Lehman Brothers Bank: The Success and Fall of the Cotton Trader. The last days of Lehman Brothers What risks were realized in the case lehman brothers
The collapse of the investment bank was the culmination of a crisis that had been brewing for almost two decades
September 15, 2008 Lehman Brothers, the fourth largest investment bank in the United States, has filed for bankruptcy. In a matter of days, the credit markets of the United States and other countries virtually closed, and American depositors embarked on an unprecedented assault on their savings in financial companies in decades.
Its volume was such that the entire financial system of the country was practically on the verge of collapse. And on September 19, the US government had to guarantee for the first time what it had never guaranteed before - uninsured deposits.
The first signs of an impending storm appeared in the United States almost three years earlier, and the first thunderclaps - at least one and a half years earlier. The origins of the crisis, it is now believed, go back to the events of the 90s. Their combination can be reduced to two main components: risky mortgages and regulation of financial markets. Without pretending to be universal, let us recall only some of their aspects.
GOLDMINE
Back in 1977, the United States passed a law on "support for local investment" aimed at making mortgage loans more affordable for families of modest means. It provided, in particular, the establishment of certain average interest rates on such loans in a particular region, which banks could not exceed for any categories of borrowers, recalls a researcher at the Hoover Center at Stanford University in the United States, a professor of economics Mikhail Bernshtam.
According to him, in 1995, in addition to the provisions of this law, the pressure on banks increased even more, actually forcing them to reduce the requirements for the financial position of borrowers.
At the same time, a market for new financial instruments was formed in the country - the very ones that were secured by numerous debt obligations - both by companies and individuals. Later they found themselves almost at the epicenter of the crisis. This market, which was then small, turned out to be very profitable for investments. New securities were quoted high, and many investors began to feel that they had stumbled upon a “gold mine”.
“Against such a favorable background, the requirements for mortgage borrowers have weakened even more: the first installment is no longer needed, and there is no need to confirm earnings,” continues Mikhail Bernshtam. - They have already begun to issue loans that could be 40-50 times higher than the real income of borrowers. Although in reality this excess cannot be more than, say, 10-fold: after all, then a person simply cannot physically return a 30-year mortgage loan with interest. Even if all his salary will be spent only on these payments ”.
As a result, by 2007, when the boom in the real estate market in the United States passed, 12% of the total volume of residential mortgages in the country, which then amounted to $ 11 trillion, accounted for “problem” loans.
DOUBLE WARRANTIES
On Sunday, September 7, 2008, that is, eight days before the bankruptcy of Lehman Brothers, the largest nationalization in the history of the country was announced in the United States.
Treasury and Federal Reserve Invested $ 188 Billion in Federal Mortgage Agencies Fannie mae and Freddie mac, which accounted for more than half of the US mortgage market. They were obliged to issue 80% of their new shares in favor of the state of law for 20 years, thereby transferring the agencies under state control. The next day, the shares of both agencies on the stock market simply collapsed - their quotes fell by 75-80%.
Fannie Mae was created back in 1938 and has been a government structure for 30 years. In 1968, it was privatized in order to free the budget from unnecessary spending, the head of the Center for the Study of the Real Estate Market at Harvard University, professor, noted in an interview with RS. Nicholas Retsinas... "For the same reason, another, competing mortgage agency - Freddie Mac - was created in 1970 as a private joint stock company."
Although both federal agencies, unique in world practice, were private companies, the financial markets had no doubts: if a crisis arose, the American state would not be left on the sidelines. As, in fact, it happened. “Rescuing them became the most important part of everything that was done in the fall of 2008 to prevent the disaster,” - said five years later in an interview with the newspaper The wall street journal then US Treasury Secretary Henry Paulson.
Fannie Mae and Freddie Mac have served as mortgage loan guarantors in the United States since their inception. As originally conceived in the name of the development of the real estate market in the country. Agencies buy out mortgages from commercial banks on mortgage loans issued by them. Such a buyback not only minimizes the risks of banks, but also returns them money, which banks can use to issue regular mortgage loans.
By “bundling” mortgages purchased from banks, agencies issue their own bonds on their basis, which are sold on financial markets. Moreover, these papers specifically indicate that Fannie Mae and Freddie Mac undertake to guarantee them, the vice president of the Californian investment company TCW noted in an interview with RS Jeffrey Gundlack.
“And if the next day both agencies suddenly ceased to exist, then guarantees would disappear along with them. As a result, real estate prices in the country will simply collapse, as the circle of potential home buyers will sharply narrow down - after all, banks will suddenly lose a powerful source of replenishment of their own funds, loans from which help people make such expensive purchases. ”
The bonds of American mortgage agencies had the highest credit ratings and were traditionally considered one of the most reliable in the world financial markets. Everyone understood that they were actually backed by the obligations of the US government.
And therefore, the bonds of Fannie Mae and Freddie Mac were willingly bought up for hundreds of billions of dollars not only by American, but also by foreign investors, including central banks and governments of other countries, thereby, in fact, additionally crediting the economy of the United States. For example, in 2008, about one fifth of all were invested in the bonds of these agencies. foreign exchange reserves of Russia.
But such a “double guarantee” of mortgage agencies (they insure bank loans, and the state actually insures them themselves) had, as it turned out, a downside, notes Professor Bernshtam. Back in the late 90s, under the influence of new trends, they first began to soften the requirements for the “quality” of the mortgage loans they buy out. In the early 2000s, this process accelerated: more and more new financial instruments appeared, also tied to the real estate market, but already issued by financial companies that were not directly related to mortgages.
