Lehman Brothers' bankruptcy - Great Depression trends !?

[singhantra]

it is going to be the next big depression period after 1930. its impact is seen throughout the world and in emerging countries like India and China. the downturn has shown pink slips to many of its employees in India leaving them jobless. it is also very sad on part of IIts and IIms as lehman brothers are considered to be their top recruiters and the downturn is surely going to affect them.
it is an outcome of negligence of the bank as they were so weak when they granted loan to their clients.
they can overcome this if they try to talk to insurance companies and propose them an idea to give insurance to the clients to pay the interest to the bankers and charge them interest on the credit which they are liable to pay to the bank. as well as give them insurance. the clients will find it beneficial and it would turn out to be a good tool to cope up such crisis.

[kartik]

At Welingkars we got a company offer a 3 lakh package CTC for equity research profile.
That means an MBA in Finance may have to go for a pay of around 20-25k per month.

Is it signs of depression in India ?

[Inlinebusiness]

It is going to impact the IT sector very badly and It is yet to be seen how many people are going to loose job in IT.

[anteshk]

good points .It seems clear that a category five storm is making landfall in the US financial system and a lot of very messy stuff is hitting the fan," Michael Panzer, author of the book "Financial Armageddon," said on his blog.
The Wall Street Journal warned in an editorial Monday that Americans should brace for "a very rough Monday" and called for more government actions in support of Wall Street.
Lehman said the bankruptcy was authorized by its board of directors and will take place at the US Bankruptcy Court for the Southern District of New York Monday.
The bank said in a statement it was acting "in order to protect its assets and maximize value."
"Customers of Lehman Brothers, including customers of its wholly-owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts," the statement said.
The bank lost an estimated 3.9 billion dollars (2.7 billion euros) in its fiscal third quarter amid fresh writedowns on mortgage assets.

[jaxe_u]

When Lehman Brothers Holdings Inc. (LEH) announced a third-quarter loss of $3.9 billion earlier this week, the investment bank’s shares plunged as Wall Street questioned its long-term ability to survive.

Of the five big investment banks that were in operation at the outset of this year, The Bear Stearns Cos. has already failed and been taken over and Lehman Brothers is trying to avoid a similar fate. That leaves only three members of the original group - Goldman Sachs Group Inc. (GS), Merrill Lynch & Co. Inc. (MER) and Morgan Stanley (MS) - a casualty rate as steep as the one experienced by second lieutenants on World War I’s Western Front. And that begs the question: Just where were all the risk-management experts who should have assessed the pitfalls these companies faced, and how could they have missed the massive risks that are now threatening to take this entire sector down?

The answer may be more than a minor exercise in financial irony. Lehman, the latest Wall Street investment bank forced to the brink of failure, may have put itself out on that precipice with its own risk-management strategies
Let’s take a closer look.

In its 2008 Annual Report, Lehman boasted of having “a culture of risk management at every level of the firm.” That was written at the end of last year, when the global stock and credit markets had already been in turmoil for several months. As an investor, one’s question here has to be: “If there was a culture of risk management at every level of the firm, how come you allowed the leverage ratio (total assets divided by stockholders equity) to rise from 26.2 to 1 in the tranquil bull market of 2006 to 30.7 to 1 in the troubled market of November 2007?”

Even more bothersome: There weren’t any losses that year that dinged stockholders’ equity - in fact, Lehman increased its stockholders’ equity by more than $3 billion.

Investment bankers love leverage: That’s because, the more assets you control, the more chance you have to make money from them - and the bigger the bonus you can hope for at the end of the year. However, 12 years of easy money - a run that started when then-U.S. Federal Reserve Chairman Alan Greenspan turned on the monetary spigots in March 1995 - seems to have made investment bankers greedy.

And reckless.

Yes, they had risk management, but it mostly used the “Value at Risk” system invented by JPMorgan Chase & Co. (JPM) in the early 1990s. VAR appears to have been designed to let the traders get on with the business of making real money, while at the same time keeping the top brass from worrying too much about the risks traders were taking. It makes a number of mathematical assumptions that are provably false in real life, then assesses the “99% confidence limit” of the loss that may be incurred by each trading position at most 1% of the time (this is usually done by modeling the price behavior of a particular security as a Gaussian normal curve - a “bell curve,” and then taking the point 2.36 standard deviations from the mean).


Advertise here.
One big problem with this approach to managing risk is that it doesn’t tell you what can happen the other 1% of the time, when the VAR limit is exceeded. But the top managers of the investment banks were lulled into believing that other 1% didn’t matter: After all, they came to believe, if it was only a 1% probability, how dangerous could it be? However, since VAR was calculated from daily price movements, that 1% actually was quite important.

Even if VAR is modeling monthly movements, an exceptionally conservative use of it recommended by international regulators for the Basel II bank regulating accords, 100 months is still only 8.33 years. Looking at the possibility of going bankrupt every 8.33 years and viewing that as an acceptable risk is absolutely not something that bankers should be doing.

Even if VAR is modeling monthly movements, an exceptionally conservative use of it recommended by international regulators for the Basel II bank regulating accords, 100 months is still only 8.33 years. Running the risk of going bankrupt every 8.33 years is not something bankers should be doing.

The other problem with VAR is that, in most cases, it depends on an assessment of the “volatility” of the security concerned - how much that security bounces around. However, volatility is by definition low in quiet markets and much higher in turbulent markets. Hence, the system’s assessment of risk is low when markets are quiet, allowing traders to pile on positions like madmen, and then zooms upward when things go wrong. At that point positions cannot be unwound.

