Lehman Brothers Bankruptcy
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bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
of
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
, also known as the Crash of '08 and the Lehman Shock, on September 15, 2008, was the climax of the
subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
. After the
financial services Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...
firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
summoned several banks to negotiate financing for its reorganization. These discussions failed, and Lehman filed a
Chapter 11 Chapter 11 of the United States Bankruptcy Code ( Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, w ...
petition that remains the largest bankruptcy filing in U.S. history, involving more than in assets. The bankruptcy triggered a 4.5% one-day drop in the
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indice ...
, then the largest decline since the
attacks of September 11, 2001 The September 11 attacks, also known as 9/11, were four coordinated Islamist terrorist suicide attacks by al-Qaeda against the United States in 2001. Nineteen terrorists hijacked four commercial airliners, crashing the first two into ...
. It shook confidence in the government's ability to manage the crisis and prompted a general financial panic. Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the
interbank lending market The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also cal ...
tightened, threatening banks with imminent failure. The government and the Federal Reserve system responded with several emergency measures to contain the panic. As of May 2022, parent company Lehman Brothers Holdings, Inc. remained in liquidation before the Bankruptcy Court for the Southern District of New York. Caretaker offices in the US and abroad have continued to oversee payments to the company's creditors.


Background


Rise of mortgage origination (1997–2006)

Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
, one of the United States and the world's bulge-bracket
investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s, was one of the first
Wall Street Wall Street is a street in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It runs eight city blocks between Broadway (Manhattan), Broadway in the west and South Street (Manhattan), South Str ...
firms to move into the business of
mortgage origination In consumer lending, mortgage origination, a specialized subset of loan origination, is the process by which a lender works with a borrower to complete a mortgage transaction, resulting in a mortgage loan. A mortgage loan is a loan in which p ...
. In 1997, Lehman bought Colorado-based lender
Aurora Loan Services An aurora ( aurorae or auroras), also commonly known as the northern lights (aurora borealis) or southern lights (aurora australis), is a natural light display in Earth's sky, predominantly observed in high-latitude regions (around the Arc ...
, an
Alt-A An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. Mortgage loan, mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime lending, subprime," the riskiest category. For thes ...
lender. In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC. Lehman quickly became a force in the subprime market. By 2003 Lehman made $18.2 billion in loans and ranked third in lending. By 2004, this number topped $40 billion. By 2006, Aurora and BNC were lending almost $50 billion per month.:129 Lehman had morphed into a real estate
hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
disguised as an investment bank.:135 By 2008, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its risky commercial real estate holdings were thirty times greater than capital. In such a highly leveraged structure, a three- to five-percent decline in real estate values would wipe out all capital.


Exposure to the mortgage market

Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008, a process known as leveraging or gearing. A significant portion of this investment was in housing-related assets, making it vulnerable to a downturn in that market. One measure of this risk-taking was its leverage ratio, a measure of the ratio of assets to owners equity, which increased from approximately 24:1 in 2003 to 31:1 by 2007. While generating tremendous profits during the boom, this vulnerable position meant that just a 3–4% decline in the value of its assets would entirely eliminate its book value of equity. Investment banks such as Lehman were not subject to the same regulations applied to depository banks to restrict their risk-taking. In August 2007, Lehman closed its
subprime lender In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took a $25-million after-tax charge and a $27-million reduction in goodwill. The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space".