Competition on their part intensified, and in 2005 federal agencies began to lose their share in the mortgage market for the first time. By that time, by the way, the growth in real estate prices in the United States, which had continued since 2001, began to slow down, and since mid-2006, it was replaced by a decline.
Agencies were forced to lower their own standards of claims again, buying out more and more mortgage loans from banks belonging to various “problem” categories. “So, unexpectedly for everyone,” continues Mikhail Bernshtam, “a situation arose in which the role of mortgage agencies in shaping the future crisis was so significant.”
Bonds issued by Fannie Mae and Freddie Mac hit $ 5.3 trillion on the eve of the crisis (for comparison, this is 36% of total US GDP in 2008), which accounted for half the volume of the entire US home mortgage market.
Today, five years later, the state through these two agencies and related structures has already guaranteed 90% of all new mortgage loans in the country. And many of the financial instruments competing then with the bonds of the agencies are in the past.
FINANCE MASS DESTRUCTION
At the beginning of the century, they experienced a real boom. For example, derivative instruments based on a variety of debt obligations (CDOs), which emerged in 1987, became a large market segment in the early 2000s. The packages that secure them began to include corporate bonds, both municipal and mortgage bonds, although the share of the latter was growing especially rapidly.
The novelty of this instrument was that it actually consisted of fragments of many debt obligations, explains Mikhail Bernshtam: some of them were more risky, others to a much lesser extent. But on average, each such bond was presented to investors as a very reliable liquid instrument, and even with a high rating, which was assigned by rating agencies.
Their spread was also facilitated by the fact that the share of “high-quality”, reliable mortgage loans in the country, in principle, is growing slowly, in line with the rate of general income growth of the population. Whereas the market demand for new financial instruments exceeded all expectations, which naturally resulted in a decrease in their “quality”.
Finally, against the background of the renewed, after "Dot com - crisis" 2000-2001, the general growth of the US economy, the supply of regular corporate bonds was small. And investor demand shifted more and more towards new financial instruments. Moreover, the profitability of investments in them turned out to be 2-3 percentage points higher than on traditional bonds with the same credit ratings. Although everyone understood that this difference only reflects the levels of risk.
In addition, back in 2000, the United States passed a law that, as noted by Mikhail Bernshtam, essentially canceled the regulation of the derivatives market. In particular, it became possible to create secondary or tertiary bonds, under which, in turn, were issued all kinds of insurance instruments that seemed to minimize the risks of investors. Moreover, they were issued by financial companies or banks not only in the USA, but also in other countries of the world, willingly selling new products to each other and to other market participants.
“By mid-2008, the international market for these securities had expanded to $ 630 trillion, which was 10 times the then total volume of the world economy,” says Mikhail Bernshtam. - It is their investor-guru Warren Buffett and called it somehow "a financial weapon of mass destruction."
No bubble in financial markets blows up overnight. First, a certain turning point must appear. In this case, the manifestation of this can be attributed, on the one hand, the decline in real estate prices in the United States that began in mid-2006. As a result, many more recently purchased houses or apartments appeared in the country. negative net value... That is, their market price turned out to be less than the remainder of the mortgage debt on them from borrowers to banks.
On the other hand, for many borrowers, the first grace period of payments for housing purchased through a mortgage came to an end, when interest rates were minimal, and payments on the main loan could be incomplete. Now the benefits were over, they had to pay in full, which was too much for many families.
By the end of 2006, the number of such families began to grow especially rapidly, and the consequences were not long in coming. During February and March 2007, about 30 American financial companies specialized in loans for potentially “problem” borrowers went bankrupt. And at the beginning of April, the largest of them - New Century Financial Corp... - went to bankruptcy court, which was already a clear manifestation of the coming changes. A month before, exchange trading in the company's shares was suspended. Among its creditors were some of the largest banks in the United States and Great Britain.
The bill actually went on for months.
CHRONICLES
Of course, just a couple of years after the peak of the crisis, economists easily lined up the events of 2007-2008 in a kind of logical chain. But at the time when these events took place, their relationship, as well as the scale of the consequences, seemed far from so obvious. Moreover, both the financial authorities and the financial market itself, which received one blow after another. Here are just a few of them.
At the beginning of March 2007, the largest UK bank - HSBC- unexpectedly announces that its last year's costs of covering “problem” debts on operations in the US were 20% higher than previously thought. The reason was the massive refusals of borrowers to service the loans taken from the bank - due to the lack of funds.
At the beginning of August 2007, the largest bank in France - Bnp paribas- announced the virtual collapse of three of its investment funds associated with the US mortgage market. Such news revealed a shortage of liquidity on the European interbank market. Trying to cut it down European Central Bank(The ECB) is injecting € 95 billion into the system all at once, the largest of its interventions on the market since the September 2001 US attacks.
And that was just the beginning. Over the next few days, the ECB provided banks with another 109 billion euros. The central banks of the USA, Canada and Japan began to carry out their own large-scale interventions.
It helped, but not for long. Already at the beginning of September 2007, the key international rate of the interbank lending market is London LIBOR- increased to nearly 10-year highs. And when banks are afraid to lend even to each other, the volume of their loans to companies and enterprises is reduced all the more, which is immediately reflected in the overall economic growth.
In the US, the economy has been in recession since December 2007. As a result, it lasted 18 months, becoming the longest in post-war American history, and, by analogy, received the name "Great recession"... In Europe, the slowdown in economic growth turned into a recession at the end of 2008. And in the eurozone it lasted exactly the same as in the United States - a year and a half.
