[Desi Masala] Why Lehman Bros went bust; what it means for you.

Why Lehman Bros went bust; what it means for you
September 16, 2008

Lehman Brothers is no more. Merrill Lynch has gone down the Bank of
America maw. AIG too could go belly up. With a doubt, these
developments in America are the most shocking events to have hit
global financial markets. So where did it all begin? And what does it
mean for the Indian stock markets? Find out. . .

What is (or was) Lehman Brothers?
America's fourth-largest investment bank Lehman Brothers Holdings Inc
has filed the biggest bankruptcy petition known to mankind.
The 158-year-old firm was founded by brothers Henry, Emanuel and Mayer
Lehman, Jewish immigrants to the US from Germany, in 1850. Henry set
up a general store in Alabama in 1844 and was later joined by his
brothers. In 1850 they set up the merchant bank in New York after
having made money in railway bonds. So what went wrong?

Lehman Bros, which till June 2008 had not reported a quarterly loss
even once, had earlier survived many an economic crises, like railroad
bankruptcies of the 1800s, the Great Depression in the 1930s, and the
collapse of Long-Term Capital Management in the 1990s.
Thus the collapse of the giant investment bank came as a major shock
for the entire world markets that plunged after Lehman filed a Chapter
11 petition with US Bankruptcy Court in Manhattan.

The $613 billion (some estimates put the size at $639 billion)
bankruptcy thus throws up the question: why did the Wall Street giant
go bust? Here's why. . .

Why did Lehman Brothers go bankrupt?
The giant investment bank succumbed to the sub-prime mortgage crisis
that has rocked the United States and the global economy. Lehman was
strangled by a massive credit crisis and fast plummeting real estate
prices.

The gargantuan $60 billion loss in bad real estate loans forced the
bank to file for bankruptcy.
However, the fall of the 158-year-year institution that started cotton
trade in US before the American Civil War and financed the railroad
that built a nation, got hit by a large dose of bad luck, pride,
arrogance and greed. Primarily, the pride of its chief executive
office Richard Fuld.

But there were more reason. Check out what they were. . .
Lehman's collapse was also triggered by the refusal of other banks to
do business with it because of its complex and, at times, opaque ways
of trading. Housing loans made by the bank to people with little
support made these loans very risky, and when interest rates rose,
these borrowers could no more repay Lehman. This led to huge losses,
the extent of which is not yet clear.

Thus other banks stopped trading with Lehman. This led to it losing
almost all business and triggered its fall.

The final straw for Lehman was the fact that both Barclays Plc of the
United Kingdom and Bank of America Corp pulled out of takeover talks.
BofA bought out Merrill Lynch for $50 billion.

However, Barclays has now said that it is in discussions with Lehman
Brothers about buying certain assets of the stricken US investment
bank.

"Barclays confirms that it is discussing with Lehman Brothers the
possible acquisition of certain Lehman Brothers assets on terms that
would be attractive to Barclay's shareholders," Britain's third
largest bank said in a statement.

When other banks do not want to buy Lehman, why is Barclays interested?
Barclays wanted to buy Lehman out at a discount, so to speak. But when
Lehman CEO Fuld decided that his bank was worth much more than what
Barclays had apparently offered, Barclays stepped back.

Now that Lehman has filed for bankruptcy, its assets are available
fairly cheap. However, the biggest problem is to take on Lehman's
enormous liabilities.

How far is the CEO of the company responsible for Lehman's fall?
Wall Street analysts believe that it was the 'hubris' of Richard Fuld,
the 62-year-old CEO of Lehman, who did not take the telltale signs of
impending doom very seriously. Fuld, nicknamed The Gorilla for his
foul temper, intimidating presence and tough talk, rejected many bids
to save Lehman because he thought that the sinking giant was much
bigger than Wall Street was giving it credit for, and wanted to get
more price for the sale of the company.
Analysts say if the bank was sold just a week before it went kaput, it
could have been saved the ignominy of a bankruptcy, but Fuld was far
too adamant to see reason. Result: the end of a 158-year-old financial
giant.

