Bankruptcy of Lehman Brothers - AbsoluteAstronomy.com

Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...

filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets.

Exposure to the mortgage market

Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008, a process known as leveraging

Leverage (finance)

In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

or gearing. A significant portion of this investing was in housing-related assets, making it vulnerable to a downturn in that market. One measure of this risk-taking was its leverage ratio, a measure of the ratio of assets to owners equity, which increased from approximately 24:1 in 2003 to 31:1 by 2007. While generating tremendous profits during the boom, this vulnerable position meant that just a 3–4% decline in the value of its assets would entirely eliminate its book value or equity. Investment banks such as Lehman were not subject to the same regulations applied to depository banks to restrict their risk-taking.

In August 2007, Lehman closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took a $25-million after-tax charge and a $27-million reduction in goodwill

Goodwill (accounting)

Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...

. The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space".

Lehman's final months

In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis

Subprime mortgage crisis

The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

. Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranche

Tranche

In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. The word tranche is French for slice, section, series, or portion, and is cognate to English trench . In the financial sense of the word, each bond is a different slice of the deal's...

s when securitizing the underlying mortgages. Whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.

On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank

Korea Development Bank

Korea Development Bank is a wholly state-owned policy bank in South Korea It was founded in 1954 in accordance with The Korea Development Bank Act to finance and manage major industrial projects to expedite industrial development and enhance the national economy. As Korea’s representative...

was considering buying Lehman. Most of those gains were quickly eroded as news emerged that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, 2008, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.

Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500

S&P 500

The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...

down 3.4% on September 9, 2008. The Dow Jones

Dow Jones Industrial Average

The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...

lost nearly 300 points the same day on investors' concerns about the security of the bank. The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.

On September 10, 2008, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman

Neuberger Berman

Neuberger Berman Group LLC, through its subsidiaries is an investment management firm that provides financial services for high net worth individuals and institutional investors. With approximately $200 billion in asset under management, it is among the largest private employee-controlled asset...

. The stock slid 7% that day.

On September 13, 2008, Timothy F. Geithner

Timothy F. Geithner

Timothy Franz Geithner is an American economist, central banker, and civil servant. He is the 75th and current United States Secretary of the Treasury, serving under President Barack Obama...

, then president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. Lehman reported that it had been in talks with Bank of America

Bank of America

Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...

and Barclays

Barclays plc

Barclays PLC is a global banking and financial services company headquartered in London, United Kingdom. As of 2010 it was the world's 10th-largest banking and financial services group and 21st-largest company according to a composite measure by Forbes magazine...

for the company's possible sale. The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...

reported on September 14, 2008, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed. It emerged subsequently that a deal had been vetoed by the Bank of England

Bank of England

The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

and the UK's Financial Services Authority

Financial Services Authority

The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...

. Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure. Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.

Bankruptcy filing

Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. According to Bloomberg

Bloomberg L.P.

Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...

, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on September 16 indicated that J.P. Morgan provided Lehman Brothers

Lehman Brothers

with a total of $138 billion in "Federal Reserve-backed advances." The cash-advances by JPMorgan Chase were repaid by the Federal Reserve Bank of New York for $87 billion on September 15 and $51 billion on September 16.

Breakup process

On September 22, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of the deal, was put before the bankruptcy court, with a $1.3666 billion (£700 million) plan for Barclays to acquire the core business of Lehman Brothers

Lehman Brothers

(mainly Lehman's $960 million Midtown Manhattan

Midtown Manhattan

Midtown Manhattan, or simply Midtown, is an area of Manhattan, New York City home to world-famous commercial zones such as Rockefeller Center, Broadway, and Times Square...

office skyscraper), was approved. Manhattan

Manhattan

Manhattan is the oldest and the most densely populated of the five boroughs of New York City. Located primarily on the island of Manhattan at the mouth of the Hudson River, the boundaries of the borough are identical to those of New York County, an original county of the state of New York...

court bankruptcy Judge James Peck, after a 7 hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency."

Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $ 47.4 billion in securities and assume $ 45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller

Harvey R. Miller

Harvey R. Miller is an American lawyer. The New York Times called him “the most prominent bankruptcy lawyer in the nation.” Born in New York City, Miller was admitted to bar in New York State in 1959...

of Weil, Gotshal & Manges

Weil, Gotshal & Manges

Weil, Gotshal & Manges is a prominent international law firm, one of the largest and most prestigious in the world with 1,200 lawyers and gross annual revenue in excess of $1.1 billion. The firm was founded in New York City in 1931 by Frank Weil, Sylvan Gotshal, and Horace Manges...

, said "the purchase price for the real estate components of the deal would be $ 1.29 billion, including $960 million for Lehman's New York headquarters and $ 330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $ 1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays. Barclays had a potential liability of $ 2.5 billion to be paid as severance

Severance

-Entertainment:*Severance , the 2003 album of Australian melodic death metal band Daysend*Severance , the 2006 British horror film* "Severance", a song by Dead Can Dance from the 1988 album The Serpent's Egg...

, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days.

On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan, Hong Kong and Australia. The following day, Nomura announced its intentions to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. A few weeks later it was announced that conditions to the deal had been met, and the deal became legally effective on Monday, October 13. In 2007, non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.

Impact of bankruptcy filing

The Dow Jones closed down just over 500 points (−4.4%) on September 15, 2008, at the time the largest drop by points in a single day since the days following

Economic effects arising from the September 11 attacks

Major economic effects arose from the September 11 attacks, with initial shock causing global stock markets to drop sharply. The attacks themselves caused approximately $40 billion in insurance losses, making it one of the largest insured events ever....

the attacks on September 11, 2001. (This drop was subsequently exceeded by an even larger −7.0% plunge on September 29, 2008.)

Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate. The prospect for Lehman's $4.3 billion in mortgage securities getting liquidated sparked a selloff in the commercial mortgage-backed securities (CMBS) market. Additional pressure to sell securities in commercial real estate is feared as Lehman gets closer to liquidating its assets. Apartment-building investors are also expected to feel pressure to sell as Lehman unloads its debt and equity pieces of the $22 billion purchase of Archstone

Archstone-Smith Trust

Archstone is one of the largest investors, developers and operators of apartment communities in the United States. As of June 30, 2011, the company owned or had an ownership position in 434 communities located in the United States and Europe, representing 77,084 units, including units under...

, the third-largest United States Real Estate Investment Trust

Real estate investment trust

A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...

(REIT). Archstone's core business is the ownership and management of residential apartment buildings in major metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at UBS said that in markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, adding "Every day that goes by there will be more pressure on pricing."

Several money fund

Money fund

A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield...

s and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by The Bank of New York Mellon

Bank of New York Mellon

The Bank of New York Mellon Corporation is a global financial services company formed on July 1, 2007 as result of the merger of The Bank of New York and Mellon Financial Corporation...

and the Primary Reserve Fund, a money-market fund, both falling below $1 per share, called "breaking the buck", following losses on their holdings of Lehman assets. In a statement The Bank of New York Mellon said its fund had isolated the Lehman assets in a separate structure. It said the assets accounted for 1.13% of its fund. The drop in the Primary Reserve Fund was the first time since 1994 that a money-market fund had dropped below the $1-per-share level.

Putnam Investments

Putnam Investments

Putnam Investments is a privately owned investment management firm founded in 1937 by George Putnam, who established one of the first balanced mutual funds, The George Putnam Fund of Boston...

, a unit of Canada's Great-West Lifeco

Great-West Lifeco

Great-West Lifeco is an insurance centered financial holding company that operates in North America , Europe and Asia through 5 wholly owned, regionally focussed subsidiaries...

, shut a $12.3 billion money-market fund as it faced "significant redemption pressure" on September 17, 2008. Evergreen Investments

Evergreen Investments

Evergreen Investments was the investment management business of Wachovia. The brand was merged into Wells Fargo Advantage Funds and subsequently phased out following Wells Fargo's acquisition of Wachovia...

said its parent Wachovia Corporation

Wachovia

Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo in 2008, Wachovia was the fourth-largest bank holding company in the United States based on total assets...

would "support" three Evergreen money-market funds to prevent their shares from falling. This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital.