September 14, 2007 depositors of a British bank Northern rock withdrew from their accounts more than 1 billion pounds in one day - about 5% of the total amount of deposits, which was the largest "foray" on banks in the country in more than 100 years. And it continued until the British government announced that it would guarantee all these deposits. However, six months later, in February 2008, the bank still had to be nationalized.
In early December 2007, US President George W. Bush announced a program of financial assistance to approximately one million American families who were under threat of eviction from newly purchased houses and apartments, for which they could no longer pay off loans.
In mid-March 2008, the US financial authorities decided to bail out the country's fifth-largest investment bank - Bear stearns... He received $ 30 billion in loans from the central bank after depositors and shareholders emptied all the bank's reserves in just three days. And a day later, Bear Stearns, with the active mediation of the financial authorities, was bought at a minimal price by a larger American investment bank - Jp morgan chase.
Thus, the second major precedent in 10 years was created, Mikhail Bernshtam notes, when the state helps not an ordinary commercial bank, whose business is subject to its traditional regulation, including deposit insurance, but a non-bank financial company, whose business involves higher risks with minimal regulation and lack of investment insurance.
US Treasury Secretary Henry Paulson will say five years later: "If the government had already had the powers that Congress gave it in 2010, it would rather take control of Lehman Brothers than let it go bankrupt."In 1998, a large hedge fund received government assistance Long-Term Capital Management, which turned out to be on the verge of bankruptcy, as it turned out, largely due to large investments in Russian GKOs, on which Russia declared a default. “The event was not given much importance then, but it actually became the first clear signal to the participants in the financial markets, - continues Professor Bernshtam: now you can risk much more, because in the event of a crisis, the state will clearly not leave them in trouble.”
“For the sake of saving the economy, we really had to violate one of the fundamental American principles - if you intend to take risks, then be prepared for all the consequences of risk,” he later admitted Neil Kashkari, who headed the first post-crisis program in the United States - TARP, within the framework of which the state bought out “problem” assets from banks and financial companies for $ 700 billion.
Finally, in early September 2008, the mortgage agencies Fannie Mae and Freddie Mac came under state control in the United States, and a week later, on September 15, the collapse of the country's fourth largest investment bank, Lehman Brothers, became apparent.
For many market participants, such a bank's ending came as a surprise: if the authorities just six months earlier decided to save the country's fifth investment bank, then the even larger one, most likely, will not be allowed to collapse, and even more so. But this time it turned out differently. Desperate to find a buyer for Lehman Brothers, the US financial authorities ultimately refused to further participate in it ...
Then, apparently, no one could have imagined all the consequences of such decisions. As soon as the bank announced that it was forced to go to bankruptcy court, it suddenly became clear that Lehman Brothers was a powerful source of short-term loans not only for hundreds of large American hedge funds, but also, for example, for the same mortgage agency Freddie Mac, recalls Mikhail Bernshtam. And that's not it.
It immediately became clear that the bonds issued by Lehman Brothers were very actively bought by American mutual funds... The very ones that created a gigantic, $ 3.4 trillion, market for short-term loans in the country, which replenished their working capital, including for current, everyday needs, tens of thousands of companies in all sectors of the American economy. It was then that the general contours of the real scale of the crisis began to emerge.
To begin with, the authorities had to announce the rescue of the country's largest insurance company the very next day, September 16, American International Group, which also suffered huge losses associated with operations in the derivatives market.
“She, in particular, offered her clients risky deals with mutual insurance against default on loans,” noted two years later in an interview with RS, an employee of the research Center for American Progress in Washington Patrick Garofalo... “And so it turned out that she wouldn't even have enough money if she suddenly really had to pay.”
But AIG has insurance policies for thousands of companies and tens of millions of Americans for many hundreds of billions of dollars. And in order to preserve them, the authorities provide the company with a total of $ 182 billion, having received, as partial compensation, the rights to 80% of its shares.
The next day, September 17, the shareholders of American mutual funds immediately withdrew $ 169 billion from them - America has not seen such "storms" of financial companies since the Great Depression of the 30s of the last century.
Moreover, explains Mikhail Bernshtam, these companies suddenly stopped lending money to each other, fearing massive bankruptcies: "As a result, the entire US credit market" froze ", and the entire financial system of the country was actually under the threat of collapse."
The financial authorities had a difficult choice to make, continues Professor Bernshtam. Either, as during the Great Depression, for some time to close financial institutions altogether, thereby blocking any attempts by depositors or creditors to get their money in them, or to extend state guarantees on deposits in commercial banks and on deposits in other financial structures.
“We chose the latter. On September 19, the US Treasury Department announced that it fully guarantees the investments of mutual fund depositors in any eventuality. Only after that did the American financial system begin to revive. "
We understood that the collapse of Lehman Brothers could turn into a disaster, so we tried to sell it, but unsuccessfully, the head of the Federal Reserve System said a year later to the Crisis Investigation Commission. Ben Bernanke.
And then US Treasury Secretary Henry Paulson, in an interview with The Wall Street Journal on the eve of the five-year crisis, admits that if the government already had the powers that Congress gave it in 2010, it would rather take control of Lehman Brothers than give it will go bankrupt. "It might be against the rules, but in the end it would be better."
The bankruptcy of the investment bank Lehman Brothers in September 2008 marked the beginning of the most acute phase of the global financial crisis. One of the former vice presidents of the bank Laurence McDonald with Patrick Robinson wrote the book The Colossal Collapse of Common Sense, in which he described how the mistakes accumulated over the years, leading to Lehman's death. Forbes publishes a magazine version of one of the chapters the book, which is published by the publishing house "Alpina Business Books".