Lehman's final months

In 2008, Lehman faced an unprecedented loss due to the continuing
subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
. Lehman's loss resulted from having held onto large positions in subprime and other lower-rated mortgage
tranche In structured finance, a tranche () is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indent ...
s when securitizing the underlying mortgages. Whether Lehman did this because it was simply unable to sell the lower-rated bonds or made a conscious decision to hold them is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. Regulators began preparing contingencies, including unofficially approaching
Barclays Barclays PLC (, occasionally ) is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services ...
executive
Robert Diamond Robert Edward Diamond Jr. is an American banker and former chief executive officer of Barclays plc. In 2010, he became its president and deputy group chief executive; and in January 2011, succeeded John Varley as group chief executive of Barcl ...
about acquiring Lehman in April 2008; by then
United States Treasury Secretary The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
Henry Paulson Henry "Hank" Merritt Paulson Jr. (born March 28, 1946) is an American investment banker and financier who served as the 74th United States secretary of the treasury from 2006 to 2009. Prior to his role in the Department of the Treasury, Paulson ...
had told Lehman CEO
Richard Fuld Richard Severin Fuld Jr. (born April 26, 1946) is an American banker best known as the final chairman and chief executive officer of investment bank Lehman Brothers. Fuld held this position from April 1, 1994 after the firm's spinoff from America ...
that there would be no government
bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global syst ...
, so his firm needed to do a deal. In the second fiscal quarter, Lehman reported losses of $2.8 billion and decided to raise $6 billion in additional capital by offering new shares. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to lay-off 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September. On August 22, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled
Korea Development Bank Korea Development Bank (KDB Bank) is a South Korean state-owned development bank which aims to encourage the industrial development of South Korea. It was founded in 1954 in accordance with The Korea Development Bank Act to finance and manage ...
was considering buying Lehman. Most of those gains were quickly eroded as news emerged that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, when 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 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...
down 3.4% on September 9. The
Dow Jones Dow Jones is a combination of the names of business partners Charles Dow and Edward Jones. Dow Jones & Company Dow, Jones and Charles Bergstresser founded Dow Jones & Company in 1882. That company eventually became a subsidiary of News Corp, an ...
lost nearly 300 points the same day, on investors' concerns about the security of the bank. The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman. On September 10, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which included
Neuberger Berman Neuberger Berman Group LLC is an American private, independent, employee-owned investment management firm. The firm manages equities, fixed income, private equity and hedge fund portfolios for global institutional investors, advisors and high-ne ...
. The stock slid 7% that day. On September 11,
JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...
, which cleared Lehman's trades, stopped the more than $100 billion Lehman borrowed daily via the
interbank lending market The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also cal ...
. That day Paulson officially asked Diamond about purchasing Lehman. On September 12, Timothy F. Geithner, then president of the
Federal Reserve Bank of New York The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the New York (state), State of New York, the 12 norther ...
, called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. Bankers representing all the major Wall Street firms were in attendance. The meeting goal was to find a private solution in rescuing Lehman and mitigate the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
.:173 Lehman reported that it had been in talks with
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
and
Barclays Barclays PLC (, occasionally ) is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services ...
for the company's possible sale; both firms made offers, but the Treasury refused Bank of America's terms, so it purchased
Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...
. Barclays's purchase of Lehman seemed assured, but ''
The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...
'' reported on September 14, 2008, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed. It emerged subsequently that a deal had been vetoed by the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
and the UK's
Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body accountable for the regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investments Board (SIB) in 1985 ...
(FSA). FSA refused to waive the rule that shareholders approve such an acquisition. Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure. Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale. By Sunday, September 14, after the Barclays deal fell through, the news of impending doom swept through Lehman, and many employees arrived at the headquarters to clean out their offices. By Sunday afternoon, the government summoned Harvey Miller of
Weil, Gotshal & Manges Weil, Gotshal & Manges LLP ( ) is an American law firm headquartered in New York City. Founded in 1931, it employs approximately 1,100 attorneys and reported annual revenues of over $1.8 billion, ranking it within''The American Lawyer'' AmLaw 10 ...
to file for bankruptcy before the markets opened on Monday.:176


Bankruptcy filing

Lehman Brothers filed for
Chapter 11 bankruptcy protection Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wh ...
on Monday, September 15, 2008. According to
Bloomberg Bloomberg may refer to: People * Daniel J. Bloomberg (1905–1984), audio engineer * Georgina Bloomberg (born 1983), professional equestrian * Michael Bloomberg (born 1942), American businessman and founder of Bloomberg L.P.; politician a ...
, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on September 16 indicated that JPMorgan Chase provided Lehman with a total of $138 billion in "Federal Reserve-backed advances". The "Federal Reserve-backed advances" as provided by JPMorgan Chase were for $87 billion on September 15 and $51 billion on September 16. The filing remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets.


