Why Lehman went bust & what it means for you
Lehman Brothers is no more. Merrill Lynch has gone down the Bank of America maw. AIG too could go belly up. With a doubt, these developments in America are the most shocking events to have hit global financial markets. So where did it all begin? And what does it mean for the Indian stock markets? Find out. . .
What is (or was) Lehman Brothers?
America's fourth-largest investment bank Lehman Brothers Holdings Inc has filed the biggest bankruptcy petition known to mankind.
The 158-year-old firm was founded by brothers Henry, Emanuel and Mayer Lehman, Jewish immigrants to the US from Germany, in 1850. Henry set up a general store in Alabama in 1844 and was later joined by his brothers. In 1850 they set up the merchant bank in New York after having made money in railway bonds. So what went wrong?
Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many an economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse of Long-Term Capital Management in the 1990s.
Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged after Lehman filed a Chapter 11 petition with US Bankruptcy Court in Manhattan.
The $613 billion (some estimates put the size at $639 billion) bankruptcy thus throws up the question: why did the Wall Street giant go bust? Here's why. . .
Why did Lehman Brothers go bankrupt?
The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices.
The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.
However, the fall of the 158-year-year institution that started cotton trade in US before the American Civil War and financed the railroad that built a nation, got hit by a large dose of bad luck, pride, arrogance and greed. Primarily, the pride of its chief executive office Richard Fuld.
But there were more reason. Check out what they were. . .
For full details:Why Lehman went bust & what it means for you
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Lehman falls, Merrill sold, AIG tottering. What next?
series of events in United States, including Bank of America agreeing to buy Merrill Lynch for $44 billion and Lehman Brothers' move to file a bankruptcy protection, has shaken up the global financial markets.
About 10 major banks, comprising Citigroup and Credit Suisse Group, reached an agreement to create a $70 billion borrowing facility committing their own money, which could be used to tide over the financial crisis.
Lehman Brothers thought of bankruptcy after it failed to find a buyer and financial media reports said that AIG could survive for only a few days without infusion of the capital.
The giants of financial markets have been shaken up by losses of hundreds of billions of dollars in bad mortgages in the housing markets.
Lehman Brothers began considering bankruptcy after Barclays and Bank of America, the top suitors, walked away apparently following Federal authorities declining to provide financial backup to them, declaring bankruptcy would allow Lehman's subsidiaries to continue to function as the company itself is wound down.
"The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence," the New York Times said.
Though the Federal Reserve steered clear of bailout of Lehman, the Wall Street Journal said it is expected to take new steps to stabilise the broader financial system.
These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral.
Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman.
Merrill has some 60,000 employees and Lehman 25,000. It was not clear how the moves would affect them. AIG executives were reported to be trying to raise funds by selling assets or infusion of capital from private equity firms.
But late Sunday night, the New York Times reported quoting a person briefed on the matter that the insurance giant was seeking a $40 billion bridge loan from the Federal Reserve as a potential downgrade of its credit rating could spell doom.
Ratings agencies threatened to downgrade the insurance giant's credit rating by Monday morning, allowing counter-parties to withdraw capital from their contracts with the company, the paper said.
more @ http://specials.rediff.com/money/2008/sep/15slide2.htm
Source:Rediff.com
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