… The last resort was to sell Lehman Brothers entirely to some major bank. But there was one obstacle - Dick Fuld remained the CEO of Lehman, and it was possible to act over his head in almost everything, except for the question of selling the corporation. The Korean Development Bank (KBR) offered to buy Lehman three times, the last offer was $ 6.4 billion per share, that is, $ 4.4 billion for the entire corporation. Fuld rejected it, he only agreed to sell at $ 17.4 per share. The negotiations died out. And since Treasury Secretary Hank Paulson was very skeptical of Fuld, Lehman was left to his fate.
With the disappearance of the Korean buyer, Lehman stock plunged below $ 10. Thousands of employees - owners of limited-stock shares issued in the form of bonuses - watched helplessly as their savings dwindled.
Monday, September 1 was Labor Day, and by the next weekend, the two largest mortgage banks in the world, Fannie Mae and Freddie Mac, nearly went bankrupt (Paulson and Federal Reserve Chairman Ben Bernanke turned green with horror), and on Sunday, September 7, Paulson nationalized them. ... The management was fired, 80% of the shares went to the state, and the government guaranteed each corporation $ 100 billion - if necessary. It was a shock for the entire economy of the country.
The blows rained down one after another. On Tuesday, September 9, Stephen Black, one of the heads of investment banking at JPMorgan Chase, in a conversation with Ful and Lehman CFO Ian Lowit, demanded additional collateral in the amount of $ 5 billion, and he wanted to get it in money. Otherwise, the line of credit for Lehman would have been closed. And then, on September 10, Lehman's accounts would have been frozen, which means that there would be no money for everyday expenses - salaries, utility bills, etc. Lehman had no access to the market for bills of exchange and one-day repo for a long time.
The CEO of JPMorgan Chase was 52-year-old Jamie Dimon, the son of a Greek immigrant, Harvard graduate and one of the world's greatest financiers, founder of Citigroup and former CEO of BankOne. There is a legend on Wall Street that in October 2006, he called from the Rwandan jungle, where he was choosing a place for a coffee plantation, and ordered to immediately get rid of all high-risk mortgages, "because this stuff can go to dust."
Lehman's prospects have been haunted by Daimon for several weeks, and his sonar continuously beeps like a mine detector stumbling upon a buried tank. Back in July, Daimon's Risk Management Department demanded additional collateral from Lehman Brothers. Collateral for $ 5 billion came in August alone, and in the form of structured securities, which JPMorgan Chase valued at much less than $ 5 billion. Lehman continued to pledge that he was about to raise additional capital, and Dimon may have believed it.
On September 4, it became clear that Lehman had never found the money, and JPMorgan Chase again asked for $ 5 billion, but only in money, because the first tranche of securities had time to depreciate and cost no more than a billion. No funds were received. So when Daimon's bank once again demanded $ 5 billion on September 9, it did not come as a surprise to Lehman. Fuld offered to set aside $ 3 billion, which further alarmed his creditors. After that, Daimon learned that the next day Lehman was going to announce losses and Fuld himself would be holding the teleconference. The news spread instantly across Wall Street. Some believed that a preemptive quarterly statement of losses would defuse the situation and, combined with promises of billions in profits in the future, would put the company out of harm's way. But Daimon was horrified. Hiring a colleague from Citigroup to support him, he asked for an emergency meeting with Lehman board member Mike Gelband, who was in charge of capital markets. They tried to convince Mike that there was no need to announce losses in advance, because in the absence of additional capital, this would only unnecessarily alarm the market.
Lehman representatives objected that Fuld intends to sell the investment management division of Neuberger Berman and receive $ 8 billion for it. Daimon's people replied that no one will give more than $ 3 billion for Berman, and Lehman needs at least $ 4 billion.
The next morning, at exactly seven in the morning, in the fourth floor conference room, 80 Lehman patriots gathered to discuss the company's future. Richard Fuld's speech to improve the fate of Lehman was several hours away. The congregation listened tensely to Managing Director Tom Humphrey and new Head of Fixed Income Instruments Eric Felder as they briefly outlined a rescue plan built around a structure to relocate our terrifying commercial real estate portfolio. Supposedly, when Lehman transfers its ruinous commercial real estate obligations to the new company, with one stroke of the pen he will remove them from his balance sheet, and then the bank's shares will rise again to $ 20.
A grave silence reigned in the hall. Suddenly, a voice filled with anger and irritation rang through her. In the middle of the room, Mo Grimey, the head of Emerging Markets Trading with more than 150 people, stood up and almost shouted.
"That is, as? Mo barked. - Is it just this nonsense? What the hell have these board idiots been doing for the last two months? What, I'm asking you? Don't fool me. If we have nothing else, we are finished. "
A complete mess began in the hall: screams, waving hands, angry faces. But the most ferocious was the face of Mo, and he, straining, yelled. “We fucking just shifted the dollar from the right pocket to the left,” he yelled. - And the debts, as they were, and remain, and we will fly into the pipe before we have time to blink an eye. What nonsense? The market will immediately understand what's what ”.
The trick was that it was not possible to remove commercial real estate from the balance sheet until January, that is, in four months, and Lehman needed a buyer for the entire corporation in the next three days. That was how Mo got turned on: it couldn't work.
As the dumbfounded conference call participants digested the news that the bank had lost $ 3.9 billion in the third quarter, Dick Fuld took the floor to share how the situation could be handled wonderfully.
