Henry Lehman started his business with the small general strore in Montgomer, Newyork in 1884.After 6years his business was joined by their brothers Emanuel and Mayer and they named the business as LEHMAN BROTHERS, founded in 1850.They became broker of trading the cotton as it was the major cash crop at that time in the Alabama. EXPANSION OF BUSINESS (1860-1869) There was a civil war in 1862,which disturped the Lehman business the firm teamed up with cotton merchant named John Durr to form Lehman Durr &Co. After the end of civil war there was a rapid growth in infrastructure like road, rail tracks and etc. in US economy. At that time Kuhn, Loeb were the major underwriting of the financing for railroad construction. Rail road bond represented a significant advance in development of capital markets, their affordable price attracted a great number of investor and Lehman brother recognizing a trend they also themselves in and they start dealing with securities . So it was the turning point of Lehman in the area of financial advisory. IN THE YEAR 1880-1889 Now they expanded their business from financial advisory to merchant banking & they became the member of NYSE in 1887 . they went Japan &Europe globally after acquiring the seat on NYSE. FINANCIER OF EMERGING RETAILERS 1900-1909 They lend the money to emerging retailers like Roebuck &co. F.W.Woolworth co.and etc. and also it helps Lehman to cover market share. FOCUS ON CONSUMER INDUSTRIES (1920-1929) In 1920 Robert Lehman perceived dynamic changes occurring in the nation economy and focused the co. on consumer industries like retailing, airlines ,& communication. From the beginning they were the supporter of entertainment sectors. They started up venture with film studios RKO, Paramount, FOX, benefited from financing arranged by the firm. They were arranging loans between blue chip borrowers and private lenders. These loans also provide to safeguard & solid returns for lender while enabling the borrowers to raise much needed capital. FUNDING CAPITAL (1930-39) Lehman brother underwrite IPO for DUMONT the first TV manufacturer & helped fund the Radio Corporation of America known as RCA (RCA was an electronic co.) Start up financing IPO underwriting (1950-59) It was boom period for electronics business in the US economy and there were number of upcoming companies it gives the opportunity for Lehman brothers to arrange start up financing for co. like Litton industries. They also provided underwriting for industry Pioneer Digital Equipment. The firm later arranged the acquisition digital equipment by Compaq. Company like General foods, Campbell Soup& Phillip Morris went to Lehman help for finance growth necessary to satisfy borrowing demand for third product.(General food Corporation was acquired by Phillip Morris co. now Atria Group Inc. Phillip Morris is one of the world largest tobacoo corporation. Works with the leading players (1960-1979) They were having their clients in overseas also to meet their financial need they opened up new office in Paris 1960, London (1972) & Tokyo by 1973.they worked with IBM, Loral, DEC, . It acquired Abraham & co. in 1975. Amex acquires Lehman Brother in 1980-1989 TITLE OF THE CASE STUDY : SHORTFALL OF LEHMAN BROTHER Lehman brother has gone to final stage bankruptcy in year 2008 of 15 September when there was recession in whole world. They were having $639 billion of assets and $ 619 billoin debt. Lehman was the fourth largest U.S investment bank. Lehman was the biggest victim of the US subprime mortgage. As they were bankrupt, it leads to financial crisis globally .Lehman collapse was a seminal event which contributed to fall of market capitalization close to $10 trillion in the global equity market the biggest monthly decline. CAUSES FOR THEIR FALL DOWN : In 2004 Lehman acquired five mortgage lenders including lender like BNC mortgage and Aurora Loan services which specialised in ALT A loans .They acquisition seems to be impressive as they earned revenues from Lehman real estate business. They earned record profit of $4.2 billion on revenue of $19.3 billion. NOTE: ALT A: It means that without proper documentation the lender provides loans to borrower. In the month of Aug 2007 their stock fell sharply due to credit crisis, which make them to close BNC unit & also ALT A offices in three states. Lehman underwrote more mortgaged backed securities than any other firm of $85 billion, which was 4 times of shareholder equity .Due to this portfolio the global equity market reached new height which lead to staged temporary rebound .They were not in position to trim this massive portfolio. There was high degree of leverage that is total assets to shareholder equity & it huge portfolio of mortgage securities which create market in vulnerable condition, which causes them their stock fell as much 48%.It was 24:1 in 2003 to 31:1 by 2007.While generating profit during the boom, this condition meant just 3-4% decline in the the value of its assets would entirely eliminate its book value. On June 9, Lehman announces 2nd quarter loss $2 billion, its first loss since acquisition of American Express co. , Lehman’s management made unsuccessful overtures to a number of potential partners. They were hoping that Korean development bank would take stake in Lehman but it was not so as they put the talks on hold on September 9.That was the big blow for them which lead 45%decrease in the stock and spike in credit default swaps on the company debt. The company’s hedge fund client began pulling out, on the other hand creditors cuts credit lines. Then they suffer a loss of $3.9 billion,and at that time Moody’s investor give credit ratings of and they said that Lehman would have to sell the majority stake to a strategic partner in order to avoid a rating downgrade. The main culprits were lender who ultimately lent funds to people with poor credit and a high risk of default Due to increase in interest rates 6 times & the economy began to