Why has Lehman Brothers collapsed?
In short, other banks refused to trade with it. Without the ability to trade, and without investors prepared to bet on its long-term viability, Lehman effectively had no business.
Why would the other banks not trade?
It is a repeat of the Northern Rock debacle. Lehman, while it was a large and complex business trading in a web of assets, also supported 100% mortgage loans offered by specialist lenders to people with few visible means of support. When interest rates jumped, borrowers could no longer afford their monthly payments.
Like Northern Rock, it mattered less that 80% of its assets were rock solid if 20% were considered toxic. We don't know the exact proportions at Lehman and neither do the bank's trading partners, which is why they refused in growing numbers to do business or buy it once the bank was up for sale.
Could the US government have stepped in?
The US treasury has reached the limit of taxpayer funds it is willing to gamble on propping up investment banks. Henry Paulson, the treasury secretary, committed £3 trillion last week to saving Fannie Mae and Freddie Mac. If they had failed, the mortgage market in the US would have collapsed and hundreds of banks around the world that invested in US property would suffer huge losses.
Paulson bailed out Bear Stearns earlier this year, but he appears to believe a trading house like Lehman, which has little direct connection with retail markets and ordinary homeowners, could be allowed to go bust without causing the kind of systemic risk posed by Fannie and Freddie.
Why was Barclays interested?
Barclays joined the talks at the weekend to buy Lehman because it was interested in picking up the bank on the cheap. It is a re-run of the proposed deal for Northern Rock by Lloyds TSB at the time of its collapse last summer.
Lloyds TSB offered to buy Northern Rock and accept its liabilities if the government was prepared to set aside £30bn in discounted loans to support the takeover. Barclays asked Paulson for the same kind of guarantee. He refused. The main City regulator, the Financial Services Authority, was also believed to have expressed concerns to Barclays boss John Varley that it was unwise to buy a US investment bank at this time.
Andrew Abraham
http://www.myinvestorsplace.com/
capitalinvestor1836.blogger.com
Will everyone at Lehman's get the sack?
The administrators, PricewaterhouseCoopers, said the bank was centrally run from New York and therefore all its main businesses across Europe are wrecked. That puts 5,000 people who are employed at the bank, largely in Canary Wharf, out of work.
Will the whole bank be liquidated?
Not yet. Chapter 11 administration in the US allows PwC to take its time while it tries to find buyers for the least affected businesses. The year-long protection offered by Chapter 11 shields a company from creditors while it is reshaped or sold as a whole or in parts.
PWC said a number of group companies remain solvent and will continue to trade. "These companies include Lehman Brothers Asset Management (Europe) and a series of special-purpose vehicles designed to manage portfolios of residential and commercial real estate assets and non-performing loans."
What are the risks for other banks?
Share prices have tumbled and are likely to fall further as investors take flight from a sector that appears to be run by a group of bankers who are in denial about the extent of their mistakes and the problems their firms now face.
A flight of investors will make their situation worse because they are to a great extent dependent on their shareholders for capital. The capital provided by shareholders is the bedrock for their lending and without it they cannot continue trading.
What is the position with Bank of America and Merrill Lynch?
In many ways the sale of Merrill Lynch to Bank of America is a more startling development in the year-long credit crunch than the collapse of Lehman. It is understood that once it was obvious Lehman's was going under, Merrill realised it was vulnerable. The "thundering herd", as Merrill is affectionately known, was approached by Bank of America earlier this year, but rebuffed takeover talks. Now it was Merrill that went cap in hand to the US's largest retail bank for a rescue deal. Sceptics say the deal does little to resolve the problems faced by both firms, which are heavily mired in the US sub-prime home debacle.
What's going on at AIG?
American International Group (AIG), which sponsors Manchester United FC, was hit hard by deterioration in the credit markets last week and yesterday issued a statement that said it was reviewing its operations. Its stock dropped 45% since the start of the week amid concerns about the security of its assets, many of which are linked to the financial turmoil on Wall Street. Over the weekend it crafted a $40bn loan facility from the federal reserve, which had obviously taken the view that AIG posed more of a systemic risk than Lehman.
Who's next?
Washington Mutual is named by several analysts as the next to find itself in serious trouble. It was the subject of a rescue led by private equity firm Texas Pacific group in the spring. But the billions poured into its coffers no longer look sufficient to satisfy investors and they are taking flight. It is possible shareholders will flee Bank of America, if they consider Merrill Lynch a bad buy.
Another victim could be the US mono line insurers, so called because they only insure the bonds of large companies, including mortgage lending institutions. Like AIG, the insurance cover they provide could be invoked by customers and, like a tsunami, overwhelm their finances.
In the UK, mortgage banks such as Halifax owner HBOS, Alliance & Leicester and Bradford & Bingley, could suffer further if investors switch to safer havens.
Will it make a recession worse?
Yes. The CBI predicts a "shallow recession" next year, but this now appears optimistic. If the last five years of our decade-long economic boom were characterised by reckless lending, then living standards, along with property prices, have a long way to fall.
We are all spending money we simply don't have and when we stop it will spell the end for many jobs in retail, hospitality and may other industries. A fall in the value of the pound will help exporters and that will offset the worst of the economy's problems. But without banks willing or able to lend money to millions of people, except at sky-high interest rates, a long and deep recession seems inevitable.