He spoke confidently, but without any pomp. The readiness to act was evident, but at the same time, there was no fighting enthusiasm in Fuld's behavior that once distinguished the old fighter. He announced "a drastic reduction in our commercial and residential real estate assets." About “significant risk reduction”. And about "strengthening areas related to the provision of services to clients." "This," Fuld said, "will enable the firm to restore profitability and strengthen our ability to generate risk-based returns from assets." The blame for the confusion among Lehman's customers, partners and employees, he blamed on the regulatory authorities with their excessive meticulousness.
Negotiations to raise additional capital have come to an end, and dividends have been cut to $ 0.05 per share, Fuld said, noting in passing that Lehman owes $ 660 billion. Those who listened to Fuld were reminded of the assertion that the value of Lehman's gigantic real estate portfolio suffered. only slightly. In the leading circles of the company believed that this could not be, and Daimon did not believe it. Lehman's main creditor was now far from certain that Fuld would be able to survive.
Just as Fuld was making his speech, on the New York Stock Exchange, our quotes fell to a ten-year low of just $ 7 per share. Fuld's speech did not help, and the news that the bank had lost $ 6.7 billion in six months made such a depressing impression that the harm from Fuld's outspokenness became obvious.
The next day, Thursday, Sept. 11, JPMorgan Chase discovered that Lehman had still failed to provide the required $ 5 billion collateral. Dimon, which six months earlier had arranged emergency financial injections at the Fed's request to investment bank Bear Stearns, had ordered Lehman's credit lines cut off. But Fuld, pressing on all the levers at his disposal, including pulling $ 2 billion from the London office, by the end of Friday managed to collect the required amount - this time it required $ 8 billion.
While Fuld was preoccupied with fundraising, several managing directors were preparing a merger with Bank of America. But nothing came of it. In fact, BofA dreamed of Merrill Lynch, which had more debt than Lehman, but also had 16,000 retail brokers with 3 million retail brokerage accounts. Accounts of retirees, whose total assets exceeded a trillion dollars, were especially profitable. As a result, Bank of America refused the deal, citing the fact that federal aid could not be counted on.
Three minutes after news of the failure of the Bank of America deal reached the Lehman office, a spirit of rebellion seized the bank and hundreds of people demanded Fuld's immediate resignation. The thirty-meter south wall on the third floor turned into a giant billboard that ridiculed and insulted Fuld and all those responsible for the death of the great bank. There was a huge photo of Dick and ex-Lehman President Joe Gregory in tuxedos, shoulder to shoulder, with the caption "Dumb and Dumber." Hank Paulson was painted on top of Dick Fuld's head, and the caption read: "We have reached full understanding with the Treasury."
The last chance remained - the British bank Barclays. However, he behaved like a shameless huckster: he wanted to get everything reliable, but he refused dubious assets worth $ 50 billion.
It was already known that Bank of America was out of the game, and the Treasury Department was not going to help us. Journalists began to swarm around us, like sharks around a sinking ship. In front of the Lehman Building on Seventh Avenue, TV crews lined up with spotlights, cameras and microphones, reporters scouring for interviews and photographers eager to film someone crying or speechless.
The evening turned out to be lively, and by one in the morning I had time to speak with a hundred people. Even the cell phone battery is dead. On Saturday morning, two Lehman managing directors Alex Kirk and Bart McDale, accompanied by Lehman General Counsel Jim Siri, traveled to the Fed's New York office. Shortly before noon, Christina Daly, who was in charge of problem bond analysis at Lehman, called: “It's over. They are filing for bankruptcy. "
Meanwhile, Lehman negotiators were still fighting in the Fed's concrete fortress on Liberty Street. But Hank Paulson, apparently, has long ago decided to surrender Lehman. He had been smart enough to save Bear Stearns, but he was unwilling to help Bank of America, which was trying to take over Lehman, and now was not going to help Barclays. The British still seemed to want a piece of Lehman, and on Saturday morning they still argued that the deal was possible if only they got the approval of the financial services department, the British supervisor.
Fuld called Paulson every couple of hours. The Treasury Secretary, who thought Lehman was in trouble himself and had to leave the stage, was personally uncomfortable with Fuld, but Paulson still feared that the crash could be a prelude to a global banking crisis. Hank pulled aside John Thane, his old friend and colleague at Goldman Sachs and now the CEO of Merrill, and gave him a harsh drag. Thane then called Ken Lewis, the CEO of Bank of America, and offered to meet. It seems that everyone, unknowingly, was playing out the same scenario that BofA had done a few months earlier when BofA rescued Countrywide, and now, in the service of someone else's interests, he was leading down the aisle of Merrill.
This did not improve Lehman's position. Lehman negotiators were everywhere, discussing the situation with bankers and lawyers. Even Mark Walsh, Lehman's commercial real estate portfolio manager, was called in to help Barclays assess the country's largest portfolio. Barclays employees interrogated Bart and Alex with passion. One of the main conclusions was: “Lehman was absolutely crazy about his assets - what was he thinking there, this Fuld of yours? Well, guys, he and Gregory. "
By mid-Saturday, Barclays decided they needed Lehman commercial property the last thing in the world. Now Fuld could only call Lewis' home every five minutes, driving his family mad. If it wasn't the longest day in Lehman's history, it certainly was the longest day in the lives of Ken and Donna Lewis.
By Saturday evening, CNBC was already talking openly about Lehman's death. On Sunday morning, the streets around Lehman's headquarters were packed with reporters and television broadcasters. Police cordoned off the sidewalk to give way to hundreds of bank employees who flocked to the office. I watched as my talented and hardworking colleagues began to appear from the door one by one with boxes and bags in their hands.
