If just 12 months ago you had suggested that investment giant Lehman Brothers would crash and burn in the aftermath of a credit crunch you would have received some very strange looks, but that it just what happened!
It may have been one of the best known names in the investment world, it may have paid multi-million dollar bonuses to its staff and it may have ruled Wall Street like few others but today Lehman Brothers is being broken up and sold on to the highest bidder. But how could this happen and what are the consequences for the investment arena?
Background to the Lehman Collapse
To understand the full extent of the collapse you really need some background on the group which was founded way back in 1850 and grew to become one of the best know names in investment banking. The group had reported assets of $691 billion in the 2007 accounts, reported revenues of $59 billion as well as profits of $6 billion in the same year. It had its finger in every investment pie going which included, stocks and shares, bonds, financial services and crucially real estate.
For many people Lehman Brothers was the prime example of the success of capitalism in the US and around the world. The group seemed to be growing, profits rising and staff often taking home bonuses in excess of $1 million, but life behind the scenes was starting to turn sour at the start of 2008 and the writing appeared to be on the wall. By the time the group filed for bankruptcy on the 15th September 2008 the situation was simply unrecoverable without US government assistance.
Lehman Brothers ended its tenure as an investment institution with bank debts of $613 billion, $155 billion in bond debts and assets valued at $639 billion – which were falling in value day by day. Unable to service its debts the book began to close on the final chapter of a story which is sure to return to our screens as a big Hollywood movie.
Investments in Lehman Brothers
To say that Lehman Brothers was involved in each and every investment market you could think of was not an understatement. The group had exposure to stocks, shares, sub-prime mortgages, financial services, golf courses, real estate around the world and crucially was also involved in the high risk debt restructuring end of the investment market. So what brought down an investment bank with over 150 years of experience in the investment world and assets valued at over $600 billion even at the end?
The fall of Lehman Brothers has been directly linked to the sub-prime mortgage market and the ongoing credit crunch which saw liquidity in the money markets almost disappear overnight. However, Lehman Brothers was also heavily involved in the repackaging and resale of low quality mortgage backed securities but not only did the group put these packages together for resale it also retained an exposure to billions of dollars of these high risk bonds for itself.
Once the sub-prime market began to fail and the group struggled to raise sufficient funding to cover its liabilities there began a free for all which saw the company’s massive real estate portfolio put up for sale at substantial discounts to the market value at the time (even after the recent falls!). Each and every asset the group could get its hands on was paced up for sale as the directors battled to bring the group back from brink. When it became apparent that the funding was not coming through the door as fast as it was required the group had little chance and Lehman Brothers was put up for sale.
Traditionally you would have seen investment banks and investment groups falling over themselves to get a slice of Lehman Brothers if it was ever put up for sale, but these are not traditional markets, these are difficult times and nobody was able to step forward with the financial strength to make it happen. Despite a number of requests for US government assistance it was claimed that the Bush administration had washed its hands of the group at an early stage as a lesson to the ‘greed is good’ movement which the company so reflected.
Even thought bankruptcy had been suggested a week before the group filed for protection many in the market place could not, and still cannot, believe it was happening. Then the worry set in – if it can happen to Lehman Brothers who is safe?
Impact of the Lehman Failure
The impact upon the financial markets has been enormous and there are some who suggest the US government is regretting its hardcore stance on a rescue. We are seeing literally hundreds of billions of dollars of real estate being dumped on the US market at a substantial discount to its true value, many financial groups around the world who dealt with Lehman Brothers are licking their wounds and counting their losses and the sub-prime mortgage market has gone.
The drag on a recovery in not only the US property market, but other majors markets around the world, is sure to last for some time. While there are some great assets up for sale at massive discounts the number of potential buyers is very small and shrinking by the day. Indirectly many people connected with the Lehman Brothers sub-prime mortgage operation have had their homes repossessed as ‘tent cities’ continue to spring up right across the US.
Many people are still annoyed and surprised that the US government seems to have underestimated the impact that a fallen Lehman Brothers would have on the US property and investment markets. While it stepped in to save AIG, Fannie Mae and Freddie Mac, the rot seems to have set in when Lehman Brothers started to hit the skids. Whether it would have delayed the inevitable, if the group had been bailed out, is uncertain but what is certain is that the amount of discounted ‘giveaway’ property assets currently on the market would not have been anywhere near today’s levels.
Many people seem to have underestimated the impact of a fallen Lehman Brothers but we are all literally paying the price now.