2008: A study on the collapse of Lehman Brothers
DOCUMENTATION - IN PROGRESS
On the 15th of September, 2008, Lehman Brothers filed for Chapter 11 that remains to this day the largest bankruptcy filing in US history (more than $600 billion in assets). While it was a shock, it didn’t happen out of context - the subprime mortgage crisis was already underway at that time. But that weekend and the following week of the crisis was the pivotal moment when everything changed - when worries, concerns and an evolving fear broke out into sheer panic. From that point on until about six more months the markets just could not hold it together and kept on going down. During this period, many financial institutions would fail and/or be recovered by their governments or by their peers (via forced marriages pushed by the regulators). The economy would enter what we now know as the Great Financial Crisis (GFC), a deep recession. It would eventually require that boldest actions by the central bank (the Federal Reserve), and they government (the US Treasury playing a key role) in the form of the easiest money policy and the largest stimulus to get the economy back on to the track.
Having a good understanding of the events is critical to having a better understanding of the functioning of the financial institutions, financial markets as well as its relationship to the wider economy. As usual, let’s get on to it via a review of the timeline of the events.
Timeline
Contextual History
1850’s
Henry Lehman is joined by his brothers Emanuel and Mayer, and their establishment becomes Lehman Brothers.
1899
Lehman Brothers takes on investment banking activities, issuing its first public offering for the International Steam Pump Company.
1929
The Lehman Corporation is created, a closed-end investment company.
1984
Shearson Division of American Express acquires Lehman Brothers and the joint-unit came to be known as Shearson Lehman.
1994
Lehman Brothers is spun off from American Express into Lehman Brothers Holdings, Inc. Richard Fuld becomes CEO.
1997
Lehman bought Colorado-based lender Aurora Loan Services, an Alt-A lender.
Early 2000s
Overview: Lehman Brothers increases its bet on the housing market and buys five mortgage lenders and becomes heavily invested in mortgage-backed securities.
2000
To expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC.
2004
January, 2004: Lehman acquires most of SIB Mortgage Corporation.
2007
The financial crisis begins to unfold with the sale of two Bear Stearns hedge funds in mortgage-backed securities.
February, 2007
Lehman Brothers share price touched a record high of $86. At that time, Lehman Brothers’ stock market value or market capitalization reaches $60 billion
June, 2007
June 12, 2007: Lehman reports 2007 Q2 earnings - This report does not indicate any signs of strain.
EPS: $2.21
Net revenues $5.51 billion
References:
August, 2007
The firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill.
September, 2007
18 September, 2007: Lehman reports 2007 Q3 earnings - This report is the first report indicating some strain with the write down in mortgage-related investments, also net income falling.
Net income fell to $887 million, or $1.54 per share
Net revenue climbed 3% to $4.3 billion, meeting expectations.
Reported write-downs: $700 million (due to its mortgage-related and leveraged loan investments)
References:
21 September, 2007: Joe Gregory appointed Erin Callan as CFO. Erin replaces Chris O'Meara.
December, 2007
December 13, 2007: Lehman Brothers reports 2007 Q4 earnings - This report starts to incorporate slower growth and profitability with revenue and net income falling and yet another big write-down.
Net income at the bank fell 12%, to $886 million, or $1.54 a share
Net revenue fell 3% to $4.39 billion, but came in above Wall Street expectations.
Reported write-downs: $830 million
References:
2008
March, 2008
March 16, 2008: Bear Stearns acquired by JPMorgan Chase in a shocking fire-sale facilitated by the Federal Reserve
Market analysts suggested that Lehman would be the next major investment bank to fall.
March 18, 2008: Lehman Brothers reports 2008 Q1 earnings.
Erin Callan fielded Lehman's first quarter conference call, where the firm posted a profit of $489 million, compared to Citigroup's $5.1 billion and Merrill Lynch's $1.97 billion losses which was Lehman’s 55th consecutive profitable quarter. The firm's stock price leapt 46 percent after that announcement.
Net income at the bank fell 57% to $489 million (vs. profit of $1.15 billion in Q1 2007 AND an expectation of a profit of $0.72 a share)
Net revenue fell 31% to $3.5 billion (vs. $5.05 billion in Q1 2007 AND an expectation of $3.35 billion)
Net income per share fell to $0.81 a share (vs. profit of $1.96 a share in Q1 2007 AND an expectation of a profit of $0.72 a share).
References:
June, 2008
Lehman also reported that it had raised a further $6 billion in capital.
June 9, 2008: Lehman Brothers reports 2008 Q2 earnings.
Net revenue: $4.2 billion
Net income (loss): $ (0.7) billion
June 12, 2008: Lehman announces executive team shuffle.
Herbert (Bart) H. McDade III will succeed Joseph Gregory as president and Chief Operating Officer (COO).
Ian Lowitt succeeds Erin Callan as the Firm's Chief Financial Officer (CFO).
References:
As a result, there was major management shakeup, in which Hugh "Skip" McGee III (head of investment banking) held a meeting with senior staff to strip CEO Richard Fuld and his lieutenants of their authority.
August, 2008
August 22, 2008: Shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank.
Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal."
September
September 9, 2008 (Tue): Lehman reports preliminary 2008 Q3 earnings & provides update on KDB acquisition.
Net income loss of $3.9 billion ($5.92 a share)
Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.
Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3.4%
September 11, 2008 (Thu): Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent.
September 13, 2008 (Sat): Timothy F. Geithner, then the president of the Federal Reserve Bank of New York, called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.
September 14, 2008 (Sun): The International Swaps and Derivatives Association (ISDA) offered an exceptional trading session to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day.Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.
September 15, 2008 (Mon): Lehman Brothers files for bankruptcy.
Shortly before 1 am Monday morning (UTC−5), Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection[111] citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion.
Lehman shares tumbled over 90%.
The Dow Jones closed down just over 500 points on September 15, 2008, which was at the time the largest drop in a single day since the days following the attacks on September 11, 2001.
September 16, 2008 (Tue):
Barclays agrees to buy Lehman Brothers' U.S. operations.
In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding company filed for civil reorganization on September 16, 2008, in Tokyo District Court.
September 17, 2008: The New York Stock Exchange (NYSE) delisted Lehman Brothers.
September 22, 2008: Nomura agrees to acquire Lehman Brothers' Asian and European operations.
2008–2009
Continuing impact of the financial crisis causes economic decline in national and global markets that leads to the Great Recession.
Key People
CEO:
Richard Fuld (1994 - Sep 15, 2008)
President/COO:
Bart McDade (Jun 12, 2008 - Sep 15, 2008)
Joe Gregory (May, 2004 - Jun 12, 2008)
CFO:
Ian Lowitt (Jun 12, 2008 - Sep 15, 2008)
Erin Callan (Sep, 2007 - Jun 12, 2008)
Chris O'Meara (Dec, 2004 - 18 Sep, 2007)
Head of Investment Banking
Hugh "Skip" McGee III