I saw Jeremiah Stafford surrounded by reporters. One of the strongest and fastest traders on Wall Street, who was awaited by the highest positions in this world, now stood among the journalists in a red baseball cap, holding a box of personal belongings under his arm. Even across the road, one could see how he was holding back tears, explaining to the reporter that everyone was expecting a similar ending and, of course, he and his colleagues feel guilty about what is happening. As he left, he said, "It was a great honor to work here."
People walked and walked, driven by fears that if Lehman went bankrupt, the authorities could seize the building and block the entrance. But the formal bankruptcy procedure had not yet begun, and although some still hoped for a favorable outcome, the majority understood that it was all over. Why else would hundreds of journalists occupy the entrance to 745 Seventh Avenue?
No one knew, or could have known, of course, that around 9:30 am this morning, a last ray of hope flashed in one of the wood-paneled conference rooms of the Fed building. Paulson and Timothy Geithner, chief executive of the Federal Reserve Bank of New York, brought together executives from leading banks and persuaded them to fund a $ 40 billion Lehman commercial property acquisition. This is exactly what the people of Barclays dreamed of, so the deal was possible again.
Bart and Alex, like everyone else, have been at the Fed building since six in the morning. Mike Gelband sat in the office of Simpson, Thatcher and Bartlett, Lehman's legal advisor, and discussed legal and financial auditing issues. At about ten, Bart told Mike that Barclays was making an offer to the firm.
Mike breathed a sigh of relief. But twenty minutes later everything became uncertain again. A new letter came from Bart: there was a problem. More precisely, two. First, the UK Financial Services Authority refused to approve the deal because it did not want to burden UK finances with American difficulties. Paulson personally tried to convince London, but to no avail. Someone suggested that the British would agree if the US Treasury Department took some of the risk, but Paulson said no.
An even more pressing issue was the approval of Barclays shareholders. There was no way Hank could have allowed British shareholders to turn down Treasury guarantees. It was necessary to agree on all this before the end of the day. After all, the bank did not have the money to start working on Monday - loans were needed, and Daimon did not agree to continue lending to Lehman. The most powerful bankers in the United States froze with two intractable problems, while Barclays backed down.
On Saturday night and Sunday night, I had a lengthy conversation with credit derivatives analyst Pete Hammack. He, as always, came to the logical conclusion that Paulson would have to save Lehman Brothers anyway. Otherwise, the financial world will face a real disaster. It all comes down to credit default swaps, Pete reasoned. - They are written out for $ 72 trillion, and they are held by seventeen banks, and only Lehman has them for $ 7 trillion. Lehman is one of the major brokers - what will happen to the rest if Hank lets us drown? Armageddon, not otherwise. " But that's not all. “If a hundred hedge funds have brokerage accounts with Lehman Brothers,” he continued, “and each has $ 500 million, there will be a $ 50 billion sale in shares. And such a sale would cause a tsunami. And even worse, all of these hedge funds operate with five or ten times the leverage. This means that there will be a $ 500 billion sale in stocks, bonds, derivatives and everything else. This will be megatsunami. Hank simply has no choice: a catastrophe must be averted. " No other market today has seen a sale of this magnitude.
Managing Director Larry McCarthy and I did not share Pete's views. "We're finished," Larry said with his characteristic cynicism, "because Hank and his people have seen the books." Personally, I thought Paulson was going to fight in defense of capitalism and leave the markets to finish the job. The only problem was that no one would survive.
At about 8 pm Sunday, Lehman negotiators returned from the Fed building and climbed to the 31st floor. Bart McDale walked straight into Fuld's crowded office and announced that there would be no rescue operation, that it was all over, and that Lehman Brothers had been ordered to file for bankruptcy.
Our CEO was stunned. It was facing a $ 660 billion bankruptcy, the largest in world history. Although everyone was already almost resigned to the fact that the federal authorities did not care whether Lehman died or survived, it was decided to make another attempt - to call Geithner, head of the Federal Reserve Bank of New York, directly.
Fuld's legal adviser, Tom Rasso, dialed, and fifteen board members watched silently. It was 8:20 pm. Geithner himself was not found, but his deputy was found. The most dramatic bankruptcy in the history of US finance was looming, and no one could find Geithner. They called him, left messages on answering machines.
But Tom seemed to have gone underground. Perhaps it was an accident, but it was not possible to shake off the gloomy thought that this was how it was intended.
Then they decided to play the last card. A delicate decision, but there was no other way out. One of the board members was investment banker George Walker IV, an Ivy League graduate with a degree from the Wharton School of Business. He was the fifth cousin of the President of the United States, George W. Bush - they had a common great-great-grandfather. The thirty-nine-year-old Walker, no worse than others, understood the severity of the situation and the prospects - the collapse of a career, the loss of personal fortune. It was to him that Gelband asked to call the president, let a relative interfere.
Walker sweated to the skin at the thought of calling the White House.
Not sure if that's right, ”he said.
But Gelband had nothing to lose. He took George aside and said frankly that if he didn’t call, "the world markets would shut down."
George turned pale.
I'm not ordering you, ”Mike insisted. - I have no right to do this. I'm on my knees before you, George. Please call him, please. This is our last chance.
Mike is joined by Eric Felder, Head of Fixed Income Instruments:
A global catastrophe awaits us, George. They don't know what they are doing. I support Mike, I beg you.
A stunned Walker strode across the room, glared at Dick Fuld, who was on the phone, and then went to the library and dialed the number of the President of the United States. Mike heard him ask to be connected to the President's apartment. It was clear that the operator was trying for a family member, but something didn’t add up, and finally the phone rang out:
I'm sorry, Mr. Walker. The President can't answer the phone right now.