Breakup process

Lehman told Diamond that while Lehman Brothers Holdings, the parent company, would declare bankruptcy, Lehman Brothers North America was available for sale. Barclays began working on another deal. On Tuesday, September 16, Diamond announced to employees at Lehman headquarters at 745 Seventh Avenue that their company had been bought, playing "
God Save the Queen "God Save the King" ("God Save the Queen" when the monarch is female) is '' de facto'' the national anthem of the United Kingdom. It is one of two national anthems of New Zealand and the royal anthem of the Isle of Man, Australia, Canada and ...
" on the intercom. On September 22, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of the deal was put before the bankruptcy court, with a $1.3666 billion (£700 million) plan for Barclays to acquire the core business of Lehman (mainly Lehman's $960 million
Midtown Manhattan Midtown Manhattan is the central portion of the New York City borough of Manhattan, serving as the city's primary central business district. Midtown is home to some of the city's most prominent buildings, including the Empire State Building, the ...
office skyscraper, 745 Seventh Avenue), was approved.
Manhattan Manhattan ( ) is the most densely populated and geographically smallest of the Boroughs of New York City, five boroughs of New York City. Coextensive with New York County, Manhattan is the County statistics of the United States#Smallest, larg ...
court bankruptcy judge James Peck, after a seven-hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency." Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of
Weil, Gotshal & Manges Weil, Gotshal & Manges LLP ( ) is an American law firm headquartered in New York City. Founded in 1931, it employs approximately 1,100 attorneys and reported annual revenues of over $1.8 billion, ranking it within''The American Lawyer'' AmLaw 10 ...
, said "the purchase price for the real estate components of the deal would be $1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New Jersey data centers. Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high-net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays." Barclays had a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days. On September 22, 2008,
Nomura Holdings is a financial holding company and a principal member of the Nomura Group, which is Japan's largest List of investment banks#Largest full-service investment banks#Bulge Bracket#Membership, investment bank and Broker-dealer#Japan, brokerage group. ...
announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan, Hong Kong and Australia. The following day, Nomura announced its intentions to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. A few weeks later it was announced that conditions to the deal had been met, and the deal became legally effective on Monday, October 13. In 2007, non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.


