Lehman & Bro. (1847) and H. Lehman (1844). The founder of the Lehman Brothers was Henry Lehman that migrated from Bavaria, Germany to Alabama, United States of America, and started up a dry-goods store. During the 1850’s, Lehman Brothers venturing on commodities trading in cotton cropping business as the market value for cotton is high. In contrast, the cotton trading business affected as the American Civil War started in 1862 and because of that Lehman Brothers joint venture with John Durr and formed a new company name Lehman, Durr & Co.
After the Civil War, due to reconstruction of the Alabama State, the company headquarter have moved out from Alabama to New York City. The Lehman Brothers listed on NYCE (New York Cotton Exchange) in 1850, listed on CSCE (New York Coffee, Sugar and Cocoa Exchange) in 1883 and finally listed on NYSE (New York Stock Exchange) in 1887. In this 21st century, Lehman Brothers Holdings Inc. are well-known as world financial services firm; the company has seven (7) core subsidiaries company that was Lehman Brothers Inc. , Neuberger Berman Inc. , Aurora Loan Service Inc. SIB Mortgage Corp. , Lehman Brothers Bank FSB, Eagle Energy Partners, and Crossroads Group. The type of businesses Lehman Brothers managing are Private Banking, Private Equity, Investment Management, Investment Banking, Equity and Fixed Income Sales, and research and Trading. In addition, Lehman Brothers is the main dealer in U. S. Treasury Securities which dealing with government bonds. Moreover, the international headquarter is located at New York City and there are two regional headquarter which located at London, United Kingdom and Tokyo, Japan.
Lehman Brothers total assets worth 691 billion US Dollar and it total equities worth about 22 billion US Dollar in year 2007, and with 28600 employees’ who work with the Lehman Brothers. Unfortunately, Lehman Brothers declare bankrupt and filed in for Chapter 11 Bankruptcy Protection on 15th September 2008 after 164 years of operation. The Lehman Brothers bankruptcy holding more than 600 billion assets as the largest bankruptcy filling in the United State of America history. What is the causal leading Lehman Brothers Holdings Inc into bankruptcy? The subprime borrowers
There core factor leading is the subprime borrowers which the people who is not eligible to obtain the loan due to low paid salary employees and with bad credit history but the banker still allowing the borrowers to obtain loan from the bank with low interest rates and easy loan terms and regulations. This factor has causing the increase of bad debts until turning into toxic debts, which unable to collect back the debts from the borrowers. Goolsbee, A (2007) stated, “We are sitting on a time bomb as a huge increase in unconventional home loans like a balloon mortgages taken out by customers who are not qualify for the regular mortgages.
The high payments, he continued, “Are just beginning to come due and lots of people who were betting on interest rates would come down by now”, as they are risking to lose their homes, as they are unable to repay their debts. As stated above, subprime borrowers are the main causal for the crisis; leading the firm to bust, and this is not healthy as it is a threat, in banking system as it is affecting the cash flows in the bank, and causing the subprime mortgage crisis occurred due to the credit crunch as toxic debts are in the peak. Subprime Mortgage Crisis occur in Lehman Brothers Inc
The bankruptcy of the Lehman Brothers is mainly due to the Mortgage Crisis during 2007. The crisis occurred due to the changes in government policies and also competition among competitors by providing the investors with easy loan terms, and because of that the bank hiked up the ARM (adjustable rate mortgage) and causing the property price decreasing. These problems occurred is partly due to the increased bad debts and causing insolvent on cash flows. Lehman Brothers facing credit crunch during the Mortgage Crisis because of lending out too much of credits to their borrowers for properties.
The easy payments term has cause insolvent for bank as rising of toxic mortgage debts. The banks has to increase their ARM (Adjustable Rate Mortgage) to re-solvent their liquidity in their banking system but unfortunately causing the property value to decrease, as loans is tougher to obtain. According to the chart beside stated that Lehman Brothers has about US 80 billion dollars of bad debts due to the Subprime crisis outbreak. (Source from Daily Mail Online) “This crisis has devastated the Lehman Brothers businesses and causing the losses of US 2. billion dollars and in the alarming situation, the firm has to sell off US 6 billion dollars worth of assets to recover the losses early last year”, reported by DPA, (2008). Meanwhile, the Lehman shares tumbled 73% as the credit market continuing to tighten causing loan tougher to obtain. The financing policy of the Lehman Brothers’ Inc The Lehman Brothers busted due to their financial policy; the extremely high level of the leverage (assets-to-equities ratio) and the strong reliance on short-term debt financing. Meanwhile, commercial banks are controlled and are not allowed having their equities leverage is more than 15:1.
Luigi Zingales (2008) cited that the “Lehman Brothers had a gearing or leverage of 30:1 i. e. (id est) only USD 3. 30 of equity per USD 100 of loans and with this leverage it has wiping off the total equities value and causing the firm insolvent with a mere 3. 3% drops in the assets value”. Moreover, the Lehman Brothers leverage system worsens as the firm widely in use of short-term debts; which financed more than 50% of the total assets in the pre-mortgage crisis, because of lowering their interest rates; the short-term loan is making money.
