The Collapse of Lehman Brothers<br />
Subprime Mortgage Crisis<br />Subprime Lending<br />Making loans to borrowers who do not qualify for market interest rates...
Causes<br />Government Policies<br />Speculation<br />Financial Innovation<br />
Government Policies<br />Glass-Steagall Act - 1933<br />Enacted as emergency response to 5,000 bank failures in Great Depr...
Speculation<br />Speculators began treating homes like stocks<br />In 2005 nearly 40% of homes purchases were not primary ...
Financial Innovation<br />Securitization<br />Pooling together and repackaging risky mortgages<br />CDO’s and MBS<br />Una...
Events<br />Early summer 2008: JPMorgan is the clearing bank on behalf of clients who have exposure to Lehman Brothers tra...
Events<br />September 10 2008: Lehman Brothers goes ahead with its pre-announcement and conference call to analysts. They ...
Lehman Brothers Stock Price<br />
Oversimplified Explanation<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed Securities<br />Investor...
Example<br />$100<br />2%<br />$10<br />$7<br />$5<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed ...
Crisis<br />$49<br />2%<br />$10<br />$7<br />$5<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed Se...
Conclusion… <br />13<br /><ul><li>Combination of events
Subprime Mortgage Crisis
Government Policies, Financial Innovation, Speculation
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Lehman Collapse

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Lehman Collapse

  1. 1. The Collapse of Lehman Brothers<br />
  2. 2. Subprime Mortgage Crisis<br />Subprime Lending<br />Making loans to borrowers who do not qualify for market interest rates<br />Market worth an estimated $1.3 trillion in March 2007<br />25% of subprime loans were delinquent or in foreclosure proceedings as of May 2008<br />
  3. 3. Causes<br />Government Policies<br />Speculation<br />Financial Innovation<br />
  4. 4. Government Policies<br />Glass-Steagall Act - 1933<br />Enacted as emergency response to 5,000 bank failures in Great Depression<br />Created separation between commercial and investment banks<br />Repealed in 1999, allowed commercial lenders to underwrite and trade mortgage backed securities and CDO’s<br />Community Reinvestment Act - 1977<br />Loosened lending standards<br />Encouraged predatory lending<br />
  5. 5. Speculation<br />Speculators began treating homes like stocks<br />In 2005 nearly 40% of homes purchases were not primary residences<br />Left the market sometime in 2006<br />
  6. 6. Financial Innovation<br />Securitization<br />Pooling together and repackaging risky mortgages<br />CDO’s and MBS<br />Unable to gauge the risk associated with these products<br />Many investment banks kept large amounts of MBS on balance sheet<br />
  7. 7. Events<br />Early summer 2008: JPMorgan is the clearing bank on behalf of clients who have exposure to Lehman Brothers trading. <br />July 2008: The head of JP Morgan&apos;s risk department begins asking for collateral from Lehman Brothers Holdings.<br />Early September 2008: Lehman Brothers still has not raised the capital it requires and at this point has approached several banks about possible mergers but there are no positive developments, or anything on the horizon to suggest that a merger could be in the offing. <br />September 4 2008: Lehman Brothers Holdings is in real trouble at this point, this time, JP Morgan asks for another $5 billion in cash, concerned that any securities might not be worth their full face value. <br />September 9 2008: Steve Black, head of capital markets at JP Morgan, knowing that Lehman has not paid the $5 billion from the week before, demands another $5 billion in cash to shore up its positions. JP Morgan receive just $3 billion from Lehman Brothers Holdings.<br />
  8. 8. Events<br />September 10 2008: Lehman Brothers goes ahead with its pre-announcement and conference call to analysts. They assure investors the firm is healthy despite all the reported liquidity issues and that the firm had delivering capital to JP Morgan to cover positions.<br />September 11-12 2008: JP Morgan discovers that its initial $5 billion wasn&apos;t paid. It demands $8 billion immediately. Over those two days Lehman Brothers Holdings delivers the money.<br />September 12 2008: Cable business channel CNBC, breaks the story that Lehman is attempting to sell itself, although no suitable offers are received.<br />September 13/14 2008: The Federal Reserve tries to save Lehman Brothers through a private sector bailout, but this fails on the Sunday Evening.<br />
  9. 9. Lehman Brothers Stock Price<br />
  10. 10. Oversimplified Explanation<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed Securities<br />Investors<br />
  11. 11. Example<br />$100<br />2%<br />$10<br />$7<br />$5<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed Securities<br />Investors<br />$102<br />
  12. 12. Crisis<br />$49<br />2%<br />$10<br />$7<br />$5<br />Lehman Bros.<br />Clearing Agent<br />Banks<br />Mortgaged backed Securities<br />Investors<br />$49<br />$100 - $49 = $51<br />The difference is the capital it has to raise to pay the investors<br />
  13. 13. Conclusion… <br />13<br /><ul><li>Combination of events
  14. 14. Subprime Mortgage Crisis
  15. 15. Government Policies, Financial Innovation, Speculation
  16. 16. Failure of Lehman similar to Bear Stearns
  17. 17. $40 billion in mortgage-backed securities</li></li></ul><li>In Hindsight…<br />Regulatory standards<br />Raising Lending Standards<br />Better Judgment and Leadership<br />14<br />
  18. 18. Thank You!<br />

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