As you can see, “a culture of risk management at every level” is not a great deal of use if you’re using dozy metrics like VAR to measure risk. The problem is made worse if you indulge in excessive leverage.

Traditionally, the maximum leverage for Wall Street broker-dealers was held to be 20 to 1. That level was always fudged a bit, partly by pretending that so-called “subordinated” debt was the equivalent of equity, which it obviously isn’t. So, while this 20-to-1 ratio is fine when your assets consist of commercial paper, bonds and shares that can be more-easily valued because they are more-liquid and trade every day, it is far too high when the asset mix has come to include investment real estate, private equity stakes, hedge fund positions, credit default swaps and other derivatives positions that do not even appear on the balance sheet.

Scaling up from 20 to 1 to 30 to 1 - as Lehman did - is asking for trouble.

Even if the off-balance-sheet credit default swaps (CDS) and other derivatives don’t give you trouble, and there are no assets parked in “structured investment vehicles,” or SIVs, that suddenly must be taken back onto the investment bank’s balance sheet. An institution that is levered 30 to 1 needs to see a decline of only 3.3% in the value of its assets before its capital is wiped out. In a global credit crisis such as the one we’re navigating right now, even if some of the assets are rock-solid Treasuries and such, a 3.3% decline can happen frighteningly quickly: You only need to see a 10% decline in value of a third of your assets.

If that seems reckless to you, consider this: Lehman’s leverage is not exceptional among Wall Street investment banks. According to the most recent quarterly financial statements (focusing on the balance sheet as of May or June), while Lehman’s leverage had been brought down to 23.3 times through asset sales, Morgan Stanley’s was still 30.0 times, Goldman Sachs’s 24.3 times, and Merrill Lynch’s was an astounding 44.1 times.

Far be it from me to contribute further to Wall Street’s current gloom. So do the research and come to your own conclusions

[yummy1984]

US mortgage loan crisis: A subprimer

What is a subprime loan?
In the US, borrowers are rated either as ‘prime’—indicating that they have good credit ratings based on their track record—or as ‘subprime’, meaning their track record in repaying loans has been below par. Loans given to subprime borrowers—which banks would normally be reluctant to—are categorised as subprime loans. Typically, it is the poor and young who form the bulk of subprime borrowers.
Why were the subprime loans given out?
In roughly five years leading up to 2007, many banks started giving loans to subprime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. The government also encouraged lenders to lend to subprime borrowers, arguing that this would help even the poor and young buy homes.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw subprime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.
What was the interest rate on subprime loans?
Since the risk of default on such loans was higher, the interest rate charged on subprime loans was typically about two percentage points higher than the interest on prime loans.
This, of course, only added to the risk of subprime borrowers defaulting. The repayment capacity of subprime borrowers was in any case
doubtful. The higher interest rate additionally
meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more subprime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.
How did this turn into a crisis?
The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically
the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle.
That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
How did this end up become a systemic crisis?
One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on. As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down.
Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed over half the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant they too had to suffer losses—$14 billion combined in the
last four quarters—because of declining prices
for their collateral and increased default rates. The forced retreat of these two mortgage giants from the market, of course, only adds to every other player’s woes.
What has been the impact of the crisis?
Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or $260 billion, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 billion by Asian ones.
Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.
The crisis has also seen Lehman Brothers—the fourth largest investment bank in the US—file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalised to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 billion bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.
How is the rest of the world affected by the crisis?
Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and—to a lesser extent—India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

[saad.motorwala]

The lehman episode is only the tip of the iceberg. Old man Greenspan started the whole thing way back in 2003 by bringing interests rates down to 1%. This created an artificial demand which fed the housing bubble which later spread to the wider economy. Expect more blood on Wall Street.

[hrishikesh_desai]

Hi,

Check out this attachment.... Its the Latest Update on AIG.....

If the Fed decided to help Bear Stearn and AIG then why not help Lehman???

Also Read the following article by Michael Lewis - Bloomberg

This really gives you a idea how bad the situation is in the US market.....

Lehman CEO was willing to give Buffet 33% stake and seat on the board for 5 billion dollars

AIG gave up 79.9 % stake in the company to the government for 85 billion dollars

How bad are the valuations of the companies.....

Some good news though from Goldman Sachs and Morgan Stanley ..... they both posted profits .... both were way below their last years performance but above market expectations.... thats what counts right now in this scenario.. i guess.....

For India...... It seems about 50,000 odd people from the IT and Banking space will be displaced just because of Lehman down fall.... thats a big big figure... they will start giving the pink slip from 1st Oct 2008, thats two weeks from now....

For guys who have something or anything to do with Tata AIG.......

Guys with Insuarance cover with Tata AIG will be safe ... thanks to our stringent laws.... boy thats blessing in disguise.... who ever said we need to have more liberal laws must be eating his words...

But for the guys who have any stake in the AIG's 54 Mutual Fund products, Rs 3400 cr. Asset under management, may find it risky as many of the key professional who manage the funds may decide to move on due to the global financial crisis of the parent company....

The future is truly unpredictable now....

[amey2dalvi]

Its a really bad news 4 all those who r working in LB

[krishi_b]

hi all
well ithink the cycle of ups and down wrt india was to take a plunge & it did with first crude then inflation and now when all these have settled then the fin crisis of us,
gr8 tome to pick value stocks.
rem ur near ones r selling & its the time to start buying with average policy