How big is Lehman Brothers?

Founded in 1850 by three immigrants from Germany, Lehman Brothers has been a
prominent investment bank in Wall Street for decades.

It operates at a wholesale level, dealing with governments, companies and other financial
institutions, employing 25,000 people worldwide, including 5,000 in the UK.

Its core business includes buying and selling shares and fixed income assets, trading and
research, investment banking, investment management and private equity.

As the crisis in financial markets gathered momentum, it saw its share price collapse
from $82 to less than $1.

reason for bankruptcy

Investment banks have been aiding or buying peers since the US Treasury Department
and the Federal Reserve established that its rescue of Bear Stearns Cos in March hadn’t
set a precedent and declined to save Lehman before it filed for bankruptcy with debt of
more than $613 billion. JPMorgan is also reported to be working with American
International Group Inc, along with Goldman Sachs Group Inc, after AIG was told not to
expect a loan from the central bank. Merrill Lynch & Co agreed to be acquired by Bank
of America Corp, leaving Goldman Sachs and Morgan Stanley as the two largest
remaining investment banks Barclays Walks: Barclays Plc, the UK’s third-biggest bank,
walked away from a reported deal to buy all of Lehman just before its bankruptcy, and
may instead buy Lehman’s trading and investment banking business, a person with
knowledge of the matter said on Tuesday .Lehman, based in New York, was the fourth-
largest investment bank when it sought bankruptcy protection.

Why didn't the US Treasury save Lehman Brothers?

When Bear Stearns ran into trouble, the US Treasury made the terms favourable for JP
Morgan Chase to buy it. And just last week, the US government effectively nationalised
Fannie Mae and Freddie Mac, which between them own or guarantee about half of the
$12 trillion US mortgage market.

So already the US tax payer has been put at risk of shouldering the burden of billions of
dollars of losses, and it is becoming politically less acceptable for the government to keep
bailing out private companies.
By not giving UK bank Barclays a guarantee for Lehman's trading obligations as part of a
deal to buy the business, analysts say the US Treasury has put a line under its willingness
to use public money to rescue banks which have made wrong decisions.

Instead, government officials have focused on supporting the financial system in other
ways, announcing measures to ease access to emergency credit for struggling financial
companies.

Effects

Nobody possesses Lehman Brothers cheque book or current account. The company is an
investment bank that specializes in big and complex deals and investments. Despite this,
Lehman's collapse and the troubles of other financial institutions will probably be felt by
millions of people around the world - at least indirectly. Most of our banks and pension
funds have dealings with Lehman, or with firms like hedge funds that traded extensively
with Lehman. Unwinding Lehman's complex deals will take months if not years. During
that time the global financial system will be snarled up. Many banks won't know for sure
how much they are exposed to Lehman, and will have difficulty freeing up the money in
those deals.

This in turn is likely to intensify the credit crunch, with potentially dire consequences for
businesses and consumers. And the dramatic collapse of Lehman Brothers has also
shaken the financial markets, with share prices slumping around the world. Every one
will feel the impact even if you are not a banker or shareholder. pension fund may have a
wobble. The employer may find it more difficult to do business. And there can b more
difficulty getting a personal loan or mortgage.

Are any other firms in trouble?

Well, for starters there is Merrill Lynch. US authorities and many bankers feared that
after Lehman's demise the attention of investors and speculators would have moved to
Merrill.The biggest worry, though, is insurance giant AIG. The company is running out
of cash to cover its losses and has asked the government for an emergency bridging loan,
reportedly to the tune of $40bn. If AIG is in trouble, it would directly affect millions of
consumers and companies around the world. It would also hurt the whole financial
system, because AIG is in the centre of a web of complex financial deals. And compared
with AIG, the crisis surrounding Lehman is small beer.

Why did Lehman fail?

1. leverage.

The best way to enhance your returns is to gear up borrowings to invest in assets which
are rising and have the potential future .this enables you to increase ur returns which is
useful when interest rates are low and on same hand it also magnifies the losses when
asset prices r falling. Lehman were very high ac far as leverage is concerned .In 2004
Lehman leverage was running around 20 that means for every £1 of cash and other
capital it would lend £20.Later it rose to thirties and reached in the incredible 44in 2007.
thus Lehman was leveraged 44 to 1 when assets prices began heading down .it was like
person of salary of rs 10000 buying a house of rs 440000

2. liquidity

Most of the business fall not because of lack of profits but bcoz of cash flow problems.
like all other banks Lehman was like an upturned pyramid balanced on a small silver of
cash .Lehman didnot have enough in way of liquidity in other words it lacked ready cash
and other easily sold assets as market fell other banks started 2 worry about the shaky
financial conditions of Lehman. and stated to protect their own interested by pulling
Lehman’s credit as a result it was losing liquidity fast an if a bank loses confidence it
loses everything

3. losses

After the terrorist attacks of 11 September 2001, US interest rates plummeted, causing a
five-year boom in domestic and commercial property prices. This boom ended in 2006
and US housing prices have since fallen for three years in a row.

Lehman was heavily exposed to the US real-estate market, having been the largest
underwriter of property loans in 2007. By the end of that year, Lehman had over $60
billion invested in commercial real estate (CRE) and was very big in subprime mortgages
(loans to risky homebuyers). Also, it had huge exposure to innovative yet arcane
investments such as collateralised debt obligations (CDO) and credit default swaps
(CDS).