Posted by Ritu Tomar on September 16, 2008 at 4:18am
http://www.myinvestorsplace.com/
In short, other banks refused to trade with it. Without the ability to trade, and without investors prepared to bet on its long-term viability, Lehman effectively had no business.
Why would the other banks not trade?
It is a repeat of the Northern Rock debacle. Lehman, while it was a large and complex business trading in a web of assets, also supported 100% mortgage loans offered by specialist lenders to people with few visible means of support. When interest rates jumped, borrowers could no longer afford their monthly payments.
Like Northern Rock, it mattered less that 80% of its assets were rock solid if 20% were considered toxic. We don't know the exact proportions at Lehman and neither do the bank's trading partners, which is why they refused in growing numbers to do business or buy it once the bank was up for sale.
Could the US government have stepped in?
The US treasury has reached the limit of taxpayer funds it is willing to gamble on propping up investment banks. Henry Paulson, the treasury secretary, committed £3 trillion last week to saving Fannie Mae and Freddie Mac. If they had failed, the mortgage market in the US would have collapsed and hundreds of banks around the world that invested in US property would suffer huge losses.
Paulson bailed out Bear Stearns earlier this year, but he appears to believe a trading house like Lehman, which has little direct connection with retail markets and ordinary homeowners, could be allowed to go bust without causing the kind of systemic risk posed by Fannie and Freddie.
Why was Barclays interested?
Barclays joined the talks at the weekend to buy Lehman because it was interested in picking up the bank on the cheap. It is a re-run of the proposed deal for Northern Rock by Lloyds TSB at the time of its collapse last summer.
Lloyds TSB offered to buy Northern Rock and accept its liabilities if the government was prepared to set aside £30bn in discounted loans to support the takeover. Barclays asked Paulson for the same kind of guarantee. He refused. The main City regulator, the Financial Services Authority, was also believed to have expressed concerns to Barclays boss John Varley that it was unwise to buy a US investment bank at this time.
Andrew Abraham
http://www.myinvestorsplace.com/
capitalinvestor1836.blogger.com
Will everyone at Lehman's get the sack?
The administrators, PricewaterhouseCoopers, said the bank was centrally run from New York and therefore all its main businesses across Europe are wrecked. That puts 5,000 people who are employed at the bank, largely in Canary Wharf, out of work.
Will the whole bank be liquidated?
Not yet. Chapter 11 administration in the US allows PwC to take its time while it tries to find buyers for the least affected businesses. The year-long protection offered by Chapter 11 shields a company from creditors while it is reshaped or sold as a whole or in parts.
PWC said a number of group companies remain solvent and will continue to trade. "These companies include Lehman Brothers Asset Management (Europe) and a series of special-purpose vehicles designed to manage portfolios of residential and commercial real estate assets and non-performing loans."
What are the risks for other banks?
Share prices have tumbled and are likely to fall further as investors take flight from a sector that appears to be run by a group of bankers who are in denial about the extent of their mistakes and the problems their firms now face.
A flight of investors will make their situation worse because they are to a great extent dependent on their shareholders for capital. The capital provided by shareholders is the bedrock for their lending and without it they cannot continue trading.
What is the position with Bank of America and Merrill Lynch?
In many ways the sale of Merrill Lynch to Bank of America is a more startling development in the year-long credit crunch than the collapse of Lehman. It is understood that once it was obvious Lehman's was going under, Merrill realised it was vulnerable. The "thundering herd", as Merrill is affectionately known, was approached by Bank of America earlier this year, but rebuffed takeover talks. Now it was Merrill that went cap in hand to the US's largest retail bank for a rescue deal. Sceptics say the deal does little to resolve the problems faced by both firms, which are heavily mired in the US sub-prime home debacle.
What's going on at AIG?
American International Group (AIG), which sponsors Manchester United FC, was hit hard by deterioration in the credit markets last week and yesterday issued a statement that said it was reviewing its operations. Its stock dropped 45% since the start of the week amid concerns about the security of its assets, many of which are linked to the financial turmoil on Wall Street. Over the weekend it crafted a $40bn loan facility from the federal reserve, which had obviously taken the view that AIG posed more of a systemic risk than Lehman.
Who's next?
Washington Mutual is named by several analysts as the next to find itself in serious trouble. It was the subject of a rescue led by private equity firm Texas Pacific group in the spring. But the billions poured into its coffers no longer look sufficient to satisfy investors and they are taking flight. It is possible shareholders will flee Bank of America, if they consider Merrill Lynch a bad buy.
Another victim could be the US mono line insurers, so called because they only insure the bonds of large companies, including mortgage lending institutions. Like AIG, the insurance cover they provide could be invoked by customers and, like a tsunami, overwhelm their finances.
In the UK, mortgage banks such as Halifax owner HBOS, Alliance & Leicester and Bradford & Bingley, could suffer further if investors switch to safer havens.
Will it make a recession worse?
Yes. The CBI predicts a "shallow recession" next year, but this now appears optimistic. If the last five years of our decade-long economic boom were characterised by reckless lending, then living standards, along with property prices, have a long way to fall.
We are all spending money we simply don't have and when we stop it will spell the end for many jobs in retail, hospitality and may other industries. A fall in the value of the pound will help exporters and that will offset the worst of the economy's problems. But without banks willing or able to lend money to millions of people, except at sky-high interest rates, a long and deep recession seems inevitable.
Posted by Ritu Tomar on September 16, 2008 at 4:18am
http://www.myinvestorsplace.com/
