Lehman Bros file for bankruptcy - Not a good day for investors

Originally Posted by BBC News

The fourth-largest investment bank in the US, Lehman Brothers, has filed for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

Its impact is being felt around the world:


Stock markets and the US dollar have tumbled in reaction to Lehman's collapse, with banking shares hardest hit; UK bank HBOS saw its shares plummet 30%.
Central banks have moved to reassure markets. The US Federal Reserve has broadened its emergency lending scheme and the UK and European central banks have injected a total of $39bn (£22bn; 28bn euros) into the financial system.
There are fears AIG, once the world's largest insurer, could also face collapse. It is taking steps to raise money amid reports it is seeking a$40bn emergency loan from the Fed.
Bank of America's move to buy Merrill in a $50bn deal means that three of the top five US investment bank have fallen prey to the sub-prime crisis within six months.
In the UK, accountants PricewaterhouseCoopers have been appointed as administrators for Lehman.
Anxious markets

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the yen, the euro and the Swiss franc as Lehman's failure raised fears about the strength of the global financial system.



The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence

The FTSE 100 index of leading UK shares was down 271 points, or 5%, at 5145.3 by midday. Banking shares have been particularly badly affected with HBOS down almost 30%.

Wall Street is also expected to open lower in what is likely to be a tense day of trading.

The Bank of England and the European Central Bank said they were monitoring developments and had pumped £5bn and $30bn respectively into money markets to help stabilise them.

US Treasury Secretary Henry Paulson, said he would work with regulators and policy-makers around the work to maintain the stability of financial markets.

"I am confident in the resilience of our capital markets, and in the commitment of US regulators and market participants to work together through this difficult period," Mr Paulson said.

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.

The Treasury had given $30bn backing to Bear Stearns in order to secure its sale to JP Morgan in March.

Greg Wood, the BBC's North America business correspondent, said that police had cordoned off the bank's headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank's demise.

"I think the whole history - 150 years of effort and hard work - that's the most saddening part for me," said one Lehman employee as she left the building.

The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.

Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.

It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.

The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.

Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world's largest financial services company.

Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.

The BBC's business editor, Robert Peston, said that it had been Wall Street's most extraordinary 24 hours since the late 1920s.

"The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence," he said.

In addition to Lehman and Merrill Lynch, problems at AIG, once the world's largest insurer, are also mounting.

Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.

To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.

Also 10 of the world's biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.

Source.

So the continuing crisis in the World's financial markets claims another scalp and rather a high profile one at that. The US government, previously adamant that they wouldn't get involved are now having to pump money into the financial system (Although given American national debt in total, it's not actually that much money) and share prices around the world are tumbling, meaning many small investors will have had their savings wiped out this morning.

General consensus is that these are all problems of the banks' own devising. That a system whereby big gains are rewarded with massive bonuses but big losses are shifted on to shareholders has encouraged bankers to take stupid risks and made the entire global financial system incredibly fragile. Even so, it's likely that the vast sums the executives have pocketed in recent years will tide them through, even if their share options become worthless. The victims here continue to be the regular people who have either lost their jobs or had their savings wiped out by today's events.

It would seem as though the way financial markets are operated will have to change and evolve in order to continue to be viable but I suspect that rather than the fundamental change that's so dearly needed, we will instead see simply a re-structuring with the companies that retain their value snapping up the failing ones and a market with even less competition arising as a result.

If people were better informed one might expect to see a few runs on banks but luckily, the average bloke on the street is rather oblivious to the fact that if his bank goes bankrupt as a result of sketchy lending, all his money goes with it. Personally I spend all my money each month and have no savings so if HSBC went tits up I'd suffer for no more than a couple of weeks.

So if you have any savings or investments are you at all concerned about their safety? What do you think needs to be done to restore stability in the market? Should governments be bailing the banks out or should we sit back and let the invisible hand run it's course, allowing the banks to fold and waiting for new financial institutions to rise up in their place? Have we learnt nothing from the mistakes of history and is another massive depression coming up or can the experience of the '20s and to a lesser extent the late '80s be used to ride through this current crisis?

