Lehman Bros goes bust - US investment bank files for bankruptcy

Tuesday September 16, 2008

NEW YORK: Lehman Brothers Holdings Inc filed for bankruptcy protection, after trying to finance too many risky assets with too little capital, making it the largest and highest profile casualty of the global credit crisis.

The Chapter 11 filing on Monday did not include its broker dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them. It said it was in advanced talks on selling its investment management division.

Lehman is one of the biggest investment banks to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy protection amid a collapse in the junk bond market.

Time is of the essence as Lehman sells assets. Customers are often reluctant to trade with dealers whose parent companies are in bankruptcy, so the longer Lehman waits to sell its broker dealer unit, for example, the less it will be worth.

”Much of (Lehman’s) asset value at the end of the day is tied up in its credibility, and that takes a significant hit early in a bankruptcy case,” said Jack Williams, resident scholar at the American Bankruptcy Institute and a professor at Georgia State College of Law.

The Chapter 11 filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of LongTerm Capital Management but could not survive the global credit crunch.

Financial institutions globally have recorded more than US$500bil of writedowns and credit losses as the US subprime mortgage crisis has spread to other markets.

Bankruptcy also represents a bad end to chief executive Dick Fuld’s four decade career at Lehman. Fuld, who piloted the investment bank through prior crises with aplomb, was widely seen as too slow to recognise Lehman’s need to raise capital and shed bad assets.

Lehman had US$600bil of assets financed with just US$30bil of equity as of the end of August.

Having so little capital meant that a 5% decline in assets would wipe out the value of the company, which investors saw as a real risk thanks to the company’s billions of dollars of mortgage securities.

”Lehman decided to play chicken with the market, and they lost,” said James Ellman, portfolio manager at hedge fund Seacliff Capital, late on Sunday.

Lehman listed its biggest unsecured creditors as Citigroup Inc, Bank of New York Mellon Corp, Aozora Bank, and Mizuho Financial Group Inc Citi and Bank of New York Mellon are trustees for Lehman bonds.

The investment bank, once the fourth largest in the US, had hoped to raise capital by selling off a stake in its investment unit, and use that capital as well as other funds to spin off some of its toxic assets to shareholders.

But that plan did not satisfy investors, who pushed Lehman’s share price to just a few dollars, or rating agencies, who pressed the company to find a stronger partner.

The filing comes after a weekend of heated negotiations among regulators and Wall Street firms regarding Lehman’s fate.

The US government refused to backstop Lehman’s worst assets in the way it backstopped Bear Stearns Cos Inc’s sale to JP Morgan Chase. Government officials told banks to support Lehman or else be prepared for more investment banks to lose investor confidence and fail.

But prospective bidders refused to buy Lehman without government support, people briefed on the matter said. – REUTERS


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