gambit, 2009 (July 29)

9. Financial Times, Fresh push at Nomura to realize ambitions, 2010 (March

18).

10.Financial Times, Nomura offers Lehman-style contracts, 2009 (April 5).

11.Foley, C.F., Meyer, L.N., 2009, Nomuras Global Growth: Picking up Pieces

of Lehman, Harvard Business Review.

the fall of lehman brothers

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