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- 2. GROUP MEMBERS Muhammad HassaanArif Shehroz Shabbir Uneeb Ahmed
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- 4. HISTORY OF LEHMANBROTHERS • Founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844. • In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers Lehman survived them all: The railroad bankruptcies of the 1800s, The Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998. LEHMAN BROTHERS
- 5. INTRODUCTION • The disorderlyand costly nature of the LBHI bankruptcy the largest, and still ongoing, financial bankruptcy in U.S. history contributed to the massive financial disruption of late 2008. • The collapse of Lehman Brothers Holdings Inc. (LEH) had a crippling effect on the global economy with the financial crisis escalating to other parts of the world. In the aftermath of this event, financial institutions froze lending activities thereby creating liquidity problems in the shadow banking financial system. LEHMAN BROTHERS
- 6. According to theWorld Bank, the economic recession hit USA and the world at large in three phases Phase 1 U.S.-subprime-mortgage-cum-structured-finance catastrophe . Phase 2 Post-Lehman global financial market turmoil Phase 3 The worldwide economic recession LEHMAN BROTHERS
- 7. PRIME CULPRIT In 2003and 2004, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation) LEHMAN BROTHERS
- 8. REASONS BEHIND THECOLLAPSE SUBPRIME BOOM THE REAL STATE BUBBLE LEHMAN BROTHERS
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- 10. • Asset-backed securities(ABS) and Collateral debt obligations(CDOs) • Lehman underwrote mortage-backed securities more than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity • Leverage levels up to 20-35 percent of their equity capital in order to invest on securitized products using debt capital. • Excessive risk-taking REASONS BEHIND THE COLLAPSE LEHMAN BROTHERS
- 11. • Passing theinvestment risks through unregulated ‘credit default swaps’ (CDS) where they didn’t have any adequate capital behind them.(AIG case) • Weakness of the FED to recognize the economic catastrophe that Lehman Brothers bankruptcy would cause. LEHMAN BROTHERS
- 12. IMPACT • At thetime when LEH filed for bankruptcy, the Lehman Brothers’ worth was estimated at $639 billion while on the other hand the Lehman Brothers were $613 billion in debt. • After the Lehman Brothers had filed for bankruptcy in the US, the financial markets in the country nearly collapsed when the Washington Mutual failed, a double tragedy for the American economy . • Due to their extensive global imprint on the debt, equity and derivatives markets, the Lehman Brothers had subsidiaries all over the world. LEHMAN BROTHERS
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- 14. • Consequently, theseglobal subsidiaries and companies affiliated to the Lehman Brothers also filed for financial insolvency hence catalyzing the traumatic as well as catastrophic effects of the global economic recession on financial markets worldwide . • Several money funds and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by The Bank of New York Mellon and the Primary Reserve Fund, a money-market fund, both falling below $1 per share, called "breaking the buck", following losses on their holdings of Lehman assets LEHMAN BROTHERS
- 15. • The DowJones 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. • Lehman's bankruptcy is 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). • 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. LEHMAN BROTHERS
- 16. • Several moneyfunds and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by The Bank of New York Mellon and the Primary Reserve Fund, a money-market fund, both falling below $1 per share, called "breaking the buck", following losses on their holdings of Lehman assets. • Putnam Investments, a unit of Canada's Great-West Life co, shut a $12.3 billion money-market fund as it faced "significant redemption pressure" on September 17, 2008. • Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter 11 Bankruptcy. Of this, 22 billion had been re-hypothecated. LEHMAN BROTHERS
- 17. CONTROVERSIES CONTROVERSY OF EXECUTIVEPAY DURING CRISIS ACCOUNTING MANIPULATION SECTION 363 SALE LEHMAN BROTHERS
- 18. ACTIONS TAKEN LBHIfiled a petition under Chapter 11 of the US bankruptcy code. Its US broker-dealer subsidiary was acquired by Barclays a few days later. LEHMAN BROTHERS
- 19. This box discussesthree particular market implications linked to the failure of Lehman Brothers that had the potential to cause systemic liquidity disturbances: 1) The impact on the CDS market; 2) The liquidation of money market funds due to losses suffered on Lehman debt; and 3) The consequences of the bankruptcy for the company's prime brokerage clients. LEHMAN BROTHERS
- 20. • Lehman's bankruptcyled to more than $46 billion of its market value being wiped out. • Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15. LEHMAN BROTHERS
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