As property prices crashed and repossessions and arrears sky-rocketed, Lehman was
caught in a perfect storm. In its third-quarter results, Lehman announced a $2.5 billion
write-down due to its exposure to commercial real estate. Lehman's total announced
losses in 2008 came to $6.5 billion, but there was far more 'toxic waste' waiting to be
unearthed.

Lessons learnt

Lesson one: Shadow banks are time bombs. There are two type of bank 1 regulatory 2
shadow. regulatory banks are those banks who are subject to Federal Reserve scrutiny
(maybe not enough, but certainly some), and the shadow bank system made up mainly of
Lehman, Merrill Lynch, Morgan Stanley, and Goldman Sachs. While the regulated banks
were forced to make reports to the government and were subjected to bank examinations,
shadow banks were pretty much required to tell us only what they wanted us to know,
and nothing more. In the past year, the shadow banking system went from being bigger
and more important than the regulated banks to being nonexistent. We now know pretty
much everything we need to know about how the big banks operate. There are no more
surprises to be had, at least no giant ones. There are no more Lehmans lurking that can
almost destroy the system again.

Lesson two: Banks shouldn’t loan more money than they can afford to.

Lehman’s demise spelled the end to reckless highly leveraged lending. The Federal
Reserve and Treasury have since made it clear that banks must raise their capital levels
and cut back on lending losses. To meet the Fed’s demands, banks have to take in more
cash and lend a lot less, making sure the money they do lend is given only to people with
very good household balance sheets and companies with long records of being able to
pay back their debts. In a year’s time, we have gone from a world where you could
borrow $30 million to buy toxic mortgage bonds with just a million dollars in your
pocket to a world where a million bucks in the bank might allow you to get a $500,000
mortgage to buy a house if you can prove you can keep your job. The standards have
gotten that tight. And if you do make too many bad loans, the Feds will seize your bank
and put you out of business. Yes, tight credit may slow the pace of the recovery in the
short run, but it’s a dose of stringency the system sorely needed.

Lesson three: Moral hazard is not a policy, it’s a suicide pact. On the eve of Lehman’s
collapse, in a series of weekend meetings, Fuld’s lieutenants told then–New York Federal
Reserve head Tim Geithner and then–Treasury Secretary Henry Paulson that if the
government let Lehman collapse, a trillion dollars in credit could vanish overnight,
financial institutions worldwide would experience liquidity shortages, and even ATM
machines might not work because companies and people would panic and pull their
money out of financial institutions. Paulson and Geithner wouldn’t listen. They wanted to
be tough guys and show that they weren’t going to kowtow to Wall Street anymore. They
were worried about the moral hazard of having to bail out still one more errant universe
master. They should have been worried about the nuclear hazards of not doing so,
because, on this point anyway, the Lehman folks were right. When Lehman went under,
banks worldwide experienced colossal withdrawals as everyone from corporate treasurers
to individuals transferred money out of their cash accounts into treasuries. Worries of
moral hazard proved penny-wise and ton-foolish as almost every major banking
institution, not just in America but worldwide, needed capital to make up for the post-
Lehman withdrawals. Of course they should have bailed out Lehman that weekend

Lesson four: The shorts are too powerful. Lehman didn’t collapse because of the shorts;
it collapsed because it made billions in overly risky loans. But the shorts did play a
significant role in the downfall of the firm because they never let the stock lift or stabilize
long enough to give the beleaguered outfit the time it needed to find a buyer or deep-
pocketed investors. If the SEC brings back the uptick rule and rigorously enforces
another measure known as the naked short regulation—and I expect it will do both soon
—the investing playing field will have been leveled between the shorts and the longs and
the markets will be far safer and honest for all, especially retail investors, than they have
been in years.

Lesson five Avoid excessive risks

Smart people can make dumb decisions, especially when they’re arrogant enough to
believe the laws of investing don’t apply to them. One such law is that leverage, the act
of borrowing other people’s money to invest, can work both ways—for you and against
you. Lehman financed $600 billion worth of assets with only $30 billion of equity. That’s
like you putting five percent down to buy a home. It only takes a minor drop in prices to
wipe out all your equity—and you still have your mortgage payment. Clearly, this is an
example of taking excessive risk

Lesson six Banking Regulation the debate on banking regulation should focus on what
needs to be regulated and not who the regulators should be. Changing ceo’s cant be the
answer to this problem

Summary...

Lehman once employed 28,000 people across the world, including 5,000 in London. At
their peak, its shares traded at $85, but they are now roughly 10¢. Lehman's remains were
shared out between Barclays, which bought its US broking arm, and Japanese giant
Nomura, which bought its European and Asian assets. These firms, plus number-one
investment bank Goldman Sachs, have profited most from picking over the bones of
Lehman's businesses.
In short, Lehman Brothers -- a company with a 158-year history, including 14 years as an
NYSE-listed giant -- failed simply because it took on too much risk in a booming market.
In the end, its move from the safety of corporate finance and M&A (mergers and
acquisitions) income into the risky world of proprietary trading proved to be its downfall.
The lesson here is that any firm, no matter how big and powerful, can be dashed to pieces
on the rocks of leverage , liquidity and losses !