IMPACT OF LEHMAN BROTHER's [PDF]

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IMPACT OF LEHMAN BROTHER’s HISTORY UNDER THE LEHMAN FAMILY(1850-1969)

•In 1844,23yrs old Henry Lehman- son of a cattle merchant emigrated to •U.S. and settled in Montgomery Albama where he opened dry goods store. •After joining his brother 1847, Emanul Lehman the firm became ‘H.Lehman •And Bro’ and with the arrival of their youngest

Impact Of Lehman Brother’s • In August 2007,Lehman closed it’s subprime lender, BNC mortgage eliminating 1200 positions in 23 locations & took a $25million after tax charge & $27 million reduction in goodwill. • In 2008 Lehman faced an unprecedented loss due to subprime mortgage.

Subprime Mortgage Crisis: • Ongoing financial crisis triggered by a dramatic rise in mortgage delinquences. • Become apparent in 2007. • Approx. 80% of U.S. mortgages were adjustable rate mortgages. • U.S. house prices decline in year 2006-07,refinancing become more difficult & mortgage delinquences soared.

Subprime Mortgage Crisis: • Result – the U.S. Govt. sponsored enterprises, tightening of credit cards around the world.

CAUSES: • Boom & burst in the housing market. • Speculation • High risk mortgage loans & lending/burrowing practices • Securitizing practices • Inaccurate credit ratings • Govt. policies

CAUSES: • Policies of Central Banks • Financial institution debts levels and incentives • Credit default swaps • Boom and collapse of shadow banking system

IMPACT: • Impacts in U.S. • Impacts on Indian Economy. • Financial market impacts – 2007. • Financial market impacts – 2008.

IMPACTS IN U.S.-

Robin Radaetz holds a sign in front of the Lehman Brothers headquarters in New York. Lehman Brothers, a 158year-old investment bank choked by the credit crisis, filed for bankruptcy

IMPACTS IN U.S.-

A woman carries a box after leaving the Lehman Brothers European Headquarters building in Canary Wharf in east London. The blue riband US investment bank

IMPACTS IN U.S.-

People walk out of the Lehman Brothers building carrying boxes of their belongings as security guards look on in New York September 14, 2008. Talks faltered when Britain's Barclays Plc, which had appeared to be front-runner to take over Lehman excluding its toxic mortgage-related assets said it had

IMPACTS IN U.S.People walk out of the Lehman Brothers building carrying boxes of their belongings as security guards look on in New York September 14, 2008. Talks faltered when Britain's Barclays Plc, which had appeared to be front-runner to take over Lehman excluding its toxic mortgage-related assets said it had

IMPACTS IN U.S.- of the Lehman Brothers The headquarters

investment bank on Sixth Avenue is seen on September 14, 2008 in New York. The troubled Wall Street investment bank moved closer to collapse as British bank Barclays pulled out of talks. Former Federal Reserve Board chairman Alan Greenspan appears for an interview on ABC's in Washington, on September 14, 2008. Without offering a

IMPACTS IN U.S.Greenspan said the government faces tough

choices as it tries to help arrange a rescue of Lehman Brothers without using public money. He cautioned that more major US financial institutions may fail in the future, but the government should not protect them all. Employees Employees of Lehman Brothers enter the headquarters building of the troubled bank on September 12, 2008 in New York. The no 4 US investment bank is currently searching Wall

IMPACTS IN U.S.-

People walk under a ticker sign announcing Lehman Brothers financial losses on September 10, 2008 in New York. Lehman Brothers plans to sell a majority stake in its investment management business and said a sale of the entire company was possible.

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IMPACT OF LEHMAN BROTHR’s ON INDIAN ECONOMY According to experts impact will be limited & restricted in only three areas –

• Stock – markets • Realty (Real – estate) • Outsourcing • -ive impact impact on those areas where these companies have operations (realty sectors)

IMPACT OF LEHMAN BROTHR’s ON INDIAN • This will shake the confidence of the industry which was banking too much on foreign institutional investors. • Lehman has investment in Indian companies like Spice Communication, Spice Mobile, Development Credit Bank & Golden

BANKRUPTCY OF LEHMAN BROTHER’s • Lehman Brother’s filled for Chapter 11 bankruptcy protection on Sept. 15/2008 • Largest bankruptcy filling in U.S. history with Lehman holdings over $600 billion in assets. • Until declaring bankruptcy in 2008, participated in business like – investment banking, equity & fixed income sales, research & trading,

BANKRUPTCY OF LEHMAN BROTHER’s • Primary dealer in U.S. • Subsidiaries included Lehman brother’s Inc.,Neuberger berman Inc.,SIB mortgage corporation, Lehman Brother’s Bank, FSB, Eagle energy partners & crossroad groups.