Close to 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. In an attempt to meet their own credit needs, Lehman Brothers International routinely re-hypothecated the assets of their hedge funds clients that utilized their prime brokerage services. Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter 11 Bankruptcy. Of this, 22 billion had been re-hypothecated. As administrators

Administration (insolvency)

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – an alternative to liquidation – is often known as going...

took charge of the London business and the U.S. holding company filed for bankruptcy, positions held by those hedge funds at Lehman were frozen. As a result the hedge funds are being forced to de-lever and sit on large cash balances inhibiting chances at further growth. This in turn created further market dislocation and over all systemic risk, resulting in a 737 billion dollar decline in collateral outstanding in the securities lending market.

In Japan, banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied to the collapse of Lehman. Mizuho Trust & Banking Co. cut its profit forecast by more than half, citing 11.8 billion yen in losses on bonds and loans linked to Lehman. The Bank of Japan

Bank of Japan

is the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...

Governor Masaaki Shirakawa said "Most lending to Lehman Brothers was made by major Japanese banks, and their possible losses seem to be within the levels that can be covered by their profits," adding "There is no concern that the latest events will threaten the stability of Japan's financial system." During bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is facing between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries, Martin Bienenstock.

Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15, 2008. Freddie said it had not received principal payments of $1.2 billion plus accrued interest. Freddie said it had further potential exposure to Lehman of about $400 million related to the servicing of single-family home loans, including repurchasing obligations. Freddie also said it "does not know whether and to what extent it will sustain a loss relating to the transactions" and warned that "actual losses could materially exceed current estimates." Freddie was still in the process of evaluating its exposure to Lehman and its affiliates under other business relationships.

After Constellation Energy

Constellation Energy

Constellation Energy, headquartered in Baltimore, Maryland, is an energy producer, trader, and distributor. The company operates over 35 power plants in 11 states under its operating company Constellation Commodities Group and/or Constellation Generation Group...

was reported to have exposure to Lehman, its stock went down 56% in the first day of trading having started at $67.87. The massive drop in stocks led to the New York Stock Exchange

New York Stock Exchange

The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...

halting trade of Constellation. The next day, as the stock plummeted as low as $13 per share, Constellation announced it was hiring Morgan Stanley

Morgan Stanley

Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....

and UBS to advise it on "strategic alternatives" suggesting a buyout. While rumors suggested French power company Électricité de France

Électricité de France

Électricité de France S.A. is the second largest French utility company. Headquartered in Paris, France, with €65.2 billion in revenues in 2010, EDF operates a diverse portfolio of 120,000+ megawatts of generation capacity in Europe, Latin America, Asia, the Middle East and Africa.EDF is one of...

would buy the company or increase its stake, Constellation ultimately agreed to a buyout by MidAmerican Energy

MidAmerican Energy

MidAmerican Energy may refer to one of the following:*MidAmerican Energy Holdings Company, a holding company controlled by Berkshire Hathaway*MidAmerican Energy Company, an energy company and subsidiary of MidAmerican Energy Holdings Company...

, part of Berkshire Hathaway

Berkshire Hathaway

Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. The company averaged an annual growth in book value of 20.3% to its shareholders for the last 44 years,...

(headed by billionaire Warren Buffett

Warren Buffett

Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...

).

The Federal Agricultural Mortgage Corporation or Farmer Mac said it would have to write off $48 million in Lehman debt it owned as a result of the bankruptcy. Farmer Mac said it may not be in compliance with its minimum capital requirements at the end of September.