Jam it back in, in the dark.

$150,000? That's not bad at all. Accounts over here are only guaranteed up to £30,000.

I was discussing this with some mates last night and the general consensus of opinion is that this probably won't change much in the long run. The executives will all get taken on by other companies and will get straight back to lining their pockets. After Enron and the dissolution of Arthur Andersson a lot of people were expecting sweeping changes in the audit market but in reality, most of the AA partners got jobs in KPMG, there were a few non-committal grumblings from the IASB and big four audits still aren't worth the paper they're written on.

I do think it'd be amusing if big Arab conglomerates started buying up American banks though. If I was the Sultan of Oman I'd buy a big American bank and rename it the Freedom Bank and impose Sharia law on all employees, just for the looks of righteous indignation on the faces of the customers.

The stock markets across the world took a proper hammering yesterday though. The time has never really been more right for the Chinese and Arabs to start buying up American businesses so I wouldn't be at all surprised to see a bit of that going on in the coming months.

There's nowhere I can't reach.

Well anyone who lives or works in New York will be immediately affected, no matter what their job. That many high-paid people losing their jobs at once is going to be a huge blow to the local economy. The London branch of Lehman's shed 5,000 jobs. That's 5,000 people who no longer buy lunch or go out for coffee, who don't catch the train to work, don't go to the gym in the area or use day-care services and that's just the regular admin staff. The executives are the ones who keep the bars and restaurants in business. To suggest that this is a finance only problem is incredibly naive.

Any big job losses have an immediate niegative effect on the local economy and you'll see job losses in all areas of business. What about the companies with big supply contracts for Lehman Bros? I imagine whoever supplied their IT systems is already planning to axe a bunch of software engineers, the catering compnay wil be laying off workers, as will the stationery suppliers, the air-con engineers, security firm, pension company, marketing company, auditors, the list goes on. When all those people lose their jobs then the local economies where they live take a hit too.

The butterfly effect is really noticeable when it comes to the death of a huge company like this. Wider financial issues aside, a company of that side going tits up has serious implications for everyone.

RR, you might be in line to score a well paid job but now the labur market has a lot more people in it than it did last week. Sure, not many will have your skills but some might and others might now re-train. All of these make job competition harder and pay-packets lower. On top of that, if big companies are worried about a period of economic shrinkage, they're less likely to be taking on new staff at all, especially highly paid ones. More and more stuff will get out-sourced to India or China where the skills are available but the labour far cheaper.

Once the inital wave of redundancy has passed, eveyone's pay packets are going to fall in real terms. As I said, an increased labour supply means more competition for jobs and as such lower wages. Also with lower revenues, companies can't afford to give pay-rises any more and the rampant inflation that's still in effect across most of the world as a result of comedy oil prices (The knock on effect of which still haven't finished filtering down into food and heating prices, let alone everything else that needs haulage, i.e. everything) means most people will be effectively receiving a pay-cut this year I'd have thought. If you work for the government you're screwed and public sector wage cuts are the easiest way to combat inflation, short of increasing taxes or persuading the fed to put up interest rates even further.

So you're earning less, there's fewer opportunities to change job, work's getting out-sourced to India and China and then you're going to see knee-jerk regulatory measures imposed on the banking system. It'll be incredibly hard to get credit any more and banks will start imposing higher charges on regular accounts to try to recoup some of their massive losses of late.

Oh yeah, and your currency is fucked and will remain so until faith is restored in your banks. This means anything you have to import will cost more. Also, OPEC are seriously considering ending the years-old system of charging for oil in dollars and switching to basing the price on a basket of currencies, including the Euro and Yen. If (Or more likely when) this happens, the weakness of the dollar against pretty much every other currency on the planet will make your oil even more expensive so you'll either see further price inflation or you'll have to invade another middle eastern country (The government expenditure related to which causes inflationary pressure). On the upside, if you do manage to land a well paid job then you're laughing because property in America won't be worth the land it's built on this time next year as the banks who reposessed it all will be after some cash so selling at bargain prices. Now would also be a good time to start buying shares if you've spare cash floating around because the market will recover eventually, that's the nature of markets, it's just going to take a while. Also, if you bought stock options and gambled low on the price than you're probably already a millionaire.