Walker did the best he could. And now everyone had gathered for the last time around Dick Fuld's table. Famed lawyer Harvey Miller, along with colleagues from Weil Gotshal, has already arrived and prepared the necessary bankruptcy filings. At about two o'clock in the morning, the bankruptcy petition was filed. So on Monday 15 September 2008, a 158-year-old investment bank died. It was the largest bankruptcy in human history.
bankruptcy, assets in North America bought by Barclays, assets in Europe, Middle East and Asia-Pacific were bought by Nomura Holdings
USA USA: New York
Investment services
Financial services, investment banking, investment management
Deputy Head of the National Bank of Ukraine, Doctor of Economics A. Savchenko noted that “Lehman Brothers ... was the strongest player in the credit default swap market. Having lost insurance on their investments, American investors hastily began to close positions in emerging markets and go into the dollar. "
The Lehman Brothers story formed the basis for the films Risk Limit (2011) and The Selling Game (2015).
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Excerpt from Lehman Brothers
“Women,” Pierre said in a low, barely audible voice. The Mason did not move or speak for long after this answer. Finally he moved over to Pierre, took the handkerchief that was lying on the table and again blindfolded him.- For the last time I tell you: turn all your attention to yourself, put chains on your feelings and look for bliss not in passions, but in your heart. The source of bliss is not outside, but inside us ...
Pierre already felt this refreshing source of bliss in himself, which now filled his soul with joy and tenderness.
Soon after that, it was not the former rhetorician who came to the dark temple for Pierre, but the guarantor Villarsky, whom he recognized by his voice. To new questions about the firmness of his intention, Pierre replied: "Yes, yes, I agree," and with a radiant childish smile, with an open, fat chest, unevenly and timidly striding with one barefoot and one shod foot, he walked forward with Villarsky put on his naked chest with a sword. From the room he was led down the corridors, turning back and forth, and finally led to the door of the box. Villarski coughed, they answered him with the Masonic knocks of hammers, the door opened in front of them. Someone's bass voice (Pierre's eyes were still blindfolded) asked him questions about who he was, where, when he was born? and so on. Then they again took him somewhere, without unbinding his eyes, and while walking he was told allegories about the labors of his journey, about sacred friendship, about the eternal Builder of the world, about the courage with which he must endure labors and dangers ... During this trip, Pierre noticed that he was called sometimes seeking, now suffering, now demanding, and at the same time they knocked differently with hammers and swords. While being led to some subject, he noticed that there was confusion and confusion between his leaders. He heard how the surrounding people argued among themselves in a whisper, and how one insisted that he be led over some kind of carpet. After that, they took his right hand, put it on something, and with the left ordered him to put a compass to his left breast, and made him, repeating the words that the other read, read the oath of fidelity to the laws of the order. Then they put out the candles, lit alcohol, as Pierre heard from the smell, and they said that he would see a small light. The bandage was removed from him, and Pierre, as in a dream, saw, in the weak light of the spirit fire, several people who, wearing the same aprons as the rhetorician, stood opposite him and held swords pointed at his chest. A man in a white, bloody shirt stood between them. Seeing this, Pierre moved forward with his chest on the swords, wanting them to sink into him. But the swords pulled away from him and immediately put the bandage on him again. “Now you saw a small light,” a voice told him. Then they lit the candles again, said that he needed to see the full light, and again they took off the bandage and more than ten voices suddenly said: sic transit gloria mundi. [this is how worldly glory passes.]
Pierre gradually began to come to his senses and look around the room where he was and the people in it. Around a long table covered in black sat about twelve people, all wearing the same robes as those he had seen before. Pierre knew some of them from Petersburg society. An unfamiliar young man sat in the chair, wearing a special cross around his neck. On the right hand sat an Italian abbot whom Pierre had seen two years ago at Anna Pavlovna's. There was also a very important dignitary and a Swiss tutor who had previously lived with the Kuragins. Everyone was solemnly silent, listening to the words of the chairman, who was holding a hammer in his hand. A burning star was embedded in the wall; on one side of the table there was a small carpet with various images, on the other there was something like an altar with the Gospel and a skull. Around the table were 7 large, church-like, candlesticks. Two of the brothers brought Pierre to the altar, put his feet in a rectangular position and ordered him to lie down, saying that he was throwing himself towards the gates of the temple.
The reasons for the bankruptcy of Lehman Brothers, which became a catalyst for the spread of the financial crisis outside the United States, provoking, among other things, a collapse in the Russian market. According to the event report, the main reasons for the collapse of the American investment bank were the attempts of the Lehman Brothers management to hide the presence of a number of assets, as well as the actions of J.P.'s competitors. Morgan Chase and Citigroup, which required disproportionate collateral for their loans.
One of the most important reasons that led to the collapse of Lehman Brothers is "accounting gimmicks," according to the 2,200-page Lehman Brothers bankruptcy report. The bank went to this in order to improve its financial performance and maintain a high rating, concludes an expert investigating the circumstances of the collapse of Lehman Brothers Anton Valukas, who prepared a report on behalf of the US bankruptcy commission.
Lehman Brothers actively used the mechanism, which the bank received the name "repo 105". Its essence is that shortly before the end of the quarter, Lehman Brothers transferred part of the distressed assets to its London division, Lehman Brothers International. This division entered into an agreement to sell the assets to a third party, pledging to buy them back in the near future at a slightly higher price. At the same time, securities with a real value, for example, $ 105 were sold for $ 100 (hence the name). This allowed the bank to conduct such a transaction according to its reporting not as a standard repo (raising borrowed funds secured by securities with the obligation of further repurchase), but as a sale of assets, which did not require keeping the assets involved in the transaction on the bank's balance sheet. This allowed the bank to artificially reduce the amount of debt in its reports. At the beginning of the next quarter, Lehman Brothers bought these assets back using credit funds. Seven non-US banks, including Germany's Deutsche Bank, Britain's Barclays and Japan's Mitsubishi UFJ Financial Group, were involved in these deals.