In Hong Kong more than 43,700 individuals in the city have invested in HK$15.7 billion of "guaranteed mini-bonds" (迷你債券) from Lehman. Many claim that banks and brokers mis-sold them as low-risk. Conversely, bankers note that minibonds are indeed low-risk instruments since they were backed by Lehman Brothers, which until just months before its collapse was a venerable member of Wall Street with high credit and investment ratings. The default of Lehman Brothers was a low probability event, which was totally unexpected. Indeed, many banks accepted minibonds as collateral for loans and credit facilities. Another HK$3 billion has been invested in similar like derivatives. The Hong Kong government proposed a plan to buy back the investments at their current estimated value, which will allow investors to partially recover some of their loss by the end of the year. HK chief executive

Chief Executive of Hong Kong

The Chief Executive of Hong Kong is the President of the Executive Council of Hong Kong and head of the Government of the Hong Kong Special Administrative Region. The position was created to replace the Governor of Hong Kong, who was the head of the Hong Kong government during British rule...

Donald Tsang

Sir Donald Tsang Yam-kuen, GBM, KBE is the current Chief Executive and President of the Executive Council of the Government of Hong Kong....

insisted the local banks respond swiftly to the government buy-back proposal as the Monetary Authority

Hong Kong Monetary Authority

The Hong Kong Monetary Authority or HKMA is Hong Kong's central banking institution . It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking"...

received more than 16,000 complaints. On October 17 He Guangbe, chairman of the Hong Kong Association of Banks

Hong Kong Association of Banks

The Hong Kong Association of Banks is an association created based on a series of Bank Ordinances enacted since 1948. In 1981 the association was established and replaced the Exchange Bank Association...

, agreed to buy back the bonds, which will be priced using an agreed upon methodology based on its estimated current value. This episode has deep repercussions on the banking industry, where misguided investor sentiments have become hostile to both wealth management products as well as the banking industry as a whole. Under intense pressure from the public, all political parties have come out in support of the investors, further fanning distrust towards the banking industry.

Neuberger Berman

Neuberger Berman
Neuberger Berman
Neuberger Berman Group LLC, through its subsidiaries is an investment management firm that provides financial services for high net worth individuals and institutional investors. With approximately $200 billion in asset under management, it is among the largest private employee-controlled asset...

Inc., through its subsidiaries, primarily Neuberger Berman, LLC, is an investment-advisory firm founded in 1939 by Roy R. Neuberger

Roy Neuberger

Roy Rothschild Neuberger was an American financier who contributed money to raise public awareness of modern art through his acquisition of pieces he deemed worthy. He was a co-founder of the investment firm Neuberger Berman....

and Robert Berman, to manage money for high-net-worth individuals

High net worth individual

A high-net-worth individual is a person with a high net worth. In the private banking business, these individuals typically are defined as having investable assets in excess of US$1 million. As explained below, the U.S...

. In the decades that followed, the firm's growth mirrored that of the asset-management industry as a whole. In 1950, it introduced one of the first no-load mutual fund

Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s in the United States, the Guardian Fund, and also began to manage the assets of pension plans and other institutions. Historically known for its value-investing

Value investing

Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis...

style, in the 1990s the firm began to diversify its competencies to include additional value and growth investing

Growth investing

Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios...

, across the entire capitalization

Market capitalization

Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...

spectrum, as well as new investment categories, such as international, real-estate investment trusts

Real estate investment trust

and high-yield investments. In addition, with the creation of a nationally and several state-chartered trust companies, the firm became able to offer trust and fiduciary services. Today the firm has approximately $130 billion in assets under management.

In October 1999, the firm conducted an initial public offering

Initial public offering

An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

of its shares and commenced trading on the New York Stock Exchange

New York Stock Exchange

, under the ticker symbol "NEU". In July 2003, shortly after the retired Mr. Neuberger's 100th birthday, the company announced that it was in merger discussions with Lehman Brothers Holdings Inc.

Lehman Brothers

These discussions ultimately resulted in the firm's acquisition by Lehman on October 31, 2003, for approximately $2.63 billion in cash and securities.

On November 20, 2006, Lehman announced its Neuberger Berman subsidiary would acquire H. A. Schupf & Co., a money-management firm targeted at wealthy individuals. Its $2.5 billion of assets would join Neuberger's $50 billion in high-net-worth client assets under management.

