Lehman Brothers Y La Crisis Financiera

Lehman Brothers and the Financial Crisis

Why Lehman was not saved?

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Appendix:

Abstract………………………………………………………………………….

Introduction…………………………………………………………………………

Reasons:

- Assets…………………………………………………………………

- Bank of America………………………………………………………..

- Barclays…………………………………………………………………

- A.I.G ………………………………………………………………..

- Dick Fuld …………………………………………………………………….

Conclusion……………………………………………………………………………

Opinion………………………………………………………………………………

Bibliographic………………………………………………………………………..

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Abstract:

This work tries to answer some questions about the case of Lehman Brothers, like, why Lehman Brothers wasn’t saved. First of all Why Bear Stearns was saved and Lehman don’t. What happened to the two potential buyers of Lehman? Why after the bankrupt of Lehman A.I.G was bailed out when the Fed and the Treasure said that there was not going to be more public money to bail outs?.

Introduction

2008 was a historic year. In 2008 many important things happened. For example, Kosovo was declared independent from Serbia, the Cyclone Nargis leaved over 32,000 deaths and 30,000 missing persons in Burma, an earthquake in Sichuan a China's Province caused more than 12,000 deaths, the depression of the financial system…

2008 made a point in the world history. It is going to be remembered as a year of chaos, distrust, complaints and unhappiness. Some people will kept in mind as a year of justice, succeed… Other will it remembered as one of their worst years they have ever seen.

2008 was a year that made a point in the history. It made a before and an after in the international finance market. It was a year of huge movements between the banks. Some of them succeeded that crisis stronger and some of them disappeared or were absorbed because of it. That was the case of Lehman Brothers.

The 15th of September of 2008, Lehman Brothers, the fourth biggest bank in US, was declared in bankrupt.

What had happened to make a Bank of that size to go to bankrupt? How could it happen with all the regulation controls that the banks have today? Why it was just Lehman? And the rest of the banks of that type and size did not go to bankrupt.

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All these questions have their answered, but I am only going to answer the last one.

“Why Lehman wasn’t saved?”

I am going to give several reasons why Lehman wasn’t saved.

First of all, it wasn’t saved because of its hole (it had total debts of $613 billion against total assets of $639 billion). As Paulson, the Secretary of the Treasure) said “It is not going to be replaced by any public money”.

So, Why Bear Stearns was saved and Lehman no?

Because they were different. First of all Bear Stearns was three times smaller than Lehman. So, it is easier to save a bank that has a small “hole” than another that has a huge one. Second, in the case of Bear Stearns the banks know that its problem was of liquidity and not a problem of his assets (because it has some assets with high value). Lehman didn’t have assets as good as the Bear´s, because it had many toxic mortgages. Third, in the case of Bear Stearns, JPMorgan was really interested. It promised to guarantee Bears obligation until the deal closed.

In the case of Lehman, it had two serious candidates Bank of America and Barclays, but what happened with them?

The case of bank of America:

Bank of America was interested in Lehman although it is a commercial bank and Lehman was an investment bank. At the beginning Bank of America thought that the government was willing to lend against Lehman´s bad assets. So, Bank of America

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auditors tried to determine how much government assistance the bank will need but they didn’t know that the government was not going to help them.

And why they didn’t buy finally Lehman? What happened to first desire of buying Lehman?

The events were the following:

During the Friday (12th of September) Fed Staff members called a number of Wall Street CEOs and asked them to attend an emergency meeting. Paulson (Secretary of Treasure) explained to them the actual situation of Lehman, asked them for solutions and he added that despite the rescues of Bear and Fannie and Freddie, there will be no government money for Lehman. Also, he said that fortunately there were two potential saviors (Bank of America and Barclays). The reason why they were called to assist to that meeting was because there was still a pool of Lehman assets that the possible buyers would not take and the CEOs of that room would have to finance it like they did in the past.

During that meeting John Thain and Gregory Fleming (CEO and President of Merrill Lynch respectively) took advantage of the situation and started to find a buyer. The circumstances were really critical and they knew that the next Bank probably the next Bank that was going to fail was their Bank, Merrill Lynch. They knew that the best hope for a possible rescuer was Bank of America too, because it had tried to get Merrill into merger talks but had been rebuffed. After the meeting they started again the talks.

As a consequence of that meeting they knew that Bank of America was not going to buy Lehman, or even tried.

A fire wall was needed if they don’t want to affect enormously the hole financial system with a confidence crisis. They had to stop the chain reaction of a possible bankrupt of Lehman, and they knew that it was Merrill Lynch.

The case of Barclays:

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Lehman had just one bullet left if they want to survived, and it was Barclays.

Meanwhile Barclays saw Lehman as an opportunity to increase Barclay´s U.S. investment-banking operations. They wanted to buy parts of the assets of Lehman.

Paulson and part of his team talked with the British counterpart, Alistair Darling, the Chancellor of the Exchequer to make sure that British authorities were comfortable with Barclay´s involvement in a potential Lehman rescue.

Barclays prepared an offer for Lehman with several conditions. The plan provided an elegant solution to Lehman´s troubled assets: they would remain in a Lehman entity, which would be dubbed “Newco” and owned by Lehman

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