Impact of bankruptcy filing

The Dow Jones closed down just over 500 points (−4.4%) on September 15, 2008, at the time the largest drop by points in a single day since the days following the attacks on September 11, 2001. This drop was exceeded by a 6.98% plunge on September 29, 2008. Lehman's bankruptcy was expected to cause some depreciation in the price of commercial real estate. The prospect for Lehman's $4.3 billion in mortgage securities getting liquidated sparked a selloff in the commercial mortgage-backed securities (CMBS) market. Additional pressure to sell securities in commercial real estate was feared as Lehman got closer to liquidating its assets. Apartment-building investors were also expected to feel pressure to sell as Lehman unloaded its debt and equity pieces of the $22 billion purchase of Archstone, the third-largest United States
real estate investment trust A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...
(REIT). Archstone's core business was the ownership and management of residential apartment buildings in major metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at
UBS UBS Group AG (stylized simply as UBS) is a multinational investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major financial centres as the ...
, said that in markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, adding "Every day that goes by there will be more pressure on pricing." Several
money fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...
s and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by
The Bank of New York Mellon The Bank of New York Mellon Corporation, commonly known as BNY, is an American international financial services company headquartered in New York City. It was established in its current form in July 2007 by the merger of the Bank of New York an ...
and the Reserve Primary Fund, a
money market fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...
, both falling below $1 per share, called " breaking the buck", following losses on their holdings of Lehman assets. In a statement The Bank of New York Mellon said its fund had isolated the Lehman assets in a separate structure. It said the assets accounted for 1.13% of its fund. The Primary Reserve Fund owned $785 million or 1.2 percent of its holdings in Lehman commercial paper.:178 The drop in the Primary Reserve Fund was the first time since 1994 that a money-market fund had dropped below the $1-per-share level. On Monday, September 15, 2008, the market staged a run on AIG with shares plummeting 61 percent. Shareholders also fled from Goldman Sachs and Morgan Stanley. Two weeks later, the Fed agreed to give the bank holding company status which provided vital access to the Fed discount window.:179
Putnam Investments Putnam Investments is an investment management firm founded in 1937 by George Putnam, who established one of the first balanced mutual funds, The George Putnam Fund of Boston. Headquartered in Boston, Massachusetts, it has offices in London, To ...
, a unit of Canada's
Great-West Lifeco Great-West Lifeco Inc. is a Canadian insurance-centered financial holding company that operates in North America (Canada and United States), Europe and Asia through five wholly owned, regionally focused subsidiaries. Many of the companies it has ...
, shut a $12.3 billion money-market fund as it faced "significant redemption pressure" on September 17, 2008.
Evergreen Investments Evergreen Investments was the investment management business of Wachovia. The brand was merged into ''Wells Fargo Advantage Funds'' and subsequently phased out following Wells Fargo's acquisition of Wachovia. The brand was officially retired on ...
said its parent
Wachovia Corporation Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo and Company in 2008, Wachovia was the fourth-largest bank holding company in the United States, based on total asset ...
would "support" three Evergreen money-market funds to prevent their shares from falling. This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital. Close to 100 hedge funds used Lehman as their
prime broker Prime brokerage is the generic term for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest ...
and relied largely on the firm for financing. In an attempt to meet their own credit needs, Lehman Brothers International routinely re-hypothecated the assets of their hedge funds clients that utilized their
prime brokerage Prime brokerage is the generic term for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to inves ...
services. Lehman Brothers International held close to $40 billion of clients assets when it filed for Chapter 11 Bankruptcy. Of this, $22 billion had been re-hypothecated. As
administrators Administrator or admin may refer to: Job roles Computing and internet * Database administrator, a person who is responsible for the environmental aspects of a database * Forum administrator, one who oversees discussions on an Internet forum * N ...
took charge of the London business and the U.S. holding company filed for bankruptcy, positions held by those hedge funds at Lehman were frozen. As a result, the hedge funds were forced to de-lever and sit on large cash balances, inhibiting chances at further growth. This in turn created further market dislocation and overall systemic risk, resulting in a $737 billion decline in collateral outstanding in the
securities lending In finance, securities lending or stock lending refers to the lending of securities by one party to another. The terms of the loan will be governed by a "Securities Lending Agreement", which requires that the borrower provides the lender with co ...
market. In Japan, banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied to the Lehman shock.
Mizuho Trust & Banking is the trust banking arm of Mizuho Financial Group The , known from 2000 to 2003 as Mizuho Holdings and abbreviated as MHFG or simply Mizuho, is a Japanese banking holding company headquartered in the Ōtemachi district of Chiyoda, Tokyo, Jap ...