An article in The Wall Street Journal on September 15, 2008, announcing that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection, quoted Lehman officials regarding Neuberger Berman: "Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said."

Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."

Lehman Brothers Investment Management Director George Herbert Walker IV

George Herbert Walker IV

George Herbert Walker IV is the Chairman and CEO of Neuberger Berman. Formerly a Partner and Managing Director at Goldman Sachs, Walker was recruited to rival investment bank, Lehman Brothers, to head its Investment Management Division, of which Neuberger was a part...

dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."

Controversy of executive pay during crisis

Richard Fuld, head of Lehman Brothers, faced questioning from the U.S. House of Representatives' Committee on Oversight and Government Reform. Rep. Henry Waxman

Henry Waxman

Henry Arnold Waxman is the U.S. Representative for , serving in Congress since 1975. He is a member of the Democratic Party. He is considered to be one of the most influential liberal members of Congress...

(D-CA) asked: "Your company is now bankrupt, our economy is in crisis, but you get to keep $480 million (£276 million). I have a very basic question for you, is this fair?" Fuld said that he had in fact taken about $300 million (£173 million) in pay and bonuses over the past eight years. Despite Fuld's defense on his high pay, Lehman Brothers executive pay was reported to have increased significantly before filing for bankruptcy. On October 17, 2008, CNBC

CNBC

CNBC is a satellite and cable television business news channel in the U.S., owned and operated by NBCUniversal. The network and its international spinoffs cover business headlines and provide live coverage of financial markets. The combined reach of CNBC and its siblings is 390 million viewers...

reported that several Lehman executives, including Richard Fuld, have been subpoenaed in a case relating to securities fraud.

Accounting manipulation

In March 2010, the report of Anton R. Valukas

Report of Anton R. Valukas

The Report of Anton R. Valukas is an examination into the demise of Lehman Brothers, a formerly dominant global financial institution, that collapsed into bankruptcy during the Financial crisis of 2007-2010. Anton Valukas, chairman of the Chicago law firm Jenner & Block, was appointed by a ...

, the Bankruptcy Examiner, drew attention to the use of Repo 105

Repo 105

Repo 105 is a repurchase agreement which results in an accounting maneuver where a short-term loan is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to reduce its leverage by temporarily paying down liabilities—just long...

transactions to boost the bank's apparent financial position around the date of the year-end balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

. The attorney general later Andrew Cuomo

Andrew Cuomo

Andrew Mark Cuomo is the 56th and current Governor of New York, having assumed office on January 1, 2011. A member of the Democratic Party, he was the 64th New York State Attorney General, and was the 11th United States Secretary of Housing and Urban Development...

filed charges against the bank's auditors Ernst & Young

Ernst & Young

Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....

in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment.

On April 12, 2010, a New York Times story revealed that Lehman had used a small company, Hudson Castle

Hudson Castle Group, Inc.

Hudson Castle Group Inc. is a private, independent company formed in 1996 and is a leading provider of debt financing solutions to the global financial institutions sector...

, to move a number of transactions and assets off Lehman's books as a means of manipulating accounting numbers of Lehman's finances and risks. One Lehman executive described Hudson Castle as an "alter ego" of Lehman. According to the story, Lehman owned one quarter of Hudson; Hudson's board was controlled by Lehman, most Hudson staff members were former Lehman employees.

Section 363 Sale

On February 22, 2011, Judge James M. Peck of the U.S. Bankruptcy Court in the Southern District of New York rejected claims by lawyers for the Lehman estate that Barclays had improperly reaped a windfall from the section 363 sale. "The sale process may have been imperfect, but it was still adequate under the exceptional circumstances of Lehman Week."

External links

Channel 4 News: How Britain could have saved Lehman Brothers

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

Exposure to the mortgage market

Lehman's final months

Bankruptcy filing

Breakup process

Impact of bankruptcy filing

Neuberger Berman

Controversy of executive pay during crisis

Accounting manipulation

Section 363 Sale

See also

External links