"Once in a century event" as Lehman closes its door for good
Bankruptcies of this size are just not supposed to happen. At 5.30am London time this Monday, Lehman Brothers — one of the remaining investment banking giants of Wall Street — announced it was filing for Chapter 11 bankruptcy.
Alan Greenspan, former chairman of the US Federal Reserve, described the credit crisis that had prompted Lehman’s collapse as "a once in a century event".
It was the biggest collapse in the history of international banking, and with Lehman’s liabilities standing at $613bn on Sunday night, it was also the largest bankruptcy in US history.
The news of Lehman’s demise sent shudders through financial markets across the world. It sparked an immediate sell-off in those Asian stockmarkets that were trading on what was a holiday for most of the region and a dramatic plunge across all the European exchanges when they opened.
All financial markets from commodities to futures to equities have been rocked by the news. Market fears were — and continue to be — that the credit crisis will claim further names.
The 4,500 staff arriving for work at Canary Wharf in London were greeted by the news that the firm was technically insolvent. They were told to await an announcement from the UK administrators, PricewaterhouseCoopers before trooping home many via pubs and wine bars.
Similar scenes were enacted around the world as the bank’s 29,500 staff were told that the bank was at the end of the line. Some bankers cried, others were seen talking to headhunters who quickly gathered outside the offices. In Asia many staff were told to keep working till further news was available.
Across the world there was an immediate dash to close off or unwind, any open positions with Lehman. In one of the larger banking errors of 2008, KfW sent a payment of Eu300m to the bankrupt bank.
That Lehman was in severe difficulties had been known for some time.
Since the beginning of the year Lehman had announced some $6.7bn in losses — almost entirely due to various types of exposure to the US property market.
However, the real trouble started on September 9 when talks with Korea Development Bank — which had been negotiating with Lehman for a stake — failed.
The sticking point was price. Min Euoo Sung, chief executive at KDB, this week said Lehman spurned his offer of $6.40 a share and that the bank had insisted on $17.50.
News that the KDB had pulled out of talks sent the bank’s share price yet lower. The bank, which had commanded a price of $100 a share in 2000 — and $67 in the past year — slipped towards single figures.
On the following day, in a sign of clear desperation that was not lost on financial markets, Lehman decided to announce a restructuring — its third this year — as well as release its third quarter results a week early. The $4bn loss, although better than analysts’ expectations, signalled the beginning of the end.
"This firm has a history based on adversity and delivering," said Richard Fuld, Lehman’s chairman and CEO to its shareholders. "We have a long track record of pulling together when times are tough."
The plea fell on deaf ears.
Investors sold Lehman stock again till it stood at $5 a share. The clearly desperate institution pinned its last hopes of rescue on striking a deal with either Barclays or Bank of America. Or failing that trying to arrange a bail-out with the US Federal Reserve similar to that orchestrated for Bear Stearns.
In the rumours ahead of the collapse even private equity firms such as JC Flowers were rumoured as considering the merits of buying all or parts of Lehman.
From Friday to Sunday evening, senior Wall Street and government executives were seen entering the Federal Reserve offices in a last minute dash to find a solution. Hank Paulson, US treasury secretary, Christopher Cox, the US SEC chairman and Timothy Geithner, New York Federal Reserve Bank and Merrill Lynch CEO John Thain were all known to be in meetings together, as were other senior banking figures.
The end was clearly in sight when the International Swaps and Derivatives Association set up an extraordinary trading session on the Sunday afternoon.
An ISDA statement released that day said that the session was called "to reduce risk associated with a ... potential bankruptcy". The largest brokers were to be allowed to limit their exposures to Lehman. The trades were only contingent on Lehman moving into Chapter 11 by 11.59pm that evening.
And that Sunday evening US time Lehman did just that. The official announcement to the world was made a few minutes later.
The effect on world markets has been made doubly dramatic by the fact that Merrill Lynch, that same Monday morning in European time, announced it was to be acquired by Bank of America — ending the story of yet another of the last great independent Wall Street investment banks.
Of the giants of yesteryear, the broker dealers, only Goldman Sachs and Morgan Stanley are left standing. Most of the week their share prices have been under pressure.
The stock market slide was exacerbated yet further when the US Federal Reserve announced it was to shore up insurance firm AIG on the Wednesday morning. The previous day Barclays bought the US operations of Lehman for $1.75bn.
The winding up of the 158 year old Lehman will have been a personal tragedy for Dickie Fuld, chief executive of the firm — a company man to the core. Fuld, who started at the firm in 1969 has never worked anywhere else.
He became chairman and chief executive of Lehman in 1994 after it was spun off from American Express and has been one of the driving forces in making it the powerhouse it grew to become in the 1990s.
The fate of Fuld — and in particular an explanation of his refusal to make deals that could have saved the bank — is still up in the air.
He has been asked to appear before the Committee on Oversight and Government Reform on October 6. Democrat chairman of the committee Henry Waxman said that he planned to hold two days of hearings to examine the regulatory mistakes and financial excesses that led to the bankruptcy filing by Lehman Brothers and the government bailout of AIG.
"Lax oversight and reckless investments on Wall Street are causing massive disruption throughout our economy," said Waxman. "Our hearings will examine what went wrong and who should be held to account."
One angry observer said: "Fuld deserves public humiliation for his destruction of Lehman, and for allowing investors, employees and the media to think last year that Lehman was weathering the credit crisis almost as well as Goldman.
This apparent mental check-out is reminiscent of Jimmy Cayne’s last days at Bear. But at least Cayne got $10 a share for his investors, which is $10 a share more than "The Gorilla" got for his.