cut its profit forecast by more than half, citing 11.8 billion yen in losses on bonds and loans linked to Lehman. The
Bank of Japan The is the central bank of Japan.Louis Frédéric, Nussbaum, Louis Frédéric. (2005). "Nihon Ginkō" in The bank is often called for short. It is headquartered in Nihonbashi, Chūō, Tokyo, Chūō, Tokyo. The said bank is a corporate entity ...
Governor Masaaki Shirakawa said, "Most lending to Lehman Brothers was made by major Japanese banks, and their possible losses seem to be within the levels that can be covered by their profits," adding, "There is no concern that the latest events will threaten the stability of Japan's financial system." During bankruptcy proceedings a lawyer from
The Royal Bank of Scotland Group NatWest Group plc is a British banking and insurance holding company, based in Edinburgh, Scotland. The group operates a wide variety of banking brands offering personal and business banking, private banking, investment banking, insurance and ...
said the company was facing between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries, Martin Bienenstock. Lehman was a counterparty to mortgage financier
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Constellation Energy Constellation Energy Corporation is an American energy company headquartered in Baltimore, Maryland. The company provides electric power, natural gas, and energy management services. It has approximately two million customers across the conti ...
was reported to have exposure to Lehman, its stock went down 56% in the first day of trading having started at $67.87. The massive drop in stocks led to the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...
halting trade of Constellation. The next day, as the stock plummeted as low as $13 per share, Constellation announced it was hiring
Morgan Stanley Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in 42 countries and more than 80,000 employees, the firm's clients in ...
and
UBS UBS Group AG (stylized simply as UBS) is a multinational investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major financial centres as the ...
to advise it on "strategic alternatives", suggesting a buyout. While rumors suggested French power company
Électricité de France Électricité de France SA (; ), commonly known as EDF, is a French multinational corporation, multinational electric utility company owned by the government of France. Headquartered in Paris, with €139.7 billion in sales in 2023, EDF ope ...
would buy the company or increase its stake, Constellation ultimately agreed to a buyout by MidAmerican Energy, part of
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska. Originally a textile manufacturer, the company transitioned into a conglomerate starting in 1965 under the management of c ...
(headed by billionaire
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American investor and philanthropist who currently serves as the chairman and CEO of the conglomerate holding company Berkshire Hathaway. As a result of his investment success, Buffett is ...
). The
Federal Agricultural Mortgage Corporation The Federal Agricultural Mortgage Corporation, also known as Farmer Mac, is a stockholder-owned, publicly traded company that was chartered by the United States federal government in 1988 to serve as a secondary market in agricultural loans such ...
or Farmer Mac said it would have to write off $52.4 million in Lehman debt in the form of senior debt securities it owned as a result of the bankruptcy. Farmer Mac said it might not be in compliance with its minimum capital requirements at the end of September. In Hong Kong, more than 43,700 individuals in the city had invested in
HK$ The Hong Kong dollar (, sign: HK$; code: HKD) is the official currency of Hong Kong. It is divided into 100 cents. Historically, it was also divided into 1000 mils. The Hong Kong Monetary Authority is the monetary authority of Hong Kong an ...
15.7 billion of "guaranteed mini-bonds" (迷你債券) from Lehman.South China Morning Post.
SCMP
" ''Chief talks tough on minibonds.'' Retrieved October 17, 2008.
Hkdf.
Hkdf
" ''Proposal for Resolution of Mini-bond Issue.'' Retrieved January 23, 2009.
Many claimed that banks and brokers mis-sold them as low-risk. However, bankers noted that the minibonds are indeed low-risk instruments since they were backed by Lehman Brothers, which until just months before its collapse was a venerable member of Wall Street with high credit and investment ratings, and many banks accepted minibonds as collateral for loans and credit facilities. Another
HK$ The Hong Kong dollar (, sign: HK$; code: HKD) is the official currency of Hong Kong. It is divided into 100 cents. Historically, it was also divided into 1000 mils. The Hong Kong Monetary Authority is the monetary authority of Hong Kong an ...
3 billion was invested in similar products, including derivatives. The
Hong Kong government The Government of the Hong Kong Special Administrative Region (commonly known as the Hong Kong Government or HKSAR Government) is the Executive (government), executive authorities of Hong Kong. It was established on 1 July 1997, following the ...
proposed a plan to buy back the investments at their current estimated value, which would allow investors to partially recover some of their loss by the end of the year. HK chief executive
Donald Tsang Sir Donald Tsang Yam-kuen (; born 7 October 1944) is a former Hong Kong civil servant who served as the second Chief Executive of Hong Kong from 2005 to 2012. Tsang joined the colonial civil service as an Executive Officer in 1967, occupyi ...
insisted the local banks respond swiftly to the government buy-back proposal as the
Monetary Authority A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monet ...
received more than 16,000 complaints. On October 17, He Guangbe, chairman of the Hong Kong Association of Banks, agreed to buy back the bonds, which were priced using an agreed upon methodology based on its estimated current value.