BANKRUPTCY OF LEHMAN BROTHER’s

Trading specialists work at the New York Stock Exchange. Wall Street had its worst day since markets reopened after the

BANKRUPTCY OF LEHMAN BROTHER’s

Pedestrians walk past the Lehman Brothers building in New York. Lehman Brothers filed for bankruptcy after trying to finance too many risky assets with too little capital.

BANKRUPTCY OF LEHMAN BROTHER’s

• Traders react in the S&P 500 pit at the Chicago Mercantile Exchange. Global markets plummeted after investment bank Lehman Brothers filed for bankruptcy protection.

BANKRUPTCY OF LEHMAN BROTHER’s

• The sign for Lehman Brothers headquarters is seen in New York. Treasury Secretary Henry Paulson said that the US banking system is 'safe and sound' despite growing financial turmoil (AFP)

BANKRUPTCY OF LEHMAN BROTHER’s

• Lehman Brothers Holdings Inc employee Jennifer Roeder writes a message on a portrait of Lehman Brothers Chief Executive

BANKRUPTCY OF LEHMAN BROTHER’s

Merill Lynch CEO John Thain leaves The Federal Reserve Bank of New York on September 13, 2008 where deliberations resumed as leading Wall Street executives and top US financial officials tried to find a buyer or financing for the nation's No 4 investment bank, Lehman Brothers, and to stop the crisis of

BANKRUPTCY OF LEHMAN BROTHER’s

A man walks out of Lehman Brothers building carrying a box of his belongings in New York. Lehman Brothers filed for bankruptcy after trying to finance too many risky assets

RESPONSES: • Federal Reserve and Central Bank • Economic stimulus • Bank Solvency and Capital replenishment. • Homeowner assistance • Regulatory proposal and long – term solutions • Implications

Regulatory proposals and long-term solutions • Ben Bernanke: Establish resolution procedures for closing troubled financial institutions in the shadow banking system, such as investment banks and hedge funds. • Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance. Re-instate the separation of commercial (depository) and investment banking

Regulatory proposals and long-term solutions • Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk. • Paul Krugman: Regulate institutions that "act like banks " similarly to banks. • Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to

Regulatory proposals and long-term solutions • Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification • Eric Dinallo: Ensure any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-

Regulatory proposals and long-term solutions • Raghuram Rajan: Require financial institutions to maintain sufficient "contingent capital" (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.) • A. Michael Spence and Gordon Brown : Establish an early-warning system

Regulatory proposals and long-term solutions • Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts. • Nouriel Roubini: Nationalize insolvent banks. Reduce debt levels across the financial system through debt for equity swaps. Reduce mortgage balances to assist homeowners, giving the lender a share in any future home

Regulatory proposals and long-term solutions • Paul McCulley advocated "countercyclical regulatory policy to help modulate human nature." He cited the work of economist Hyman Minsky, who believed that human behavior is procyclical, meaning it amplifies the extent of booms and busts. In other words, humans are momentum investors rather than value investors. Countercyclical policies would include increasing capital requirements during

Implications • Estimates of impact have continued to climb. During April 2008, International Monetary Fund (IMF) estimated that global losses for financial institutions would approach $1 trillion. One year later, the IMF estimated cumulative losses of banks and other financial institutions globally would exceed $4 trillion. This is equal to U.S. $20,000 for each of 200,000,000 people. • Francis Fukuyama has argued that the crisis represents the end of Reaganism in the financial sector, which was

Implications • Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either. “ Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years. Microsoft CEO Steve Ballmer has argued that this is an economic reset at a lower level, rather than a recession, meaning that

Implications • The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy