Sturdy investment bank Essay

When the Lehman Brothers declared their bankruptcy on 15 September 2008, the response of the concern universe was pied. Some of them were dying about the bankruptcy would do while some found it allow that the large performing artist on the fiscal market in the terminal had to confront the effects of its ain shot. The death of Lehman brothers can merely be understood within the context of the current fiscal crisis the biggest crisis of all time faced by US. As Lehman Brothers was considered one of the biggest traders in the fixed involvement trading and 4th biggest in the investing banking on the Wall Street ( BBC, 16 September 2008 ) .

Company Overview

The rise of this hardy investing bank started in 1844 and played a cherished function in the fiscal and commercial industry of United States for more than 15 decennaries? In 1844 Henry Lehman immigrated from Germany to Montgomery, Albania and set up a little dry goods store and sold food markets to the nearby husbandmans, six old ages subsequently he was joined by his two brothers Emanuel and Mayer and they subsequently on named it Lehman Brothers. Soon after its establishing the Lehman Brothers evolved from trading concern to trade goods agents that trade cotton to husbandmans. In the twelvemonth 1898 Lehman Brothers underwrote its first public offering for the international steam pump company in the 1900 ‘s the house became a financer of many top retail merchants like R.H. Macy & A ; Co, Sears, Roebuck and Company etc. In twelvemonth 1906 Lehman Brothers agitate custodies with Goldman Sachs in order to convey the general cigar company to the market. In the twelvemonth 1929 Lehman Corporation was created which was a closed terminal investing company. In the twelvemonth 1975 Lehman brothers acquired Abraham & A ; carbon monoxides and two old ages subsequently in 1977 merged with Kuhn, Loeb & A ; carbon monoxide to organize Lehman Brothers Kuhn Loeb Inc. Later on in the twelvemonth 1984 American Express acquired Lehman Brothers and merged it with Shearson but in 1994 Lehman Brothers became independent through public stock offerings and Lehman Brothers Holding Inc. In 2003 Lehman acquired Neuberger Berman for $ 2.6 billion and late in 2007 Lehman Brothers recorded high grosss and income for the 4th back-to-back twelvemonth and the highest volume of trade on the London stock Exchange ( Deal Book, 1928 Bakers library ) .

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SWOT Analysis of Lehman Brothers

The Lehman Brothers provide a scope of equity and fixed income services and apart from that they were a elephantine in investing banking services and underwriting services and therefore serves the fiscal demands of assorted client sections. They operate in really big magnitude and because of its big scale operations ; they were able to hold a deeper visibleness, client callback and enhanced market incursion. However because of the hapless public presentation of residential mortgage inception and securitization concern might necessitate to reconstitute its concern portfolio.


Grosss Coming From Diversified Operationss:

On the London Stock Exchange the equity volume market portion of the company increased to 14.5 % whereas on the New York stock exchange reached 6.2 % in the first half of 2007 as comparison to 13.2 % and 5.7 % severally in 2006. Lehman brothers had broad operations spread across Europe. In 2007 Lehman brothers American operations contributed 51 % of the entire grosss Europe and Middle East accounted for32.7 % and grosss from operations in Asia Pacific were 16.3 % . The grosss from American operations decreased 12.7 % whereas grosss from Europe and Middle East increased to 38.8 % and73.9 % from Europe and Asia Pacific operations severally.

Expertise cardinal and proficient research:

Lehman Brothers provides adept cardinal, quantitative and strategic research in the field of fixed income and equity market as a consequence of this Lehman Brother was ranked no 1 in front of Bear Sterns and Citigroup in the institutional investors US equity research canvass of 2007. Equity research of Lehman Brothers is spread in 1500 companies and over 100 sectors.


Legal Issues:

The ailment was filed against Lehman Brothers on behalf of those clients who paid certain sum of minimal adoption rate fees to agent traders in connexion with borrowing securities besides in June 2006 40 stockholders of Nova star financials filed an allegation against Lehman brothers that its agent traders were involved in illegal stock market use. As a consequence of all these legal issues and allegations Lehman Brothers might confront immense amendss and besides an impact on their trade name image.

Heavy Investment in Subprime market:

In 2007 Lehman Brothers reportedly wrote down $ 830 million in existent plus backed securities. The fixed income cyberspace grosss of Lehman Brothers declined to $ 6.0 billion. In 2007 from $ 8.4 billion in 2006. The impairment of US residential mortgage sector besides had a inauspicious affect on Lehman Brothers existent estate investing. Lehman Brother had a portfolio of $ 5276 million in US subprime mortgage market.



The twelvemonth 2007 was really favorable twelvemonth for Lehman Brothers, in June 2007 they completed the acquisition of EAGLE ENERGY PARTNERS and in October 2007 they announced the acquisition of a Turkey based equity security securities firm house MNG securities. Lehman Brothers besides expanded its concern in different geographical locations where new growing chances were emerging.

Rapid Growth in plus direction industry:

Asset direction industry grew by 7.8 % in 2006 to stand for a compound one-year growing rate of 11.3 % for the clip period 2002-2006. The portfolio of Lehman brothers plus direction concern grew by 25.3 % in 2007 to take its plus under direction to $ 282 billion and this growing is expected to drive the sector to a value of $ 71.6 trillion by 2011

New Investment chances:

The investing Banking industry is globally profiting from the twenty-four hours by twenty-four hours increasing amalgamations and acquisitions and corporate reforms and Lehman Brothers is one of the chief participants in the investing banking sector and the expected result for 2011 are forecasted at $ 8.8billion by the terminal of 2011.

New Trading chances in Foreign exchange indices:

In grand Lehman brothers announced the foreign exchange indices ( LBFX ) which are a set of regulations that keeps a path on the public presentation of g10 currencies against US dollars. Index returns are published on the Lehman unrecorded client web site and the Lehman brothers planetary household on Bloomberg and they can be used to track the currency public presentation in entire returns.


Residential Mortgage Business Taking a Dip: Harmonizing to the information of US Mortgage Bankers Association Housing starts continuously declined continuously from 2.1 million in the first one-fourth in the twelvemonth c2006 to 1.5 million in the first one-fourth of 2007 and in return this dip affected the concern of Lehman brothers to a certain extent.


Due to the amalgamations a figure of companies had now came up with a offering of broad scope of merchandises at really competitory monetary values, this exposed Lehman brothers to completion in the fiscal markets at both the international and local degree, apart from this the of all time turning engineering and debut of e-commerce have paved a manner for non depositary establishments to offer those merchandises which were traditionally banking merchandises.

The Finance Function of Lehman Brothers

Lehman Brothers had a portfolio consisting of a bulky portion of loan connected to the buying existent estate ‘s ( Guardian, 15 September 2008 ) . Its nucleus concern includes purchasing and merchandising portions and fixed income assets, trading and research, investing banking, investing direction and private equity. Out of the different activities performed by them the nucleus concern of the planetary Lehman Brothers Group was investing banking and besides provides fiscal services to corporations, authorities institutional clients and high net worth persons. Workss of the company was structured into three classs foremost the capital market, investing banking and venture direction. These three diverse fragments comprise of concern in equity and fixed income sale, trading and research, plus direction and private direction and equity ( monetary value H2O house Coopers study, 28 October 2008 ) . Lehman Brothers was the world-wide Godhead in certain equity and fixed income merchandises and its distribution aptitude in equity and fixed income merchandises was based on client flow concern theoretical account which chiefly focus on the dealing of the client in the planetary capital markets across the universe by reding on specified demand of the client, functioning as the mediator in the market topographic point and let the client to set harmonizing to their portfolio by moving as an investment banker to them. Early on in 2007 there was the diminution in the monetary values of belongings market ( about 16 to 20 per centum ) which made the value of the belongings lesser than the loan value outstanding which was the smashing for Lehman brothers.

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The beginning of the terminal?


The main executive of Lehman Brothers Dick Fuld ran the company as if he is in a war. Despite several warnings he ignored the marks of the coming prostration. Fuld made tonss of money and made some of his stockholders and employees excellently rich. In the best eight old ages of the company he took home $ 300 million. Harmonizing to him Lehman was at war in the market, the employees were the soldiers and everyday was a conflict. Even when Merrill Lynch and ContiGroup went down Dick Fluid and his co-workers were satisfied those there cagey hedge schemes worked. In other words we can state that Dick Fluid was a bid and control CEO. Even when Lehman Brothers net incomes started coming down even so he was observing the fact that 2007 was a record twelvemonth for them. Lawrence McDonald, a former bargainer with Lehman Brothers one time said that” Other than six or seven people, no one truly knew him. In my four old ages at that place, he ne’er came down to the trading floor. Not once.” . This clearly shows the fact he was confined to himself and wanted that everyone should follow his determination word to word, he ne’er discussed his jobs with the employees, bid and control was his policy, this affected the company as there was no internal communicating within the company and as consequence he failed to foretell that Lehman is on the brink of bankruptcy. Some stairss would hold been taken if he had paid some attending towards the warnings which were issued and Lehman could hold been saved.


