Description
Lehman Brothers
The weekend that changed
What is (or was) Lehman Brothers?
• The 158-year old firm was founded by Henry, Emanuel and Mayer Lehman. • It was started as a General Store in 1844 and changed to a Merchant Bank in 1850. • Had not reported a quarterly loss even once, till June 2008. • A range of services from Investment Banking, Assetmanagement and Investment Management.
Commercial-Paper
• A short-term, unsecured fixed-income instrument issued by a corporation to meet short-term debt obligations. • Companies with investment-grade credit ratings can issue CPs. • Consider as a most safe and liquid investments in the market. • Lehman had a CP market of $40 billion.
Growth of CDS Market in Billion Dollars
Why did the Wall street giant go bust?
• Housing loans given to the NINJA group. • Huge investments in real estate derivatives. • High use of CDS and CPs.
• Debt-equity ratio was very high - $3.3 equity for every $100 of debt.
Impact of Lehman Brother’s Bankruptcy
• Stock markets around the world fell, with Dow Jones closed down by 500 points.
• Oil prices plunge from $141 to $60 a barrel between July to November 2008. • Dollar prices gone down, resulting in devaluation of the foreign reserves kept by countries. • Share prices of Lehman Brothers fell to $0.21 from a whopping $16.20 a share within 10 days.
Share price of LB from Aug to Nov 2008
Contd...
• Banks became more risk-averse • Extremely violent liquidity crisis experienced by financial world due to dry up of CP market • Lehman’s failure increased moral hazard; when faced with the post-Lehman chaos, Congress passed the $700 billion Troubled Asset Relief Program.
Failure vs. bailout:
Effect on Moral Hazard
• Bailouts are opposed because of fear of creating moral hazard
• Bankers would expect the government to help them out when needed and thus take more risks than they would otherwise
• Are the risks of allowing failure far greater than the damage to markets caused by propping up failed firms ?
Why did the Fed not save Lehman Brothers?
• Change in Fed image as ‘ultimate risk manager’
• Tax payers must not bear the impact of financial risks taken on by corporations • Given the limited resources, would choosing not to rescue Lehman create any problems?
Would rescuing Lehman have been a better option?
Thank You
doc_828902292.pptx
Lehman Brothers
The weekend that changed
What is (or was) Lehman Brothers?
• The 158-year old firm was founded by Henry, Emanuel and Mayer Lehman. • It was started as a General Store in 1844 and changed to a Merchant Bank in 1850. • Had not reported a quarterly loss even once, till June 2008. • A range of services from Investment Banking, Assetmanagement and Investment Management.
Commercial-Paper
• A short-term, unsecured fixed-income instrument issued by a corporation to meet short-term debt obligations. • Companies with investment-grade credit ratings can issue CPs. • Consider as a most safe and liquid investments in the market. • Lehman had a CP market of $40 billion.
Growth of CDS Market in Billion Dollars
Why did the Wall street giant go bust?
• Housing loans given to the NINJA group. • Huge investments in real estate derivatives. • High use of CDS and CPs.
• Debt-equity ratio was very high - $3.3 equity for every $100 of debt.
Impact of Lehman Brother’s Bankruptcy
• Stock markets around the world fell, with Dow Jones closed down by 500 points.
• Oil prices plunge from $141 to $60 a barrel between July to November 2008. • Dollar prices gone down, resulting in devaluation of the foreign reserves kept by countries. • Share prices of Lehman Brothers fell to $0.21 from a whopping $16.20 a share within 10 days.
Share price of LB from Aug to Nov 2008
Contd...
• Banks became more risk-averse • Extremely violent liquidity crisis experienced by financial world due to dry up of CP market • Lehman’s failure increased moral hazard; when faced with the post-Lehman chaos, Congress passed the $700 billion Troubled Asset Relief Program.
Failure vs. bailout:
Effect on Moral Hazard
• Bailouts are opposed because of fear of creating moral hazard
• Bankers would expect the government to help them out when needed and thus take more risks than they would otherwise
• Are the risks of allowing failure far greater than the damage to markets caused by propping up failed firms ?
Why did the Fed not save Lehman Brothers?
• Change in Fed image as ‘ultimate risk manager’
• Tax payers must not bear the impact of financial risks taken on by corporations • Given the limited resources, would choosing not to rescue Lehman create any problems?
Would rescuing Lehman have been a better option?
Thank You
doc_828902292.pptx