Could the United States government helped, like it helped Bear Stearns
in May this year, and Fannie Mae and Freddie Mac earlier this month?

The US government could have helped, but US Treasury Secretary Henry
Paulson said that it would not use up any more taxpayer dollars to
bail out Lehman Brothers as it would lead to investment banks getting
away with their gambling ways. Paulson had bailed out Fannie Mae,
Freddie Mac and Bear Stearns, saying that if the government had not
done so, the US housing loan market would have collapsed leading to
gigantic losses for hundreds of banks all over the globe that have
invested in US property.

Paulson, however, believes that a brokerage major like Lehman, which
does not have a direct connection with ordinary people who have taken
on home loans, need not be bailed out as it would not cause any
systemic damage to the US economy.

Will everyone in Lehman lose their jobs?
The bankruptcy administrators, PricewaterhouseCoopers, feels that as
Lehman's operations were essentially centralized at New York, the
folding up of the investment banker in the US will have a telling
impact on all its operations globally.

Over 5,000 employees in the UK have already lost their jobs, while
about 20,000 in the US might as well forget going back to their work
stations. About 2,500 Lehman employees in India too face the axe.

Will the whole bank be liquidated?
Unlikely, at least for now. The US Chapter 11 that deals with
bankruptcy says that PwC, the administrators, can go about taking its
time to find good offers and buyers for Lehman's 'least affected
businesses.'

The entire exercise can take months before all of Lehman's assets are
sold, given the complexities linked to the bankruptcy.

What about the Bank of America and Merrill Lynch deal?
Merrill Lynch's buy out by Bank of America is also a shocking
development. ML, saw the writing on the wall once it guessed that
Lehman was going bust, and decided to sell out before it actually has
to file a bankruptcy petition..

What about the insurance giant AIG?
The world's largest insurer, American International Group, has been
downgraded by credit rating agencies and is racing against time to
find a multi billion dollar infusion to stay afloat. US Federal
Reserve officials and two leading banks, JPMorgan Chase and Goldman
Sachs, were negotiating to put together $75 billion package to save
the insurance giant to stave off crisis.

AIG has sought $40 billion in bridge loan to stave off the crisis. But
the Fed rebuffed the request. AIG's ills came to fore, when three
leading credit rating agencies - Standard and Poor's Moody's and Fitch
- lowered the company's credit scores.

Who could be the next to fall?
Some Wall Street analysts, reports The Guardian, name Washington
Mutual as the next financial major to 'find itself in serious
trouble.'

However, the even bigger worry is whether the world's largest
securities firms, Goldman Sachs and Morgan Stanley, would be able to
survive this brutal financial crisis. But many say that these two
gaints will not melt down as they have 'done a better job of spreading
their bets across world markets and are also more diversified, less
leveraged and have managed such risks much better.'

What do Indian markets fear?
The fall of two global financial behemoths -- Lehman Brothers and
Merrill Lynch -- is expected to dent India Inc's ability to raise
resources via the equity route.
Experts feel that such events significantly increase the risk
perception, which in turn will put all future investments by
institutional investors such as pension or endowment funds, on the
back burner.

While the public issue market has already dried up, the private equity
funds are also becoming conservative in terms of pricing. This is
resulting in either inordinate delays in concluding deals or
transactions being called off.

There are many instances of private equity fund managers refusing to
go ahead with deals after signing the term sheet. Sources said that a
leading fund conducted due diligence on two companies in the last
fortnight but did not close either deal primarily because of the
developments in the US, their home country.

The crisis faced by Merrill Lynch and Lehman Brothers is expected to
have a cascading effect on PE firms too.

Will it hit the Indian growth story?
The ongoing financial sector crisis in the United States and its
repercussions on developed markets worldwide will result in lower
capital inflows into emerging markets like India, economists and
government officials said today.

At the same time, they called for the government to make it easier for
Indian companies to borrow overseas by easing the restrictions that
have been imposed in the past to reduce excessive liquidity in the
system and control inflation.

