Introducing 

Prezi AI.

Your new presentation assistant.

Refine, enhance, and tailor your content, source relevant images, and edit visuals quicker than ever before.

Loading…
Transcript

The Collapse of Lehman Brothers

$613bn

Monday, September 15, 2008

Vol XCIII, No. 311

The Timeline

September 10, 2008

September 16, 2008 and onwards

September 14, 2008

The Last Days of Lehman Brothers

Causes & Cast

Beginning of the end

  • Lehman Brothers posts a $3.93bn third-quarter loss;
  • $5.6bn of writedowns on toxic mortgages;
  • Plans to sell off assets;
  • Shares have now fallen 52pc in two days.

On the brink

  • More than 100 top Wall Street bankers spend the night in the New York Fed exploring options;
  • US Treasury unwilling to part with more taxpayer money following $229bn already spent on bailouts;
  • Doomsday scenario: Lehman's problems infect other banks;
  • Fed announces extraordinary measures to increase liquidity and calm markets;
  • Increasingly precarious state of AIG discussed.

  • Sept. 16: Barclays announces $2bn deal to buy a large part of Lehman out of bankruptcy;
  • Sept. 16: Fed unveils $85bn rescue package for AIG;
  • Sept. 17: FTSE 100 closes below 5,000 for first time since May 2005, down 113.2 points at 4912.4. The Dow Jones fell 449.36 points - or 4pc - to 10,609.66;
  • Sept. 18: Central banks inject $184bn;
  • Sept. 18: The five-year CDS credit default swaps on a clutch of America’s biggest companies are flashing imminent bankruptcy signals: Washington Mutual (2638), General Motors (2284), MBIA Insurance (2187), Advanced Micro (1773), Ford Motor (1718).
  • Sept. 19: News of the “bad bank” bailout plan and short selling ban helps world stock markets soar. FTSE roars back, up 431.3pts - or 8.8pc - to 5,311.3. Dow Jones climbs 368 to 11,388.4.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Senate Banking Committee Chairman Chris Dodd (D-CT) join other leaders from the House and Senate for a meeting at the U.S. Capitol September 18, 2008 in Washington, DC. The financial leaders were on Captiol Hill to brief lawmakers on the latest efforts by the government to stem the recent Wall Street fear and the resulting financial crisis.

The Timeline

September 15, 2008

September 11-12, 2008

Search for a knight in shining armour continues

  • Lehman in talks with potential buyers (Korea Development Bank, Bank of America, Barclays);
  • Washington Mutual, AIG and Merril Lynch shares also tumbling on capital adequacy concerns;
  • Fed: 'good bank, bad bank' solution.

Collapse

  • Lehman files for bankruptcy: the largest US corporate bankruptcy in history;
  • Fed widens the set of assets eligible as collateral for Treasury loans;
  • 10 biggest investment banks provide a $70bn liquidity pool for any one of them to tap;
  • Moves to save AIG as analysts estimate the world banking system would face losses of $180bn should the insurer collapse;
  • Bank of America announces rescue buyout of Merrill Lynch.

Hank Paulson, US Secretary of the Treasury briefs on efforts to heal the nascent crisis on September 19, 2008.

Lehman employees on September 16, 2008.

1. Timeline

2. Main actors central to the dynamics of the crisis

3. Major lessons for political economy and global finance

4. Conclusions

The Timeline

Main Actors

September 22, 2008

The Lenders (& Sub-prime Lenders)

End of an era on Wall Street

  • Countrywide;
  • Washington Mutual;
  • Wachovia;
  • IndyMac.

Lloyd Blankfein, CEO of Goldman Sachs, says the change will allow the bank access to funding

Main Actors

Major Lessons from the Collapse of Lehman Brothers

The Government-sponsored Enterprises (GSEs)

The Credit Rating Agencies

'Terrible, Surreal Moment," says Ben Bernanke

  • When Lehman failed, regulators suddenly realised they had been ignoring the non-bank sphere, enabling egregious behaviour to flourish.
  • Shadow Banking has expanded since 2008 from $59tn in size to $67tn, according to the Financial Stability Board.