Somehow, the mortgage crisis arises; the interest rates increased, causing the lenders tightening up credit provision to the borrowers, and causing the borrowers facing liquidity or money shortage, which is a very serious problem. However, “Lehman Brothers Inc. trying hard to fixed up their default by decreasing their leverage or gearing and dependency on short-term debt on assets unfortunately it is too late, the firm is collapsed”, according to Zingales L, (2008). Lehman Brothers Liabilities and Shareholders’ Equity statement: (Source from Testimony of Luigi Zingales)
The statements above clearly shown that Lehman Brothers short terms debt on assets from August 2007 to February 2008 is more than 50% and their leverage ratio is more than 30:1 which causing the firm insolvent in cash term. These problems are causing the firm unable to refinancing. The borrowers unable to get loan, causing money unable to cycle and to generate as money in the public is limited. Lehman Brothers’ filing Chapter 11: Bankruptcy Protection The reason why Lehman Brothers filed in Chapter 11 Bankruptcy, because could not find any buyers to buy over the Lehman Brothers assets.
The early stage firm acquire “Korea Development Bank to invest on Lehman Brothers but not successful because the Korea firm executives unable to please regulators and also unable to attract shareholders for the deal”, said by Morcroft, G (2008), as the company is losing money because of the toxic debts of US 80 billion dollars. Secondly, the United States of America government never assist and to prevent Lehman Brothers from bankrupt, the firm never obtain any stimulus package from the government to solve the firm liquidity problem.
According to Andrew et al. (2008), ‘The US government told the bankers that they will not bail out for Lehman Brothers financial crisis and it was up to the Wall Street to solve the problems’, due to this issue the firm unable to get any assistant from the United States government and leading the company to bust. At the end, the Lehman Brothers filed in Chapter 11: Bankruptcy Protection, which is Lehman Brothers Holdings Inc. , will be bankrupt but not the other subsidiaries company.
As Lehman Brothers announced their bankruptcy plan, ‘the shares tumbled from US 19. 74 dollars to US 0. 21 cents; causing the company market value from US 46 billion dollars to US 145 million dollars’ according to Michael et al (2008). The impacts of Lehman Brothers’ Bankrupting The bankruptcy of the Lehman Brothers is a major threats to worldwide economy and deepen the financial crisis as Lehman Brothers is the largest leading Investment Bank in the United States and also worldwide.
After the Lehman Brothers bankrupted, a lot of investors at fear and dare not to invest which is also the main factor causing Dow Jones fell 233 points of 2% and also causing deterioration worldwide stock exchange market. ‘Lehman Brothers, a leading Wall Street Investment Bank filed for bankruptcy after trying to finance too many risky assets with too little capital, leading to fears about the future of other big firms’, cited by Barrack, O (2008). Conclusion In conclusion, the company busted it is because of the firm financial policy dragging the firm to the point of bankruptcy.
The mistakes that the Lehman Brothers caused is highly dependent on short-term debt; there is more than 50% of the total assets are short term based which is not healthy, and also there is also the leverage ratio is 30:1 which is too high and making the firm cash flows insolvent. Yet, during the pre-mortgage crisis and the credit crisis, the firm providing easy term on loaning, making loan easy to obtain by the subprime borrowers but at the end they are not paying back their debts and causing the increase of bad debts in the bank, and due to this problems causing the firm insolvent in money term.
In contrast, because of these bad debts problems the many bankers has to increase the interest rates but unfortunately causing the properties price to slump. This problem occurred as loan is tougher to obtain, borrowers unable to obtain loan, money are not generating, at the end causing the firm to collapse. In addition, why Lehman filed in Chapter 11: Reorganisation under the Bankruptcy Code rather than Chapter 7: Liquidity under the Bankruptcy Code. The differences between Chapter 11 and Chapter 7 Bankruptcy Code Chapter 11| Chapter 7| * Called as rehabilitation bankruptcy * Opportunities to reorganise he debts * able to try to re-emerge as a healthy organisation * able to discuss about the loan terms such as interest rates and dollar value payment with the creditors * not necessary to sell off all the assets| * Called as liquidation bankruptcy * Must sell off any unexampled assets to pay creditors * No option| (Source from US Courts: The Federal Judiciary) According to the table above; have clearly shown that Lehman Brothers filing Chapter 11; does not means that the firm busted, and with this Chapter 11 Bankruptcy protection; the firm is able to re-emerge as a healthy firm.
The firm not necessarily have to sell off their assets to pay their debts as there is terms and regulations on Chapter 11 to protect the right of the firm from totally sell off. Meanwhile, the firm able to drag the duration of the payments, as times gone by the value of their assets might increase so on that time they can easily repay back all the debts without selling off their firm, that is the benefit of Chapter 11 bankruptcy protection. Personal Opinion
In my opinion, I am strongly disagreeing about how the United States of America government ignore to bailout to assist Lehman Brother from bankruptcy, and push the responsibilities to the Wall Street. The Lehman Brothers collapse causing many people out of job, and causing the shocks market to fluctuate. Nevertheless, Lehman Brothers CEO (Chief Executive Officer) doing a good job on protecting the company assets from being sold off by filing chapter 11: Bankruptcy Protection; to protect the firm assets from auctioning.
In addition, if, Lehman Brothers corrected their financial policy earlier, they might not overwhelm with toxic debts that caused the firm insolvent. In financial term: high risk, high return; higher the risk, higher the consequences of going busted.
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‘Irresponsible Mortgages have Opened Door to many of the excluded’, The New York Times, 29 March 2007, http://www. nytimes. com/2007/03/29/business/29scene. html? ex=1332820800&en=e09a15f9b118d649&ei=5088&partner=rssnyt&emc=rss Zingales, L (2008),
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