Lehman Brothers And The Aftermath Of Its Bankruptcy
The Lehman Brothers’ bankruptcy – Stories and events
The Lehman Brothers’ bankruptcy is one of the most spectacular events in the world’s economic history, as show the stories and controversies surfaced in the two years that have elapsed since the event.
The weekend of 13 to 14 September 2008 was one of the most dramatic for the U.S. financial industry, when the fate of Lehman Brothers, one of the oldest investment banks on Wall Street, was decided.
Bank officials began the weekend with two potential customers, namely Bank of America and Barclays Capital, and ended it working on regulations for the largest bankruptcy in American history. The company had assets at the time of 630 billion dollars.
It was then when Richard Fuld, chief executive of the bank at that time, trampled over his pride and agreed to sit at the negotiating table, meaning to sell the institution which he led for 14 years. But all failed when Henry Paulson, the then Secretary of the Treasury, but in the past former CEO of Goldman Sachs (thus a rival of Fuld), decided that whatever the buyer, he will not receive money from the state as financial support for the transaction, as happened in the spring of that year, when JP Morgan received 25 billion dollars to buy Bear Stearns.
Without the state’s support, representatives of BarCap and BofA left negotiations and dropped the idea of buying the fourth largest investment bank on Wall Street. Subsequently, Bank of America went and bought Merrill Lynch, a bank located also on the brink of bankruptcy.
What makes the Lehman bankruptcy into an amazing story are the details such as Warren Buffett being able to save the bank if he knew how to use his cellphone.
The Billionaire admitted that he had been approached by representatives of Barclays in September 2008. They asked him to provide the necessary assurance for the British bank to be able to submit an offer for Lehman.
Buffett has confessed that he asked the bank to provide additional details by fax, but received nothing until ten months later, when he realized that a director at Barclays, believed to be Bob Diamond, had left him a voice message on his phone. Before parting with the heads from Barclays, Buffett told them: “Do not try to contact me by phone”. But a survey of the Federal Court in Manhattan shows that Buffett, one of the most powerful businessmen in the world, hesitated to help Lehman three times in 2008.
“On the Brink”
The bankruptcy of the investment bank took authorities by surprise, as former U.S. Treasury secretary Henry Paulson admits in his book “On the Brink”.
“I was always one step behind events. It was always more than we expected,” Paulson said at his book launching in February. The fear of an unprecedented collapse of the dollar and the collapse of the American financial system had authority acting under time pressure and taking drastic decisions, even if they did not have any substantial evidence that their decisions would be best.
Paulson testified that he feared that the giants Goldman Sachs and Morgan Stanley will be next on the list of disappearing companies, after Washington Mutual and Wachovia. Authorities have examined the possibility of merger between JPMorgan and Morgan Stanley, Goldman and Citigroup or Goldman and Wachovia. It was later chosen the conversion of Morgan Stanley and Goldman into bank holding companies, thus having access to liquidity provided by the Central Bank. “Banks dropped like flies”, remembers Paulson. Regarding Lehman Brothers, he said the government had no legal authority to save the bank.
“A Colossal Failure of Common Sense”
Another point of view, this time from inside, is presented in the book “A Colossal Failure of Common Sense”, written by a former vice president at Lehman. This book shows the pressures within the bank several months before the collapse.
The book written by Lawrence “Larry” McDonald presents a tense episode in spring 2008, when Paulson met with Fuld. At that meeting was concerned with the situation Paulson Lehman and Fuld tried to convince him that it was former Secretary of Treasury control of the situation and knew that exposed risks. Director Lehman raised its head with superior experience bank, far more rich experience than Paulson’s leadership at Goldman Sachs. Richard Fuld was at the head of Lehman in 1994. He said then that will do well beyond the critical period. Several months later, Lehman was allowed to enter into bankruptcy by the U.S. authorities, led by Henry Paulson. It was former Treasury secretary Fuld drove the discussion to act in this direction, “McDonald asks.
Misunderstandings on the US-UK line
Barclays, one of the leading banks in the UK could have acted as a savior of the banking industry if it had bought Lehman. However, the lack of involvement of the U.S. government in the financial transaction and the reluctance of authorities in London have made the history follow another course.
In London, the Ministry of Finance, the Bank of England and the Financial Services Authority found out that the U.S. government will not provide guarantees Lehman.
British authorities insisted that their counterparts in Washington were made clear that Barclays could try to save Lehman if it was supported by the U.S. government.
So, who is to blame?
If at first the CEOs and VPs were considered guilty of Lehman’s bankruptcy, like Richard Fuld, who by his blind chase after profits failed to see or did not want to accept that his institution was facing problems, several investigations show that rival JP Morgan, Goldman Sachs and HSBC in Europe too have played an active role in the bankruptcy of the late giant.
U.S. authorities are investigating whether Goldman Sachs, the most influential American bank, is in part responsible for Lehman’s downfall by short selling transactions.
