September 15, 2008: They are walking down the sidewalk past police barricades as scores of New Yorkers and tourists’ gawk, some asking, "Which star is coming out?" - Not knowing what's going on. A big cop issues the standard "keep moving" line to those of us who stop to gaze. He tells the crowd, "Go home. There is no one famous coming out. You are looking at a whole bunch of people who just lost their jobs."
Six months earlier and five blocks away, a similar scene played out as Bear Stearns collapsed. But today, it was Lehman Brothers Holdings Inc turn. Failed talks with Bank of America and Barclays resulted in a sudden breakdown of this giant firm. Its shares fell by 94% in a day ($ 3.79 -$ 0.12, 15th September 08) and the company that was worth 46 Billion US$ few months ago had an insignificant worth of 145 Million US$ before it filed chapter 11 of US bankruptcy code for protecting its assets and maximizing its values.
Looking Back
Lehman's history from its Alabama roots to its demise on Wall Street:
1850: Henry, Emanuel and Mayer Lehman, immigrants from Bavaria, founded the firm as a commodities house in Montgomery, Ala.
1984: The saddest thing of all is that decades ago Dick Fuld, now Lehman's CEO, bitterly opposed having the firm do big, aggressive deals with its own capital. But during one of Lehman's recurring crises, Fuld's decision to do the risky things that he opposed in the 1980s hurt Lehman badly. Back then, Fuld's trading faction from the old Lehman Brothers was struggling against the firm's banker faction, led by Steve Schwartzman and Pete Peterson. The bankers wanted the firm to use its capital to do deals. The traders opposed it. The trader-banker war so weakened Lehman that it sold out to American Express (AXP, Fortune 500) in 1984. Fuld, a Lehman lifer, stayed on, while Schwartzman and Peterson went off to found the Blackstone Group (BX) and become billionaires.
1990: Shearson Lehman Hutton revives the Lehman Brothers name
1994: AmEx, giving up its "financial supermarket" strategy, spun off a small, undercapitalized firm called Lehman Brothers, with Fuld as CEO. (That's why, despite what you read, Lehman wasn't a 158-year-old firm; it was a 14-year-old firm with a 158-year-old name). Firm goes public on the NYSE as Lehman Brothers Holdings Inc.
2003: Lehman acquires Neuberger Berman money-management firm.
2008: Battered by the mortgage-market downturn, Lehman files for bankruptcy-law protection. The sad fate of Lehman Brothers is a cautionary tale of what's gone wrong with Wall Street.
Lehman ended up on the financial scrapheap because it played - and ultimately lost - a dangerous game involving high-stakes bets and huge borrowings. The firm's reported profits grew nicely through last year. But to keep its profits growing, Lehman was taking on more and more risk.Lehman (LEH, Fortune 500) borrowed too much money, put too much of it into deals of dubious quality, and then insisted for months that all was well without reporting quarterly losses even once and conveying it to the stakeholders that the institution was financially stable and it was apparent that all wasn't well. Monday's bankruptcy filing is a sad end for a firm once regarded as prudent and well managed.
Lehman's leverage - borrowings relative to capital - grew and grew, even as other firms were cutting back as the credit crunch worsened. Last October, with the real estate collapse well underway, Lehman (in partnership with the Tishman Speyer real estate firm) had paid a whopping $22.2 billion to do a leveraged buyout of a big apartment developer, Archstone. Losses on the deal began to surface almost immediately.
Lehman looked as if it would be able to survive more or less intact after the Federal Reserve Board (Fed) announced in March that it would make huge loans available to eligible investment banks. Six months ago, when Bear Stearn's faced a similar fate, the Federal Reserve intervened with the Treasury Department's support.
So, the Lehman's collapse was first, 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. Second shock to 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.
The Federal Reserve and Treasury’s Role was the third and the final nail in the coffin. The US government could have helped Lehman, 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.
This leads Wall Street to learn a lesson from Lehman: that the Fed and Treasury can no longer control events as they once could.
The Impact on India Inc
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. Some prime development projects funded by the Lehman Brothers were with HDIL, Unitech and DLF Assets. But these companies have started looking for alternative investments.
But for IT, 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. 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.
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