Neuberger Berman

Neuberger Berman Neuberger Berman Group LLC is an American private, independent, employee-owned investment management firm. The firm manages equities, fixed income, private equity and hedge fund portfolios for global institutional investors, advisors and high-ne ...
Inc., through its subsidiaries, primarily Neuberger Berman, LLC, is an investment-advisory firm founded in 1939 by Roy R. Neuberger and Robert Berman, to manage money for
high-net-worth individual In the financial services industry, a high-net-worth individual (HNWI) is a person who maintains liquid assets at or above a certain threshold. Typically the criterion is that the person's financial assets (excluding their primary residence) are ...
s. In the decades that followed, the firm's growth mirrored that of the asset-management industry as a whole. In 1950, it introduced one of the first
no-load Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual funds. Operating a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. F ...
mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...
s in the United States, the
Guardian Fund Guardian usually refers to: * Legal guardian, a person with the authority and duty to care for the interests of another * ''The Guardian'', a British daily newspaper (The) Guardian(s) may also refer to: Places * Guardian, West Virginia, Unit ...
, and also began to manage the assets of
pension plan A pension (; ) is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work. A pension may be either a "Defined benefit pension pla ...
s and other institutions. Historically known for its value-investing style, in the 1990s the firm began to diversify its competencies to include additional value and
growth investing Growth investing is a type of investment strategy focused on capital appreciation. Those who follow this style, known as ''growth investors'', invest in companies that exhibit signs of above-average growth, even if the share price appears expen ...
, across the entire
capitalization Capitalization ( North American spelling; also British spelling in Oxford) or capitalisation (Commonwealth English; all other meanings) is writing a word with its first letter as a capital letter (uppercase letter) and the remaining letters in ...
spectrum, as well as new investment categories, such as international, real-estate investment trusts and high-yield investments. In addition, with the creation of a nationally and several state-chartered trust companies, the firm became able to offer trust and fiduciary services. In 2016, the firm had approximately $246 billion in
assets under management In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...
. In October 1999, the firm conducted an
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investm ...
of its shares and commenced trading on the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...
, under the ticker symbol "NEU". In July 2003, shortly after the retired Mr. Neuberger's 100th birthday, the company announced that it was in
merger Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
discussions with
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
Holdings Inc. These discussions ultimately resulted in the firm's acquisition by Lehman on October 31, 2003, for approximately $2.63 billion in cash and securities. On November 20, 2006, Lehman announced its Neuberger Berman subsidiary would acquire H. A. Schupf & Co., a money-management firm targeted at wealthy individuals. Its $2.5 billion of assets would join Neuberger's $50 billion in high-net-worth client assets under management. An article in ''
The Wall Street Journal ''The Wall Street Journal'' (''WSJ''), also referred to simply as the ''Journal,'' is an American newspaper based in New York City. The newspaper provides extensive coverage of news, especially business and finance. It operates on a subscriptio ...
'' on September 15, 2008, announcing that Lehman Brothers Holdings filed for
Chapter 11 Chapter 11 of the United States Bankruptcy Code ( Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, w ...
bankruptcy protection Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
, quoted Lehman officials regarding Neuberger Berman:
Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.
Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multimillion-dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance". Lehman Brothers Investment Management Director
George Herbert Walker IV George Herbert Walker IV (born April 1969) is an American investment manager. He is the chairman and CEO of Neuberger Berman, one of the largest independent, employee-owned investment management firms. During Walker's tenure, the firm survived the ...
dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."


Controversies


Executive pay during crisis

Richard Fuld Richard Severin Fuld Jr. (born April 26, 1946) is an American banker best known as the final chairman and chief executive officer of investment bank Lehman Brothers. Fuld held this position from April 1, 1994 after the firm's spinoff from America ...
, head of Lehman Brothers, faced questioning from the
U.S. House of Representatives The United States House of Representatives is a chamber of the bicameral United States Congress; it is the lower house, with the U.S. Senate being the upper house. Together, the House and Senate have the authority under Article One of th ...
'
Committee on Oversight and Government Reform The Committee on Oversight and Government Reform is the main investigative United States congressional committee, committee of the United States House of Representatives. The committee's broad jurisdiction and legislative authority make it one o ...
. Rep.
Henry Waxman Henry Arnold Waxman (born September 12, 1939) is an American politician and lobbyist who was a U.S. representative from California from 1975 to 2015. He is a member of the Democratic Party. His district included much of the western part of the ...
(D-CA) asked: "Your company is now bankrupt, our economy is in crisis, but you get to keep $480 million (£276 million). I have a very basic question for you, is this fair?" Fuld said that he had in fact taken about $300 million (£173 million) in pay and bonuses over the past eight years. Despite Fuld's defense on his high pay, Lehman Brothers executive pay was reported to have increased significantly before filing for bankruptcy. On October 17, 2008,
CNBC CNBC is an American List of business news channels, business news channel owned by the NBCUniversal News Group, a unit of Comcast's NBCUniversal. The network broadcasts live business news and analysis programming during the morning, Day ...
reported that several Lehman executives, including Richard Fuld, had been subpoenaed in a case relating to securities fraud.