A Congressional report, concluded in the wake of the Senate's Permanent Subcommittee on Investigations' two-year foray into the causes of the financial crisis, found that Moody's and Standard and Poor's were responsible for triggering the crisis when they were forced to downgrade the inflated ratings they had slapped on complex MBSs. The panel found that the two agencies had continued to give top ratings to MBSs months after the housing market had started to collapse.

Fannie and Freddie's GSE status created certain perceptions in the marketplace, the first of which was that the federal government would step in and bail these organizations out if either firm ever ran into financial trouble. This was known as an "implicit guarantee".

The fact that the market believed in this implicit guarantee allowed Fannie Mae and Freddie Mac to borrow money in the bond market at lower rates (yields) than other financial institutions. The yields on Fannie Mae and Freddie Mac's corporate debt, known as agency debt, was historically about 35 basis points (.35%) higher than U.S. Treasury bonds, while 'AAA-rated' financial firms' debt was historically about 70 basis points (.7%) higher than U.S. Treasury bonds.

Fannie Mae and Freddie Mac were given a government-sponsored monopoly on a large part of the U.S. secondary mortgage market. It is this monopoly, combined with the government's implicit guarantee to keep these firms afloat, that would later contribute to the mortgage market's collapse.

  • Foreign banks operating in the US short-term debt markets are “window-dressing” their accounts, routinely cutting about $170bn of balances at the end of each quarter to appear safer and more profitable, says a new study.

Caveat Emptor- Those who accept the risks are no longer those who get stuck with the bills.

Main Actors

The Bankers

The Policy Makers

The Financiers

Kenneth D. Lewis, Chairman and CEO of Bank of America Corp.

Kenneth Lewis, the chairman and CEO of Bank of America Corp., engineered a series of takeovers during the financial crisis that created a banking behemoth involved in nearly every nook of the financial system. In early 2008, he took a gamble in buying leading mortgage lender Countrywide Financial, weighing what he called at the time the “short-term pain” of acquiring a deeply troubled company against the chance for instant scale in the business. He placed an even bigger bet in September 2008, buying Merrill Lynch and jumpstarting Bank of America’s efforts to enter investment banking.

In the years after the acquisitions, however, losses escalated and litigation proliferated. Analysts in 2012 estimated that Countrywide had cost Bank of America more than $40 billion, The Wall Street Journal reported.

Hank Paulson

Henry Paulson was barely into his second year as Treasury secretary when the financial crisis hit, prompting the former chief executive of Goldman Sachs Group Inc. to undertake a series of unprecedented government rescues—including helping to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. and placing mortgage giants Fannie Mae and Freddie Mac into conservatorship.

Ben Bernanke

Ben Bernanke, Chairman of the Federal Reserve during the crisis, and a student of the Great Depression, was eager to avoid a repeat on his watch and made broad use of the Fed's authorities to open financing spigots and protect Wall Street from collapse.

Timothy Geithner

Timothy Geithner was at the helm of the Federal Reserve Bank of New York during the crisis, serving as the U.S. government's eyes and ears on Wall Street. Mr. Geithner pushed to intervene in the crisis quickly, advocating for rescues of firms such as Bear Stearns Cos. and American International Group Inc.

Ralph Cioffi & Matthew Tanner, Hedge Fund Managers at Bear Sterns

The $1.6 billion, mid-2007 collapse of the highly leveraged Bear Stearns hedge funds managed by Ralph Cioffi and Matthew Tannin’s was one of the first distress signs in the credit markets. Federal prosecutors then moved to file criminal charges against the men, alleging they had misled investors about the portfolio of mortgage-backed securities.

Main Actors

The Bankers

The Financiers

"Not that anyone on this committee cares about this, but I wake up every single night wondering, 'What could I have done differently?' This is a pain that will stay with me for the rest of my life."

- Richard Fuld

Jamie Dimon, Chairman and CEO of JP Morgan Chase & Co.

Jamie Dimon emerged as one of the banking industry's most powerful executives during the financial crisis. J.P. Morgan swept in to acquire Bear Stearns Cos. in March 2008 as the brokerage firm was collapsing, getting a $29 billion backstop from the government. J.P. Morgan then bought Washington Mutual Inc.’s banking operations in September 2008 from the government.

