Lehman Bankruptcy

In follow up with my article on Lehman Brothers as Second Bear Stearns?, certainly it was not. Bear Stearns was absorbed by JP Morgan while Lehman went to file the biggest Chapter 11 Bankruptcy in the history.

People were shocked yesterday as the 4th biggest securities firm declared the biggest Chapter 11 Bankruptcy listing $613 Billion of Debt, of which $157.97 Billion are unsecured debts. They listed Citibank N.A. as the largest unsecured creditor with $138 Billion of debts. This was followed by The Bank of New York Mellon Corp. listing $17 Billion, AOZORA with $463 Million and Mizuho Corporate Bank Ltd. with $382 Million.


Most of their unsecured creditors are big banks particularly located in Japan, China, Taiwan and Australia.

How Did Lehman Fail?

• For most of 2008, Lehman Brothers operated in an extremely unfavorable global business environment. Conditions were characterized by a continued lack of liquidity in the credit markets, significantly depressed volumes in most equity markets, a widening in certain fixed income credit spreads compared to the end of 2007, and declining asset values.
  


• These hardships were compounded by slowed growth in major economies as a result of declining business and consumer confidence. Global inflation rose amid slowing economic growth. As a result, commodity prices rose significantly during the quarter raising costs on industrial production. Consumer spending was challenged by a combination of lower wealth from declining housing values, higher commodity prices impacting disposable income and falling private sector employment growth.
  


• Ultimately, the onset of instability in the financial and credit markets over the past several months created significantly liquidity problems. Despite infusions of liquidity by central banks into the financial system, broad asset classes, particularly domestic subprime residential mortgages and structured credit products, remained thinly traded throughout this period.
  


• The company purchases many of its assets using secured credit obtained under tri-party repurchase agreements. When the market value of these pledged assets began to deviate from the pledged value of those assets, secured lender imposed "haircuts" or discounts on the company. This deviation, in turn, also has an adverse impact on borrowing availability. The reduced availability forced the company to draw down on its liquidity pool in order to execute transactions. With diminished cash to fund transactions, major credit rating agencies put the company's credit ratings on negative watch with potential for multiple downgrades.
  


• All these factors contributed to the company's liquidity problem announcing a $3.9 Billion third quarter loss, the largest loss in its 158-year history. This in turn resulted to the dry up of the company's equity losing more than 90% of its value when investors dumped their stocks aggravated by the time when takeover talks with Bank of America and Barclays PLC ended.
  

What's Next?

• As of now, all eyes are on American Insurance Group, the biggest insurer, with their stock plunging down 61 percent closing at $4.76.
  
• Another company on the look out is Washington Mutual. It retreated to 27% to $2, the lowest price since October 1990. After the trading, credit rating agency Standard & Poor lowered its rating to junk due to the deteriorating housing market.