lose speed the dot com bubble burst, numerically on March 10 2000.As you can see in the graph subprime mortgage origination grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001,A and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home. Investment bank worsen the situation The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum. A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as CDO. In this process, investment banks would buy the mortgages from lenders as securitisise these mortgages into bonds, which were sold to investors through CDOs. The chart below demonstrates the incredible increase in global CDOs issues in 2006. FUTURE STRATEGIES OF LEHMAN BROTHER The outlook for Lehman Brothers’ future seemed dim Sunday after Barclays PLC withdrew its bid to buy the beleaguered investment bank and government officials and Wall Street bankers remained at an impasse about a rescue plan. The withdrawal of Barclays, which along with Bank of America Corp. was considered a front-runner to buy Lehman, demonstrated how complicated negotiations over Lehman’s fate had become. And, Sunday afternoon, The Wall Street Journal reported that Bank of America and Merrill Lynch & Co. were involved in merger talks – which would knock Bank of America out of contention as well. The Lehman talks were aimed at selling the investment bank in whole or in part. The sticking point was the potential buyers’ insistence that the Bush administration offer the kind of help it did in brokering the buyout of Bear Stearns Cos. last March, when the government agreed to a $29 billion loan to buyer JPMorgan Chase & Co. from the Federal Reserve. But Treasury Secretary Henry Paulson said the government will not help close a Lehman deal. Lehman declined to comment on the talks. If no deal were reached, it raised the specter of a bankruptcy and liquidation of the 158-year old investment bank. Bankers and investment banking officials briefed on the talks described them as being both complicated and fluid, and that there was still hope that an agreement can be brokered or that new bidders might emerge. They spoke on condition of anonymity because talks were ongoing. There were signs that Lehman Brothers Holdings Inc. might be edging closer to a bankruptcy filing, with several reports that it has hired Weil, Gotshal & Manges, the law firm that handled the collapse of investment firm Drexel Burnham Lambert in 1990. Moreover, there was also an emergency trading session being held at the International Swaps and Derviatives Association to “reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy.” The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman – but that those trades would be voided if no filing occurs before midnight. Barclays, Britain’s third-largest bank, backed out of talks on Sunday after emerging during the morning as a front-runner to take over Lehman’s assets, according to a person inside the U.K. bank who spoke on condition of anonymity, in keeping with company policy. The person, who had knowledge of the talks, said the decision was “very unlikely” to change. He said Lehman was attractive but did not meet what he described as Barclay’s stringent requirements. The Journal said on its Web site that after Bank of America was unable to reach a deal for Lehamn, it turned instead to a possible combination with Merrill, considered a better fit for the bank. Several private-equity firms were also believed to be interested in Lehman’s assets. Bankers and officials with direct knowledge of the discussions described the talks as complicated Sunday morning. Top officials from the Federal Reserve and the Treasury Department and executives from several Wall Street banks were huddled at the New York Fed’s downtown Manhattan headquarters for a third day seeking a solution to Lehman’s financial crisis. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets around the world when they reopen Monday. Asian markets will begin trading Sunday night Eastern time.
In the fifth consecutive year, Lehman brothers ranked 1 in the “all American research team” survey in 2007. They got rank 4* in the 2006 “All Europe Research Team” survey ranking. They ranked 1* in the 2006 “All America Sales” survey. In 2006 Annual Awards, Lehman Brothers got five deal-related awards. In 2005 Annual Awards, the firm was named U.S. Equity House of the Year and U.S. Structured Equity House of the Year, and was also recognized in association with various deal-related awards. Lehman Brothers got several top-three rankings in the 2007 Global Custodian Prime Brokerage survey. In 1999, Lehman had 19 top-ranked analysts; in 2001 that shot up to 42 star analysts, an increase of 121%. The firm now places fifth in number of ranked analysts. SOME DETAIL ANALYSIS ARE GIVEN BELOW IN GRAPHICAL FORMAT Lehman Brothers gave mortgage loans to provide a monetary support to loan applicants. It generally provided loans to following sectors:- 1.Industrial Sectors 2.Retail Sectors 3.Corporate Sectors 4.Others- Private Loans, Small Business. The maximum percentage of loans were provided for industry. In the year 2006 Lehman Brothers earned a huge profit as they started to issue ipo. They earned lots of profit in Real Estate which gives height to the global equity market and loss was due they were not able to trim the massive portfolio of ipo.and also they had high degree of leverage it was 23:1 i.e. assets to shareholder due to global financial crisis on 7 th August 2007 which hit back the stock of Lehman’s brother due to ALT A loan provided to borrower due to excessive interest rates put by federal reserve bank 6 times than the usual. OPERATION INCOME AND OPERATING EXPENSE Market Up and Down (2003-2007) MARKET CAPTURE (1998-2006) Lehman Brothers held a good market share in competition to its near competitors, It captured 29% of market in investments and finance. Its nearest competitor was Bear Stearns. THANK YOU .
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