Second, HSBC, too has been accused in the fall. Lehman is demanding collateral security for billions of pounds which were transferred a few days before the bankruptcy. Pellerani Carlo, executive officer of Lehman, said then that “HSBC did not allow us to continue our business. They have put a gun to our heads.” Of the same practices are accused and JP Morgan and Citigroup, according to a report commissioned by the U.S. justice system.
The History of Lehman Brothers, a name in the financial world for 160 years in years
1844 Henry Lehman, an immigrant from Germany, opened a small food store in Montgomery.
1850 Henry join his brothers Emanuel and Mayer and they name their business Lehman Brothers.
1858 The brothers opened an office in New York.
1860 The brothers moved to New York and New York Cotton Exchange the foundations.
1887 Lehman Brothers becomes a member of the NYSE.
1888 Lehman arranged its first public offer for the International Steam Pump Company.
1929 The Lehman Corporation is created, a closed investment company.
1962 Together with Salomon Brothers, Merrill Lynch & Co. and Blyth, the corporation creates an association rivaling with the leading giants in intermediation.
1975 The corporation acquires Abraham & Co.
1984 American Express buys Lehman Brothers and merges the corporation with Shearson.
1993 American Express gives up Shearson, and the independent company becomes once again known as Lehman Brothers.
1994 Lehman is listed in New York and Richard Fuld is taking the lead.
1998 Fuld rejected rumors that the collapse of Long Term Capital Management caused a liquidity crisis.
2002 Lehman Brothers starts a wealth and asset management division.
2003 Lehman Brothers acquires Neuberger Berman and The Crossroads Group.
2007 The corporation has record levels of net revenues, net income and earnings per share.
2008 Lehman enters into bankruptcy, which is by far the largest in U.S. history.
2009 The company sues Barclays to recover billions of dollars in assets illegally transferred to the British bank.
2010 The prices and fees for lawyers and financial advisers for the sale of the company’s operations will exceed two billion dollars this year.
Eastern Europe is still recovering
Only a year and half ago, when the Lehman Brothers’ bankruptcy effects infected the global economic markets, the economic prospects of most countries in Central and Eastern Europe were dark. The region was the main victim of global recession and more economists and analysts feared that the eastern flank of the Old Continent will reiterate the Asian financial crisis at the end of the ’90s, writes the Financial Times.
Most countries were in the past decade the investors’ favorite emerging markets and benefited from cheap credit. The deficit for current accounts has grown rapidly, and companies and households accumulated massive loans in foreign currency.
When the credit crisis hit the West, the main export destination for companies in Central and Eastern Europe, growth has entered the red region and some countries even had difficulty in refinancing their debt. For this reason, Hungary, Romania, Serbia, Ukraine and Latvia have knocked on the door of the International Monetary Fund (IMF) to request support and loans.
Even in this scenario, no country entered into default and, moreover, a regional crisis was avoided because of international financial institutions. The G20 summit (the group of the top 20 industrialized and emerging countries) in April 2009, held in London, provided sufficient IMF funding in order to support countries that faced problems. Also, the Vienna Initiative, adopted under guardianship of the European Bank for Reconstruction and Development, led foreign banks which held a significant market share in the region not to withdraw funding from subsidiaries in the region.
Moreover, even households and companies proved to be quite resilient, managing to bear the austerity programs implemented by local governments. The decline of imports amid the recession and lower energy prices helped reduce the current account deficits of countries in the region and even brought revenue surplus.
On the other hand, though, budget deficits have increased strongly given the costs implied by economic incentives and by social protection. This phenomenon was present even in Poland, the only country in the region and, throughout Europe, which managed to avoid the recession in 2009.
Overall, though many feared that the recession of the last two years will cause people in Central and Eastern Europe to question the haste with which the transition to market economy was made, the crisis has not led to a change in vision. Governments have remained true to a capitalist approach and even to the entry into the euro area and the EU (for states that are yet to become member of the EU).
If Poland, together with the Czech Republic and Slovakia are leading the region’s economic recovery platoon, the same cannot be said about the Balkans and Southeast Europe.
“This area has a lower capacity of export. Overall, these countries have a very small commercial sector and, in some cases, have accumulated significant debt to foreign creditors,” said Michael Landesmann at Vienna Institute for International Economic Studies. Romania is one of the few countries in Europe that will not have an economic growth in 2010. The economy will contract by 1.9% according to the IMF estimates.
Lehman’s restructuring will exceed $ 2 billion
Prices and fees paid to lawyers and financial advisers for the sale of the Lehman Brothers operations in the U.S. and Europe will soon exceed $ 2 billion, given that some legal services were offered with a discount, writes the Financial Times.
The costs for the U.S. division reached 917 million dollars in July, and it is expected that the amount will exceed one billion dollars in September.
For the London division about 900 million dollars are needed.
Over 1,000 people work in restructuring the U.S. operations of Lehman Brothers, following the most resounding bankruptcy in the history of finance, while 300 people work in London for the same project.
Despite these astounding bills, tax experts say these costs are small compared with the asset value at the time the company went bankrupt – 691 billion dollars.11