Joseph Cassano, Head of AIG's Financial Products Division

As head of AIG’s Financial Products division, Joseph Cassano was the center of a bet made on mortgages that helped force the insurance giant into the arms of the U.S. government. The unit sold billions in credit-default swaps on mortgage-backed bond pools, essentially insurance against the bonds collapsing, and then faced billions in collateral calls when the market turned.

Richard Fuld Jr., CEO of Lehman Brothers Holding, Inc.

Richard Fuld was chairman and CEO of Lehman Brothers Holdings Inc., a bond-focused investment bank that moved aggressively into the commercial real-estate market and leveraged loans in the years just before the crisis. As losses mounted in 2008, Mr. Fuld sought to reassure creditors and trading partners and raise capital. But efforts to sell the firm foundered on Sept. 14, 2008, when the government refused to provide a financial backstop. On Sept. 15, Lehman filed for bankruptcy protection, and its assets were subsequently sold off.

Main Actors

The Bankers

Robert Willumstad, Chairman and CEO of American International Group Inc.

Mr. Willumstad scrambled the weekend of Sept. 13-14, 2008, to raise cash ahead of an anticipated costly downgrade of AIG’s credit rating, even appealing to the Federal Reserve in vain for temporary funding. On Sept. 16, the U.S. government seized control of AIG, signaling its concerns about the danger a collapse could pose to the financial system. As part of the deal, Treasury Secretary Henry Paulson insisted that Mr. Willumstad step aside.

Angelo Mozilo, co-founder and CEO of Countrywide Financial Corp.

Angelo Mozilo was the co-founder and CEO of Countrywide Financial Corp., one of the country’s largest lenders and a purveyor of high-risk loans leading up to the financial crisis. Mr. Mozilo was a pioneer of the subprime and adjustable-rate mortgages that helped fuel the housing boom in the years before 2008. Mr. Mozilo has defended Countrywide’s lending practices, saying turmoil in the credit markets and falling home prices caused most of the lender’s loan losses.

John Thain, Chairman and CEO of Merrill Lynch & Co.

John Thain was chairman and CEO of Merrill Lynch & Co., taking the job in October 2007 as the financial crisis was brewing. He sought to insulate the company from mounting market problems: raising capital, purging toxic assets and selling big equity stakes. But Merrill held the same kinds of mortgage-backed assets as Lehman and was hammered in early September 2008 by investors worried it would need capital. After 48 hours of frenetic negotiating, and with federal officials pushing for a deal, Bank of America Corp. agreed Sept. 14 to buy Merrill Lynch for $50 billion in stock, about 40% less than Merrill’s peak stock-market value.

Major Lessons from the Collapse of Lehman Brothers

September 15, 2015 - Seven Years On

Main Actors

Major Lessons from the Collapse of Lehman Brothers

Unethical Behaviour, What Have We Learnt?

The Bankers

Who is to blame?

  • Richard Fuld chose to paint an unrealistically optimistic picture of Lehman Brothers’ financial situation

  • Christopher M. O'Meara and Erin Callan, formerly CFO at Lehman, allowed the filing of financial statements that omitted or misrepresented Lehman's Repo 105 activities and for failing to tell the bank's directors about the accounting "gimmick".

  • Ernst & Young knew about Repo 105 but did not keep a check on how much the bank was using the accounting trick.

Kerry Killinger, Chairman and CEO of Washington Mutual Inc.

Kerry Killinger was the chairman and CEO of Seattle-based Washington Mutual Inc., growing it from a small, regional lender in the early 1990s into the largest savings and loan bank nationwide. During the housing boom, Mr. Killinger led the bank on a path of explosive mortgage growth in part by expanding heavily into subprime and option adjustable-rate mortgages.

Mr. Killinger was ousted from his position as CEO in September 2008, just before WaMu suffered a run that forced the government to seize the bank. Its closure marked the largest bank failure in U.S. history. The banking operations were sold to J.P. Morgan Chase & Co. for $1.88 billion.

From 'The Street, The Bull and The Crisis': unethical behaviour

continues to persist.

(May, 2015)

Neil Barofsky, the departing special inspector general for TARP, warned that the same "too big to fail" firms that nearly brought down the financial system in 2008 have now become bigger.

Learn more about creating dynamic, engaging presentations with Prezi