Accounting manipulation

In March 2010, the
report of Anton R. Valukas The Report of Anton R. Valukas is an examination of the bankruptcy of Lehman Brothers during the 2008 financial crisis. Anton Valukas, chairman of the Chicago law firm Jenner & Block, was appointed by a bankruptcy court in New York in early 2009 t ...
, the Bankruptcy Examiner, drew attention to the use of
Repo 105 Repo 105 is Lehman Brothers' name for an accounting maneuver that it used where a short-term repurchase agreement is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to redu ...
transactions to boost the bank's apparent financial position around the date of the year-end
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
. The New York attorney general
Andrew Cuomo Andrew Mark Cuomo ( , ; born December 6, 1957) is an American politician and lawyer who served as the 56th governor of New York from 2011 until his resignation in 2021. A member of the Democratic Party and son of former governor Mario Cuomo, ...
later filed charges against the bank's auditors
Ernst & Young EY, previously known as Ernst & Young, is a multinational corporation, multinational professional services partnership, network based in London, United Kingdom. Along with Deloitte, KPMG and PwC, it is one of the Big Four accounting firms, Big F ...
in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment. On April 12, 2010, a story in ''
The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...
'' revealed that Lehman had used a small company, Hudson Castle, to move a number of transactions and assets off Lehman's books as a means of manipulating accounting numbers of Lehman's finances and risks. One Lehman executive described Hudson Castle as an "alter ego" of Lehman. According to the story, Lehman owned one quarter of Hudson; Hudson's board was controlled by Lehman, most Hudson staff members were former Lehman employees.


Section 363 sale

On February 22, 2011, Judge James M. Peck of the U.S. Bankruptcy Court in the Southern District of New York rejected claims by lawyers for the Lehman estate that Barclays had improperly reaped a windfall from the section 363 sale. "The sale process may have been imperfect, but it was still adequate under the exceptional circumstances of Lehman Week."


See also

* Michael Ainslie *
Report of Anton R. Valukas The Report of Anton R. Valukas is an examination of the bankruptcy of Lehman Brothers during the 2008 financial crisis. Anton Valukas, chairman of the Chicago law firm Jenner & Block, was appointed by a bankruptcy court in New York in early 2009 t ...
*'' The Last Days of Lehman Brothers'' *
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
*
List of entities involved in 2007–2008 financial crises A list of companies, governmental and quasi-governmental agencies (government-sponsored enterprises), and/or non-profit organizations involved in the various economic and financial crises of 2007–2008. Housing Bubble United States National ho ...
* Subprime crisis impact timeline *
2000s United States housing market correction United States housing prices experienced a major market correction after the 2000s United States housing bubble, housing bubble that Timeline of the 2000s United States housing bubble, peaked in early 2006. Prices of real estate then adjusted down ...
*
Federal takeover of Fannie Mae and Freddie Mac In September 2008, the Federal Housing Finance Agency (FHFA) announced that it would take over the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both government-sponsored enter ...
*'' A Colossal Failure of Common Sense'' * Aurora Bank * Hudson Castle Group *''
Margin Call ''Margin Call'' is a 2011 American drama film written and directed by J. C. Chandor in his feature directorial debut. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the ...
'', a 2011 film about the collapse of an investment bank during the 2008 financial crisis. *
Free Money Day Free Money Day is a global social experiment held annually on September 15, the anniversary of the Lehman Brothers' 2008 filing for bankruptcy. Participants hand out money to strangers, asking them to pass half onto someone else. Money is excha ...
*''
Too Big to Fail "Too big to fail" (TBTF) is a theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected with an economy that their failure would be disastrous to the greater e ...
'', a 2010 HBO docudrama about the 2008 financial crisis. *''
The Big Short ''The Big Short: Inside the Doomsday Machine'' is a nonfiction book by Michael Lewis about the build-up of the United States housing bubble during the 2000s. It was released on March 15, 2010, by W. W. Norton & Company. It spent 28 weeks on '' ...
'', a 2015 film about bank fraud. *'' C'', a 2011 anime inspired by the bankruptcy of Lehman Brothers. *
Overend, Gurney and Company Overend, Gurney and Company was a London wholesale banking, wholesale discount bank, known as "the bankers' bank", which collapsed in 1866 owing about £11 million, equivalent to £ million in . The collapse of the institution triggered a bankin ...
, a British bank active in wholesale markets which collapsed in 1866.


References


External links


Channel 4 News: How Britain could have saved Lehman Brothers
*

—as told by a former employee {{DEFAULTSORT:Lehman Brothers 2000s in economic history Bank failures in the United States Great Recession
Bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
September 2008 in the United States