The scheme has been used in the bank since 2001. Anton Valoukas' report cites Lehman Brothers COO Bart McDead as calling "repo 105" a "drug." According to investigators, with the help of this trick, the bank managed to hide the existence of assets worth $ 50 billion in the reporting for the first and second quarters of 2008.
Anton Valukas notes that charges of negligence and dereliction of duty may be brought against former Lehman Brothers CEO Dick Fuld and CFOs Chris O "Miara, Erin Kalan and Ian Lovitt. In his report, Anton Valukas notes that the lawsuit may be filed and the auditing firm Ernst & Young, which, as the auditor for Lehman Brothers in the UK, "took no action."
Lawyers for former US bank executives say their clients "did not know what the deal was," as well as "what impact they had on financial statements."
In his report, Anton Valukas noted that competitors of Lehman Brothers who were its creditors - in particular J.P. Morgan Chase and Citigroup. Both banks demanded excessive collateral from Lehman Brothers for their loans and changed the terms of guarantee agreements at the very time when the bank was most in need of credit resources. For example, according to some experts, for loans provided by Lehman Brothers from J.P. Morgan, collateral was requested that was $ 6.1 billion in excess of the cost of the loans. This was the situation on September 12, three days before Lehman Brothers filed for bankruptcy, which subsequently provoked a collapse in the global financial market. "The claims ... of Lehman's lenders had a direct impact on Lehman's liquidity ... The question of Lehman's available liquidity is central to understanding what caused the crash," the report said. J.P. Morgan Chase declined to comment, and a Citigroup spokesman said the report did not identify any specific violations by Citigroup.
Lehman Brothers Bank specialized in investments. In this area, he was one of the world leaders.
However, the enterprising German émigré brothers Lehmann: Henry, Emmanuel and Mayer, did not plan to engage in banking activities.
Their company (essentially a large store, warehouse) traded in agricultural products, primarily cotton.
Moreover, the population had little cash, so they often had to engage in natural exchange. And since the turnover was very significant, the company began to resemble a stock exchange.
The civil war forced the brothers to leave the loser south and seek success in New York.
And here, they tried to help the starving south: organized the first public fundraising for the development of the region: secured the issue of bonds of the state of Alabama. It was 1867 and is considered to be the founding date of the investment bank Lehman Brothers. However, in the future, Lehman Brothers continued the cotton trade, taking advantage of their old connections in the south and the new influence that appeared in the north.
NB: the history of this family shows that they not only cared about their own enrichment, but also tried to help society at various difficult times for the country (albeit not without their own benefit).
The Lehman brothers had an innate flair for lucrative projects, they made successful deals in the coffee and oil markets, financed the issuance of securities of start-up companies, which brought them considerable profits.
The bank invested money in projects that others refused, and almost always won. Enterprises such as Woolworth, Macy’s and Sears, which developed on the investment of Lehman Brothers, are still successful today. However, investing is always a risk.
Politics
In the early 1920s, Robert Lehman (grandson of one of the founders) joined the company. He headed Lehman Brothers from 1925 until his death in 1969. Under him, the company experienced the peak of its power.
Money was invested in the aviation industry, railways, the film industry - Paramount Pictures and 20th Century Fox, as well as companies that built oil pipelines and the development of oil fields.
At the same time, the rear of the bank was covered by Herbert Henry Lehman (the uncle of the head). He also worked in a bank, but left the family business and went into politics.
In the late 1920s, he became a close associate of Franklin Roosevelt, the future president of the United States. In 1932, when Franklin Roosevelt became president, Herbert Lehman was elected mayor of New York (this was the second attempt to take this post). Further, Herbert was re-elected 2 more times. He was later elected a member of the Senate and remained so until 1957.
Fact: In 1942, when Herbert left the post of mayor, New York's budget surplus was $ 80 million, while in 1933, when he was first elected to this position, the deficit was in excess of $ 100 million.
Lehman Brothers bankruptcy
Until the mortgage crisis that began in 2007, the capitalization and stock price of Lehman Brothers were in constant growth.
But with the collapse of the mortgage market, when the holders of the contracts presented their legal claims, it turned out that the bank had neither money nor securities to fulfill its obligations.
And back in 2006, the bank's net profit was estimated at $ 4 billion.
This is how the site lehman.com looks now - a web resource of a once prosperous bank.
Lehman Brothers Bank has seen many crises during its activity and dealt with them quite successfully. Even during the Great Depression, he managed to withstand, but the crisis of 2008 led to a bankruptcy petition, which was filed in court on September 15. It contained a request to protect the bank from creditors, since he could not find investors.
Lehman Brothers did not believe in the fall: We expect losses, but raise the estimate. Merrill Lynch report on Lehman Brothers with a buy recommendation dated June 4, 2008.
Interesting: in some crises, the bank, on the contrary, grew, so in 1977 the legendary bank Kuhn, Loeb & Co was joined to Lehman Brothers, forming Lehman Brothers, Kuhn, Loeb Inc (the name was later shortened again).
Many hoped that the bank, which had been operating for more than 150 years, would find support and assistance from the US government, however, it was decided to admit bankruptcy.
Interesting: based on the story of the fall of Lehman Brothers, the film Risk Limit was filmed:
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