I mean, that's pretty much a best case scenario. Standing back laughing at people working in finance is fine but when you do so, remember that the people at the top who fucked everything else already liquidated their assets, hence the plummeting stock markets, and are happily sitting on piles of cash. The people who worked for the bank on a normal wage are basically fucked, as are the people who relied on those people's money for their own income and it's those people you're laughing at. Hardly the kind of grass-roots patriotism that Americans are so famous for.

This is a far bigger story than anything else on the planet at the moment and will have a more significant impact on global economics and national foreign policies than I feel most people realise.

This thing is sticky, and I don't like it. I don't appreciate it.

AIG might not be dead just yet but to buy up that much debt means there's less money available elsewhere in the federal budget. You can't just keep increasing your national debt ad infinitum, at some point you've got to pay your bills. Barclays have been forced to buy the Lehman stocks while at the same time over here HBOS and Lloyds, two of our biggest retail banks are in sudden merger talks which the government has said they won't enforce the competition rules over, implying that one or the other was in seriously bad financial dire straits.

Barclays will only have bought functioning bits of Lehmans, the fuck off massive debts will still get written off by the liquidators meaning that a lot of firms who supplied them are going to find themselves seriously out of pocket. Corporate restructuring on this level also always involves shedding most of the work force so all the negative issues regarding mass unemployment still stand.

Just because your newspapers are telling you not to panic, doesn't mean everything is ok. The American and UK governments and probably a few others around the world are desperately trying to preclude a massive run on the banks at the moment. Talk of banks collapsing makes everyone with any savings want to run to their branch and withdraw the whole lot, whether or not their savings are protected by federal laws.

The situation at present is similar to the collapse of the Soviet Union. Everything's fucked on an institutional level and it'll take a long time to reorganise everything and get back to any sort of normality. In the mean time, the common people get shit on either because their jpbs are axed or prices rise so fast. At the end of it, you'll have a much smaller number of much bigger companies which will mean higher prices for everyone as they attempt to claw back what they just spent on asset stripping their competitors. Either that or the government will run everything and although the irony of America having a state operated banking system is a delicious prospect, that just isn't going to happen any time soon. You'll also see the emergence of some super-rich individuals who will be the ones who kick started the recovery by actually buying all the shares that are up for sale and thereby sending the prices back in the right direction.

Essentially there'll be a smaller market that for a time at least will be far more risk-averse. Banking will become more expensive for everyone leading to further inflationary pressures but any country with an independant central bank (UK, US) won't be able to rely on interest rate rises slowing things down as that would just stop the banks lending to each other again and re-fuck the financial markets. Also, with little disposable income left, concumer spending wouldn't be the driving factor behind the inflation, it'd be government spending and the only easy way to cut that is reduce public services.

As I see it, there's going to be some tough choices ahead and it being an election year in the US at least means that the politicians will be looking for vote-winning quick fixes, such as bailing out the failing companies. The problem being that in the medium to long term this is going to shaft the economy and there's little they can do about it.

The sensible thing for a free-market loving economy like America's would have been to let AIG die and wait for other companies to pick off the bits they want. The government stays out of it, thereby not introducing any false demand into the economy and if the demand for the business is there, then someone will supply the products. There is the risk that it'd be foreign money that steps in though which I suspect is why this hasn't been allowed to happen. The problem with a protectionist free-market is that it completely fails when the market you're protecting runs out of resources. All it takes is for the World Bank to decide it wants some of it's money back or at least to say America has reached it's borrowing limit and the whole economy is royally fucked, unless the borders are opened up and they let the Chinese, Russians and Arabs bail them out.

I am a dolphin, do you want me on your body?