Lehman Brothers : Financial Failure

Shearson Lehman had pressed for the implementation of the normal "gun-to-the-head" strategy, offering the board of directors a complete, fully financed bid and giving the board little alternative but to accept it. Johnson, believing that he had the board under control, had refused and the eager Shearson Lehman had reluctantly agreed. Largely because of the unprecedented size of the proposed leveraged buyout, the management-Shearson Lehman group grossly underestimated the potential competition and assumed that it would be an uncontested takeover. The estimated $15.5 billion of bank financing necessary to complete the $17.6 billion buyout would use up approximately three-fourths of the bank funds available worldwide for a single transaction (Burrough, 169).

During the times leading up to the power struggle, the power dynamic within Lehman was steadily shifting as trading profits became increasingly more important to Lehman versus traditional investment banking profits. Thus, Glucksman was able to step into the spot light and Peterson became more expendable. Peter Peterson’s core

The U.S. economy experienced a deep recession in years of 2008 through 2009. A huge factor in this was the number of large financial institutions that failed. Also, the stock market declined significantly which can be contributed to the bailout plan that was passed by our government. Third, spreads on many different types of loans over comparable U.S. Treasury securities has expanded significantly (Chari, Christiano, & Kehoe, 2008). The financial crisis is the result of the collapse of the housing bubble in the U.S., which can be seen as the starting point of a crisis in the global economy afterward.

The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.

On its way to becoming the nation’s largest mortgage lender, Countrywide Financial became one of the nation’s largest business failures in history. Started in 1969 by Angelo Mozilo, and partner David Loeb, Countrywide had become the largest provider of home loans in the United States, with one in every six U.S. loans being created by Countrywide. However, according to Bethel, Countrywide’s entire operation, from its computer systems, incentive pay structure, financing arrangements, was meant to obtain maximum profits out of the mortgage lending programs no matter what the cost. Countrywide’s initial stakeholders consisted of employees, investors, regulators, clients, communities, and as well as shareholders. Furthermore, because of its

This is really asking about what happened during the Financial Crisis when Lehman Brothers and Bear Stearns went under. Governments oftentimes intervene when there is a danger of massive bank failures. Bank failures have dire consequences to the health of an economy. Banks provide capital to businesses in the form of loans to businesses grow. Banks also provide liquidity to businesses and markets. If banks fail, businesses are unable to access capital to grow their businesses. Liquidity tightens and economic growth is stunted. Additionally, banks running into trouble can lead to "runs on the bank" where people get nervous about their ability to access their cash/savings and pull their money out...people pulling their money out of the banking

Around the time of the housing crisis in the US, Hollate Manufacturing underwent a series of major changes at key managerial positions. The former CFO, Jack Brennahan, became the new CEO. Brennahan helped conduct the search for a new CFO to fill his spot, and they eventually decided on William Blackburt. Blackburt was hired mostly due to his prior success at growing a manufacturer through acquisitions. Despite the recent economic downturn, Hollate had success with their first acquisition and IPO and were looking to continue to grow the company through further acquisitions. When Blackburt was hired, he negotiated aggressively for his compensation package to include significant bonus opportunities based on higher revenue growth. Shortly prior to Blackburt being hired, Hollate’s board also underwent some changes. Mike Soltany was the Audit Committee Chair. The two other members of the board were recruited by and were acquaintances of Brennahan’s. Eventually this board would become even closer with one another and with other members of management at the firm. Once operations got underway with Blackburt as the new CFO, he was an aggressive supporter of Hollate making further acquisitions. This strategy seemed to work for the company and things seemed to be looking up. The positive environment at Hollate and the personal relationships that formed among top managers led to a strong sense of trust among top management. Eventually, this sense of trust paired with the focus on meeting

They created an environment and had the departments and individuals competing with each other. Employees and divisions were constantly under pressure to deliver the required results, at times at each others' expense. Since a person's job was at risk if he didn't deliver, there was often the temptation to lie and deceive in order to meet the requirements and stay employed. Since all of this flowed down from, and then bubbled back up to the very top of the company to the executives who had set expectations with investors, the same temptations and the same behaviors existed at all levels within the company. Each department within the company had firm financial goals to meet. Whenever possible, individuals had specific financial goals. This behavior created a culture of selfishness, greed, and "results at all costs." In the end, it bred lies and deception. This culture resulted in the massive accounting fraud that has been uncovered. (Sarno)

With all of this happening, Lehman Brothers needed help. They asked many potential trade buyers include Bank of America and Nomura, plus a number of private equity houses that have expressed an interest in buying the bank, but in all the desperation to find a savior, people started to ask questions and that made the value of their stocks plummeted. Lehman brothers were in deep trouble. They assumed that the U.S Government would bail them out was because of TARP. TARP stands for Troubled asset relief program, which was a group of programs created by the U.S. Treasury to preserve the country’s

Lehman Brothers was a major player in the mortgage market and a top player in underwriting securities backed by mortgages made to homebuyers with weak, or subprime, credit histories. (Investopedia.com)

Despite its humble beginnings in 1844 as a simple general store turned financial firm, the Lehman Brothers greed drove their firm into the ground. It seemed as if Lehman Brothers was indestructible. Surviving through the railroad bankruptcies in the 1800’s, the Great Depression of the 1930’s, two world wars, a capital shortage in 1994, and everything in-between, it seemed the firm was built to last. However its inevitable end started in the early 2000’s with the housing boom after the repeal of the Glass-Steagall act.

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman 's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. The consequences for the world economy were extreme. Lehman’s ' fall contributed to a loss of confidence in other banks, a worldwide financial crisis and a deep recession in many countries. Lehman 's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government 's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman 's bankruptcy led 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.

In 2003 and 2004, Lehman acquired five mortgage lenders: BNC Mortgage (subprime lender) and Aurora Loan Services, (loan without full documentation). Lehman 's acquisitions initially looked prescient; record incomes from Lehman 's real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of development than other businesses in investment banking or asset management. The firm securitized, a 10% increase from 2005 to 2006 ($146 billion of mortgages). Lehman reported record profits from 2005 to 2007 & in 2007, the firm reported net income of a record $4.2 billion.

On September 10, 2008, Lehman Brothers announced the lowest decline as the shares dropped to 45%. It left the market value at $5.4 billion after the Korea Development Bank rejected to make an investment deal that could rescue Lehman. The company would seek capital from other investors in order to recover their financial situation. These efforts faltered and the situation grew more severe, even after the US government had already saved the Bear Stearns and Fannie Mae and Freddie Mac. Though it is less likely that the US government will keep Lehman's bailout, there should be a resolution from the Federal Reserve System to bolster Lehman’s finance so as to prevent the US economic declination.

In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld’s aggressive leadership, the company flourished and became one of the largest investment banks in the United States. （Crossley-Holland 2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market.