This will, in turn, lead to a slowing in investment growth in the
months ahead. As lending gets tighter and investment flows dry,
corporate India will find it more difficult to raise both equity and
debt.

Technology firms are shivering
Lehman Brothers' bankruptcy filing may well prove to be the last straw
for Indian IT firms, which were expecting the second half of FY09 to
be better. As a result of the US financial market crisis, analysts do
not expect Indian IT firms to sign any significant contracts in the
banking, financial services and insurance (BFSI) space in the months
to come.
While IT firms do not disclose client-specific details, it's estimated
that Lehman Brothers has outsourced deals amounting to anywhere
between Rs 550 crore and Rs 700 crore (annually) to numerous IT firms,
including majors like Tata Consultancy Services, Satyam Computer
Services and Wipro. Lehman Brothers, say sources, works with 14
services providers in India - Wipro and TCS being the largest. It also
has investments in a few IT firms. It's not clear if these holdings
will be liquidated to raise funds.

Moreover, the sources add that Lehman Brothers' unit in India has
issued termination letters to a majority of its 2,500 employees.

What kind of investment does Lehman have in India?
Lehman does not have direct large holding in the Indian stock markets.
These holdings are estimated at around $200 million, including
Participatory Notes. This figure is not enough to cripple the Indian
stock markets.

But Lehman has exposure to the Indian stock market through special
purpose vehicles. This exposure to real estate stocks is said to be of
about $1.5 billion, enough to shake up the markets.

Download prohibited? No problem. CHAT from any browser, without download. Go to http://in.webmessenger.yahoo.com/

------------------------------------

Please forward this message to everyone who will love it! If you like such messages, you may want to join these fun lists by sending blank emails to:

Best Jokes & Great Masti: DesiMasala-Subscribe@YahooGroups.Com
Cosmopolitan Showtime: Chumma-Subscribe@YahooGroups.Com
Hindi Shayris & Ghazals: Shayris-Subscribe@YahooGroups.Com

---------------------------------------
@ THE DESI MASALA HUMOR LIST @
---------------------------------------

Group Email Addresses
Post message: DesiMasala@YahooGroups.Com
Moderator: TejasMehta@aol.com

To modify your list subscription, please send a blank email to:
SUBSCRIBE: DesiMasala-Subscribe@YahooGroups.Com
UNSUBSCRIBE: DesiMasala-Unsubscribe@YahooGroups.Com
INDIVIDUAL MAILS: DesiMasala-Normal@YahooGroups.Com
DAILY DIGEST: DesiMasala-Digest@YahooGroups.Com
VACATION HOLD: DesiMasala-Nomail@YahooGroups.Com

All of you are encouraged to submit your favorite jokes in simple text format to the list! You are requested to properly format your contribution, use a unique subject line, and avoid attachments, virus warnings, chain letters, commercial messages, disclaimers etc. The better you follow the guidelines, and the original or fresher you are, the higher are the chances of your jokes getting posted!

You will be banned from the group if you spam or flame fellow members, ignore posting guidelines routinely, send out auto replies, or post advertisements.

Fun URLs (May require a login with Yahoo ID)
Homepage: http://groups.yahoo.com/group/DesiMasala
Masala Archives: http://groups.yahoo.com/group/DesiMasala/messages
Mail Delivery: http://groups.yahoo.com/group/DesiMasala/join
Polls: http://groups.yahoo.com/group/DesiMasala/polls
Subscribe Box: http://groups.yahoo.com/group/DesiMasala/promote
Graphical Funnies: http://groups.yahoo.com/group/chumma
Romantic Shayris: http://groups.yahoo.com/group/shayris
Yahoo! Groups Links

<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/DesiMasala/

<*> Your email settings:
Individual Email | Traditional

<*> To change settings online go to:
http://groups.yahoo.com/group/DesiMasala/join
(Yahoo! ID required)

<*> To change settings via email:
mailto:DesiMasala-digest@yahoogroups.com
mailto:DesiMasala-fullfeatured@yahoogroups.com

<*> To unsubscribe from this group, send an email to:
DesiMasala-unsubscribe@yahoogroups.com

<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/