Wednesday, September 17, 2008

The Timeline to collapse of Lehman Brothers

Just to show that people expect things to be bad but never thought to be that bad...

22nd Aug 07
Announces plans to shutter its subprime mortgage business, eliminating 1,200 jobs.

20th Sep 07
Chief Financial Officer Chris O'Meara steps down to head global risk management division. Erin Callan, head of the investment banking practice for hedge funds, succeeds him.

13th Dec 07
Reports fiscal fourth-quarter profit of $870 million and full-year earnings of $4.2 billion.

17th Jan 08
Lehman says it will stop originating mortgages through wholesale channels amid continued weakness in the housing and real estate markets.

16th Mar 08
The federal government and JPMorgan Chase & Co. bail out Bear Stearns Cos. Analysts question whether other investment banks might also collapse.

17th Mar 08
Reports suggest Southeast Asian bank DBS Group Holdings Ltd. instructed its traders to cease working with Lehman, though those instructions were later rescinded.

18th Mar 08
Lehman announces it earned $489 million during its fiscal first quarter.

1st Apr 08
Company raises $4 billion in capital.

15th Apr 08
Speaking at the investment bank's annual shareholder meeting, Chairman and Chief Executive Richard Fuld tells investors that the worst of the credit crisis is behind Wall Street, but that the environment "will remain challenging."

16th May 08
Lehman announces it is cutting 1,400 jobs, or about 5 percent of its work force.

9th Jun 08
Company estimates it lost about $3 billion for the second quarter and that it is raising $6 billion in fresh capital.

12th Jun 08
Removes Callan as CFO and Joseph Gregory as chief operating officer. Herbert McDade replaced Gregory, while Ian Lowitt replaced Callan.

29th Aug 08
The New York Times reports Lehman is preparing to cut 1,500 jobs.

2nd Sep 08
Reports indicate state-owned Korea Development Bank was considering buying a 25 percent stake in Lehman.

8th Sep 08
Shares of Lehman plunge 52 percent amid worries the investment bank was struggling to find new investors and raise capital. Reports say the talks with KDB have ended.

10th Sep 08
Lehman says it lost $3.9 billion during its fiscal third quarter and plans a number of moves to shore up its balance sheet. The announcement, coming a day after Lehman shares lost 45 percent, is an attempt to assuage market worries. Fuld says the firm will consider all "strategic alternatives."

11th Sep 08
Lehman stock plunged 42 percent as the embattled investment bank tried to locate a suitor before more market value and confidence was lost. The stock is down more than 94 percent for the year.

14th Sep 08
Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed.


Lehman brothers still reported profit in its first quarter before it collapsed. KDB still considered buying over the bank days before its collapsed. The managements still tried to reassure their investors that the Credit Crisis problem is over. Most expect things to be bad but not to the point that it has to file for bankruptcy.

Federal Reserve is trying to stablise the financial market through funds injection to ensure Lehman Brother's operation goes on. Its a ripple effect and will bound to affect financial market globally. Both equities and bonds will get the impact.

AIG is the next problem and more might come. How much more funds can the Federal Reserve inject? They certainly have a limit and cannot be a saviour everytime. Or else the market will expect Fed to help everytime. If too much funds are injected, the dollar will surely weakens and I have no idea how a significantly weaker dollar will impact the global economy.

I am not an investment analyst, I'm not as smart as many people, I do not have any private information to back what I said but its certainly a challenging time. Its a great time to start some investment via dollar-cost averaging. If you are having a lumpsum of money, you can construct a 25E-75B portfolio and invest ~30% of funds first. Sit, wait and observe. Stay partially invested because the market is full of unexpected news. It may creep back even before you realise it.
I have one belief :"The market is not dead. Someday, it will spring back to life"


Anonymous said...

Wow. This is good stuff. Thanks.

Anonymous said...

yes , adrain , a good time to start investing although there will be short term uncertainty. Much risk has been taken off the market but there will a lot of bargain buy.Down the raod the recovery will reward those who invest now.


Anonymous said...

Hi Adrian,

Do you mind writing about how AIG get into trouble as well? I don't understand why an insurance company get into this mortgage thing. Thank you.

Anonymous said...

Most banks and insurance companies invest in CDOs to improve return of their portfolio. Their extend of involvement is matter of disclosure. Some did voluntarily, some until they cannot tahan. Example, NTUC had exposure to CDOs and Lehman. DBS had more , in fact around $350millions. When these derivatives turned sour their investment (life fund kenna) incurred losses.If you put all the losses together in the world it will come to trillions, right?
Now where does AIG come into the picture?
AIG insured them using swaps. The payout is tremendous. AIG lost their pants, more than 100s of billions , unable to meet the liabilities in the short term before FED gave them a loan. As for now they are selling off assets to pay FED and divest non core businesses and focus on less risky insurance. AIG has $ trillion assets and why is it that it cannot meet a run on the company? Liquidity was the problem.


Anonymous said...

A response to your fan on AIG crisis

Swaps Game
The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.

One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured.

As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.

Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," says Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York. The sheer volumes of outstanding CDS contracts -- and the fact that they trade directly between institutions, without centralized clearing -- intertwined the fates of many large banks and brokerages.

Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.

But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending.

Anonymous said...

We're now at a point where it's at the right PE to get into equities. It's still better to defer your purchases to somewhere around US presidential election before deciding to invest