Founded by Henry Lehman and his two brothers in 1850

Core business:
buying and selling shares
buying and selling fixed income assets

Lehman
Brothers

Merger with American Express (196994)

In 1994 it spun off from American Express
In 2003, aggressively re-entered the asset-management business
4th largest U.S. investment bank at time of collapse

25,000 employees worldwide

IPM 2011-16, IBH Group 10 A, IIM INDORE

 Survived financial shocks:

Lehman
Brothers

Railroad bankruptcy 1800s

Great Depression 1930
Two world wars
Capital shortage 1944
Russian debt default 1998

Securitized $146 billion of mortgages in 2006

Reported record profits from 2005 to 2007
In 2007, Income: $4.2 billion, Revenue: $19.3 billion

Stock reached $86.18 in Feb 2007

Largest victim of financial crisis

IPM 2011-16, IBH Group 10 A, IIM INDORE

IPM 2011-16, IBH Group 10 A, IIM INDORE

Taking Risk

Modern
Financial
Model

Rewards

Build up
Confidence
of Market
IPM 2011-16, IBH Group 10 A, IIM INDORE

Distributing
Widely

System
Derisked

 Home ownership
Government supported:

Housing
Bubble

Good for America

Good for families
Good for economy

House prices raised steadily after WWII

Rocketed after 9/11, when interest rates were slashed
Boom fuelled by loans with tempting int. rates to more risky
clients

Subprime mortgage scramble was born

IPM 2011-16, IBH Group 10 A, IIM INDORE

 Leverage

Sub-prime Mortgages:

Crisis of credit

No down payments
No proof of income
No documents

Collateralised Debt Obligations (CDO)

Credit default swaps
Frozen credit markets

IPM 2011-16, IBH Group 10 A, IIM INDORE

Economic
Meltdown

Homeowners

Investors

Mortgages

Money

Houses

Institutions
(Pension Funds, Insurance
companies, Sovereign Funds,
Mutual Funds)

Investment
Banks

IPM 2011-16, IBH Group 10 A, IIM INDORE

Family

Broker

Investors
Investment Bank

Economic
Meltdown

Mortgage

Mortgage
Lender
CDO
(Credit Default
Swap)
Family

Family

Family

Family
Family

Family
Family
IPM 2011-16, IBH Group 10 A, IIM INDORE

Family

Money
Credit Default
Swap

Economic
Meltdown

Credit
Rating
Agency

BBB

Unrated

IPM 2011-16, IBH Group 10 A, IIM INDORE

Risky

4% return

AAA

Safe

Okay

7% return

10% return

CDO

Bankrupt
Family

Bankrupt

Broker

Investors

Bankrupt

Investment Bank

Economic
Meltdown

Sub-Prime
Mortgage

Mortgage
Lender
CDO
(Credit Default
Swap)
House

House

House

House

House

House

House
IPM 2011-16, IBH Group 10 A, IIM INDORE

House

 Rush into subprime mortgage market

Alt-A loans (without full documentation)
NINJA Mortgages (No Income No Job or Assets) : More risky
clients

Causes for the

fall

Relyed solely on appreciation of housing prices

Misjudged impact of rising home delinquencies on firms earnings
Didnt trim its massive mortgage portfolio during temporary
rebound
High degree of leverage

Spike in credit default swaps

IPM 2011-16, IBH Group 10 A, IIM INDORE

 Too late in its measures

Causes for the

fall

Balance sheet manipulations (Repo 105)

Inability to predict future government actions, inconsistent
government policy
Korea Development Bank deal dashed
Federal government went against bailout

IPM 2011-16, IBH Group 10 A, IIM INDORE

 Contributed to depression
Mortgages dried up

Stock markets tumbled

Catalyst for purchase of Merrill Lynch

Its effect

Greatly intensified the 2008 crisis

Erosion of $10 trillion from global equity market
Governments around the world came together to prevent financial
catastrophe

Central banks resorted to provide liquidity support to financial

institutions

IPM 2011-16, IBH Group 10 A, IIM INDORE

 People in power were profited

Central banks resorted to rate cuts to aid world economy
National Stabilization Act, 2008

Its effect

Bailout packages, Government guarantees and outright

nationalisation
Taught that confidence of financial market, once shattered, cant
be quickly restored
Protective laws placed

IPM 2011-16, IBH Group 10 A, IIM INDORE

 Have been more conservative in its borrowing

Lehman could
have saved
itself if

Borrowed money for longer periods of time (paying higher

interest)

Borrowed less money at a time (less "leverage")

Try for additional time, try to operate on its own
Vote down proposal, Sell off part of business to possible suitors

IPM 2011-16, IBH Group 10 A, IIM INDORE

Alternatives

JP MORGAN
CHASE

FEDERAL
RESERVE

Loan out $17Bn

capital
Provide breathing
space for operations

Relaxing collateral
norms
Revenue charge for
operation will be
reduced

BANK OF AMERICA

BARCLAYS

KOREAN DEVELOPMENT
BANK

FEDERAL RESERVE

IPM 2011-16, IBH Group 10 A, IIM INDORE

Sceptical about bad assets on balance

sheet of Lehman
Had an option to acquire Meryill Lynch

UK regulators concerned of systemic

risk
Uncertainty in its own operations
Asian financial stability was bad
Only interested to purchase firms Asian
assets
Should consider infusing capital
Criticism from public.

 It is understood the many firms failed to understand the inherent

risks associated with various instruments viz, Mortgage backed
securities and had to pay heavily.

Few firms couldnt limit their balance sheet exposure to these

dicey instruments. There was no proper mechanism for dealing
with balance sheet consolidation.

Conclusion

Early signs liquidity risks have surfaced which have called for the
need of emergency lending mechanism.
The management of better performing firms were able to enforce
active controls over their balance sheet and liquidity
Need for strong risk management system is untenable, which
could have averted this crisis.

IPM 2011-16, IBH Group 10 A, IIM INDORE

 The collapse of Lehman Brothers. Investopedia

Norbert J. Michel. Lehman Brothers Bankruptcy and the Financial
Crisis: Lessons Learned
Lehman Brothers Bankruptcy: PWC

References

Lehman Brothers rise and fall: From hero to dust :Pranvera Latifi
(Epoka University, Albania)
Lehman Brothers - The big failure: Umar Gurkhanov
The Global Financial Crisis: Causes and Consequences: Franklin
Allen
The global crisis Causes, responses and challenges: ILO

IPM 2011-16, IBH Group 10 A, IIM INDORE

Group 10 A:
Gaurav Saini
Gaurav Jharwal
Gupta Taru Dilip

IPM 2011-16, IBH Group 10 A, IIM INDORE