•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
•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
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 Officer Richard Fuld
But there were more reason. Check
out what they were. . .
•Lehman's collapse was also triggered by the refusal of other banks to do
business with it because of its complex and, at times, opaque ways of
•Housing loans made by the bank to people with little support made these
loans very risky, and when interest rates rose, these borrowers could no
more repay Lehman
•This led to huge losses, the extent of which is not yet clear.
Thus other banks stopped trading with Lehman. This
led to it losing almost all business and triggered its
The final straw for Lehman was the fact that both
Barclays Plc of the United Kingdom and Bank of
America Corp pulled out of takeover talks. BofA
bought out Merrill Lynch for $50 billion.
However, Barclays has now said that it is in
discussions with Lehman Brothers about buying
certain assets of the stricken US investment bank.
"Barclays confirms that it is discussing with Lehman
Brothers the possible acquisition of certain Lehman
Brothers assets on terms that would be attractive to
Barclay's shareholders," Britain's third largest bank
said in a statement.
When other banks do not want to buy
Lehman, why is Barclays interested?
•Barclays wanted to buy Lehman out
at a discount, so to speak. But when
Lehman CEO Fuld decided that his
bank was worth much more than
what Barclays had apparently offered,
Barclays stepped back.
•Now that Lehman has filed for
bankruptcy, its assets are available
fairly cheap. However, the biggest
problem is to take on Lehman's
How far is the CEO of the company
responsible for Lehman's fall?
•Wall Street analysts believe that it was
the 'hubris' of Richard Fuld, the 62-year-
old CEO of Lehman, who did not take the
telltale signs of impending doom very
•Fuld, nicknamed The Gorilla for his foul
temper, intimidating presence and tough
talk, rejected many bids to save Lehman
because he thought that the sinking giant
was much bigger than Wall Street was
giving it credit for, and wanted to get
more price for the sale of the company.
Analysts say if the bank was sold just a week
before it went kaput, it could have been saved
the ignominy of a bankruptcy, but Fuld was far
too adamant to see reason.
Result: the end of a 158-year-old
Could the United States government helped, like it
helped Bear Stearns in May this year, and Fannie
Mae and Freddie Mac earlier this month?
•The US government could have
helped, but US Treasury Secretary
Henry Paulson said that it would not
use up any more taxpayer dollars to
bail out Lehman Brothers as it would
lead to investment banks getting
away with their gambling ways.
•Paulson had bailed out Fannie Mae,
Freddie Mac and Bear Stearns,
saying that if the government had
not done so, the US housing loan
market would have collapsed leading
to gigantic losses for hundreds of
banks all over the globe that have
invested in US property.
Paulson, however, believes that a
brokerage major like Lehman, which
does not have a direct connection with
ordinary people who have taken on
home loans, need not be bailed out as it
would not cause any systemic damage
to the US economy.
Some Lehman Brothers' employees leaving
the bank's Canary Wharf office in London
Has everyone in Lehman lost their jobs?
Has everyone in Lehman lost their jobs?
The bankruptcy administrators,
PricewaterhouseCoopers, feels that as
Lehman's operations were essentially
centralized at New York, the folding up of
the investment banker in the US will have a
telling impact on all its operations globally.
Over 5,000 employees in the UK have
already lost their jobs, while about 20,000
in the US might as well forget going back to
their work stations. About 2,500 Lehman
employees in India too face the axe.
Will the whole bank be liquidated?
Unlikely, at least for now. The US Chapter 11 that deals with
bankruptcy says that PwC, the administrators, can go about taking its
time to find good offers and buyers for Lehman's 'least affected
The entire exercise can take months before all of Lehman's assets are
sold, given the complexities linked to the bankruptcy.
What about the Bank of America and
Merrill Lynch deal?
Merrill Lynch's buy
out by Bank of
America is also a
saw the writing on
the wall once it
Lehman was going
bust, and decided
to sell out before it
actually has to file a
What about the insurance giant AIG?
The world's largest insurer, American International Group,
has been downgraded by credit rating agencies and is racing
against time to find a multi billion dollar infusion to stay afloat.
US Federal Reserve officials and two leading banks, JPMorgan
Chase and Goldman Sachs, were negotiating to put together
$75 billion package to save the insurance giant to stave off
AIG has sought $40 billion in bridge loan to stave off the crisis.
But the Fed rebuffed the request. AIG's ills came to fore, when
three leading credit rating agencies - Standard and Poor's
Moody's and Fitch - lowered the company's credit scores.
Who could be the next to fall?
Some Wall Street analysts, reports The Guardian, name
Washington Mutual as the next financial major to 'find itself
in serious trouble.'
However, the even bigger
worry is whether the
world's largest securities
firms, Goldman Sachs and
Morgan Stanley, would be
able to survive this brutal
But many say that these
two gaints will not melt
down as they have 'done a
better job of spreading
their bets across world
markets and are also more
diversified, less leveraged
and have managed such
risks much better.'
What do Indian markets fear?
The fall of two global financial behemoths -- Lehman Brothers and
Merrill Lynch -- is expected to dent India Inc's ability to raise
resources via the equity route.
Experts feel that such events significantly increase the risk
perception, which in turn will put all future investments by
institutional investors such as pension or endowment funds, on the
While the public issue market has already dried up, the private
equity funds are also becoming conservative in terms of pricing.
This is resulting in either inordinate delays in concluding deals or
transactions being called off.
There are many instances of private equity fund managers
refusing to go ahead with deals after signing the term sheet.
Sources said that a leading fund conducted due diligence on two
companies in the last fortnight but did not close either deal
primarily because of the developments in the US, their home
The crisis faced by Merrill LynchandLehman Brothers is expected
to have a cascading effect on PE firms too.
Will it hit the Indian growth story?
The ongoing financial sector crisis in the United States
and its repercussions on developed markets
worldwide will result in lower capital inflows into
emerging markets like India, economists and
government officials said today.
At the same time, they called for the government to
make it easier for Indian companies to borrow
overseas by easing the restrictions that have been
imposed in the past to reduce excessive liquidity in
the system and control inflation.
This will, in turn, lead to a slowing in investment
growth in the months ahead. As lending gets tighter
and investment flows dry, corporate India will find it
more difficult to raise both equity and debt.
Will it hit the Indian growth story?
Technology firms are shivering. Lehman Brothers' bankruptcy filing
may well prove to be the last straw for Indian IT firms, which were
expecting the second half of FY09 to be better. As a result of the
US financial market crisis, analysts do not expect Indian IT firms
to sign any significant contracts in the banking, financial services
and insurance (BFSI) space in the months to come.
While IT firms do not disclose client-specific details, it's estimated
that Lehman Brothers has outsourced deals amounting to
anywhere between Rs 550 crore and Rs 700 crore (annually) to
numerous IT firms, including majors like Tata Consultancy
Services, Satyam Computer Services and Wipro. Lehman Brothers,
say sources, works with 14 service providers in India - Wipro and
TCS being the largest. It also has investments in a few IT firms.
It's not clear if these holdings will be liquidated to raise funds.
Moreover, the sources add that Lehman Brothers' unit in India has
issued termination letters to a majority of its 2,500 employees.