Because of the obstinate nature of Fuld he decided to put in the subprime markets with the premise of addition in the market by 20 % but the program backfired because of that the purchase ratio rose to 44:1 From 30.7:1 and they were wholly under a immense debt as there was a hapless hazard direction. There were no far-reaching reforms in regard of capital screen governments ; Lehman did non saved capital buffers in good times for the extroverted losingss. Subsequently on they appealed Barclays and Bank of America for aid but they merely refused.


The American Banking ordinance system was divided into two parts but Lehman Brothers being an investing bank did non had such difficult ordinances as commercial Bankss which was regulated by US Federal Government. Apart from that there were really less ordinances to cut down the hazard taking in the company but they did non had sufficient sum of inducements to avoid system hazards because the authorities takes a big part of the company which is traveling belly-up and this could be said as one of the grounds as to why the American authorities did non saved Lehman Brothers. The American authorities had non much thought about the web of Lehman and other fiscal institutes and therefore refused to assist it in the terminal.

Impact on fiscal markets and planetary markets ( effects )

The prostration of the Lehman brothers was one of the biggest catastrophe for the fiscal markets which blow the markets like a moving ridges of Tsunami in US but its accomplished markets worldwide which disturbed the universe economic system by 21 % overnight. A imperativeness conference released that one-year rate of GDP dropped in the first one-fourth of 2008 by 18 % and which effected the net worth as it was decreased by more than a one-fourth. Same worsening effects can be seen on the New York stock exchange which faced the steep diminution of 45 % of its stock index S & A ; P 500 by the early November 2008. US and European Bankss lost more than 1 trillion dollar on toxic assets from January 2007 to 2009. Harmonizing to studies, Bankss of US by the clip lost 60 % of our economic system. The extremely leveraged nature of Lehman led the bank to bespeak security from the Bank of England. This in bend led to investor terror and a bank tally in mid-September 2007 ( diaries of bankers, 1 quarterly study, 2008 ) . Over 100 of mortgage loaners went belly-up during 2007-2008. The crisis hit its extremum in September and October 2008. As the consequence of that many lost their occupation which was evaluated 2.6 million and 129,000 occupations lost in Canada and 17033 approximate in Australia between Septembers to December 2008. Several major establishments failed, were acquired under duress, or were capable to authorities coup d’etat. UBS stated on October 6 2007 that 2008 would see a clear planetary recession, with recovery improbable for at least two old ages. The economic expert of the UBS announced that its beginning of the terminal has begun. The day-to-day telegraph wrote in their article that ”The problems in forepart of Britain is out of the blue accurate similar to the 1930s, since monetary values of many assets – from portions to house monetary values – are falling at record rates [ in Britain ] , but the value of the debt against which they are held remains unchanged ” ( The daily telegraph January imperativeness release, diaries 2009 the banker ) . The darkest twenty-four hours in the history of England which wiped off more than ?50 billion London ‘s blue-chip portions when it dropped by 215.5 points or can state that more than 4 % in the stock market. More than 5000 Lehman staff in Britain was uncluttering their desks in the state ‘s largest individual loss of occupations. The consequence of prostration was besides seen on the universes elephantine insurance company AIG as it was running out of the hard currency in order to cover its loses they asked the authorities to assist them out of it reportedly to tune of $ 40 billion. The job was that if the AIG would hold straight affected countless of consumers and companies worldwide as a consequence the whole fiscal system would be affected as it was the web of complex fiscal trades.

Subprime mortgage means in finance those doing loans that are in the riskiest class of consumer ‘s mortgage. As it was associated to the subprime mortgage in which they offered an chance for borrowers to pay subtraction than the normal recognition records for the place mortgage.


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