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Lehman Brothers headquarters in New York City See also: Lehman Brothers Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets.[1]
Contents
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1 Background o 1.1 Exposure to the mortgage market o 1.2 Lehman's final months 2 Bankruptcy filing o 2.1 Breakup process 3 Impact of bankruptcy filing 4 Neuberger Berman 5 Controversies o 5.1 Controversy of executive pay during crisis o 5.2 Accounting manipulation o 5.3 Section 363 Sale 6 See also 7 References 8 External links
[edit] Background
On September 13, 2008, Timothy F. Geithner, then 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.[15] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale.[15] The New York Times 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.[16] It emerged subsequently that a deal had been vetoed by the Bank of England and the UK's Financial Services Authority.[17] Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure.[16] Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.[16]
Lehman Brothers headquarters in New York City Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. According to Bloomberg, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on September 16 indicated that J.P. Morgan provided Lehman Brothers with a total of $138 billion in "Federal Reserve-backed advances." The cash-advances by JPMorgan Chase were repaid by the Federal Reserve Bank of New York for $87 billion on September 15 and $51 billion on September 16.[18]
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."[19]
Barclays acquired the investment banking business of Lehman Brothers in September 2008 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."[citation needed] 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, 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. Lehman's original estimate valued its headquarters at $ 1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million."[citation needed] 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.[20] 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.[21][22] On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan, Hong Kong and Australia.[23] 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, 13 October.[24] In 2007, non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.[25]
In Japan, banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied to the collapse of Lehman. Mizuho Trust & Banking Co. 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 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."[34] During bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is 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.[35] Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15, 2008. Freddie said it had not received principal payments of $1.2 billion plus accrued interest. Freddie said it had further potential exposure to Lehman of about $400 million related to the servicing of single-family home loans, including repurchasing obligations. Freddie also said it "does not know whether and to what extent it will sustain a loss relating to the transactions" and warned that "actual losses could materially exceed current estimates." Freddie was still in the process of evaluating its exposure to Lehman and its affiliates under other business relationships.[36] After Constellation Energy 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 halting trade of Constellation. The next day, as the stock plummeted as low as $13 per share, Constellation announced it was hiring Morgan Stanley and UBS to advise it on "strategic alternatives" suggesting a buyout. While rumors suggested French power company lectricit de France would buy the company or increase its stake, Constellation ultimately agreed to a buyout by MidAmerican Energy, part of Berkshire Hathaway (headed by billionaire Warren Buffett).[37][38][39] The Federal Agricultural Mortgage Corporation or Farmer Mac said it would have to write off $48 million in Lehman debt it owned as a result of the bankruptcy. Farmer Mac said it may not be in compliance with its minimum capital requirements at the end of September.[40] In Hong Kong more than 43,700 individuals in the city have invested in HK$15.7 billion of "guaranteed mini-bonds" () from Lehman.[41][42][43] Many claim that banks and brokers mis-sold them as low-risk. Conversely, bankers note that 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. The default of Lehman Brothers was a low probability event, which was totally unexpected. Indeed, many banks accepted minibonds as collateral for loans and credit facilities. Another HK$3 billion has been invested in similar like derivatives. The Hong Kong government proposed a plan to buy back the investments at their current estimated value, which will allow investors to partially recover some of their loss by the end of the year.[44] HK chief executive Donald Tsang insisted the local banks respond swiftly to the government buy-back proposal as the Monetary Authority received more than 16,000 complaints.[41][43][44] On October 17 He Guangbe, chairman of the Hong Kong Association of Banks, agreed to buy back the bonds, which will be priced
using an agreed upon methodology based on its estimated current value.[45] This episode has deep repercussions on the banking industry, where misguided investor sentiments have become hostile to both wealth management products as well as the banking industry as a whole. Under intense pressure from the public, all political parties have come out in support of the investors, further fanning distrust towards the banking industry. Politically the bankruptcy proved of influence on the 2008 United States Presidential Election, for the day after Barack Obama moved ahead of John McCain in the presidential gallup poll, never again to fall behind.[dubious discuss]
Neuberger Berman's New York City headquarters on Third Avenue. In October 1999, the firm conducted an initial public offering of its shares and commenced trading on the New York Stock Exchange, 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 discussions with Lehman Brothers 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.[46] An article in The Wall Street Journal on September 15, 2008, announcing that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection, 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."[47] 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 multi-million 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 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."[48]
[edit] Controversies
[edit] Controversy of executive pay during crisis
Richard Fuld, head of Lehman Brothers, faced questioning from the U.S. House of Representatives' Committee on Oversight and Government Reform. Rep. Henry Waxman (DCA) 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?"[49] Fuld said that he had in fact taken about $300 million (173 million) in pay and bonuses over the past eight years.[49] Despite Fuld's defense on his high pay, Lehman Brothers executive pay was reported to have increased significantly before filing for bankruptcy.[50] On October 17, 2008, CNBC reported that several Lehman executives, including Richard Fuld, have been subpoenaed in a case relating to securities fraud.[51]
On April 12, 2010, a New York Times story 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.[53]