What is subprime crisis? How it caused financial mayhem?
The current upheaval in the global financial markets has caused more mayhem in a fortnight than the world has seen in its entire economic history. Although there are many reasons responsible for bringing the world to the doorstep of financial doom, the main cause of this financial disaster is said to be the sub-prime loan.'
So what is this sub-prime loan? And why has it caused global panic? If it is related to the American housing sector, why should it affect Indian and other markets?
A sub-prime loan
Sub-prime mortgage loans (or housing loans or junk loans) are very risky. But since profits are high where the risk is high, a lot of lenders get into this business to try and make a quick buck.
Sub-prime loans are dicey as they are given to people with unstable incomes or low creditworthiness. These individuals are not financially sound enough to be given a loan when judged under the strict standards that should normally be followed by a bank or lending institution.
However, there's more to it. Let us simplify this issue to understand better how sub-prime loans work and how they brought the world down to its knees. It all begins with an American wanting to live the famed American dream. So he seeks a housing loan to give shape to his dream home. But there is a slight problem. He doesn't have good credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individual before it sanctions a loan.
Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a default by him are high. Banks don't like customers who default on their payments.
But lo!, before the American dream can fade away, there enters a second American -- usually a robust financial institution -- who has good credit rating and is willing to take on some amount of risk. Given his good credit rating, the bank is willing to give the second American a loan. The bank gives the loan at a certain rate of interest.
The second American then divides this loan into a lot of small portions and gives them out as home loans to lots of other Americans -- like the first American -- who do not have a great credit rating and to whom the bank would not have given a home loan in the first place.
The second American gives out these loans at a rate of interest that is much higher rate than the rate at which he borrowed money from the bank. This higher rate is referred to as the sub-prime rate and this home loan market is referred to as the sub-prime home loan market.
Also by giving out a home loan to lots of individuals, the second American is trying to hedge his bets. He feels that even if a few of his borrowers default, his overall position would not be affected much, and he will end up making a neat profit. Now if this home loan market is sub-prime, what is prime? The prime home loan market refers to individuals who have good credit ratings and to whom the banks lend directly.
Now let's get back to the sub-prime market. The institution giving out loans in the sub-prime market does not stop here. It does not wait for the principal and the interest on the sub-prime home loans to be repaid, so that it can repay its loan to the bank (the prime lender), which has given it the loan.
So what does the institution do?
It goes ahead and ? securitises' these loans. Securitisation means converting these home loans into financial securities, which promise to pay a certain rate of interest. These financial securities are then sold to big institutional investors. Many investment banks (or institutions like the ?second American' in our story) sold complicated securities that were backed by debt which was very risky. And how are these investors repaid? The interest and the principal that is repaid by the sub-prime borrowers through equated monthly installments (EMIs) is passed onto these institutional investors.
The institution giving out the sub-prime loans takes the money that it gets by selling the financial securities and passes it on to the bank he had taken the loan from, thereby repaying the loan. And everybody lives happily ever after. Or so it would have seemed.
The sub-prime home loans were given out as floating rate home loans. A floating rate home loan as the name suggests is not fixed. As interest rates go up, the interest rate on floating rate home loans also go up. As interest rates to be paid on floating rate home loans go up, the EMIs that need to be paid to service these loans go up as well.
With US interest rising, the EMIs too increased. Higher EMIs hit the sub-prime borrowers hard. A lot of them in the first place had unstable incomes and poor credit rating. They, thus, defaulted. Once more and more sub-prime borrowers started defaulting, payments to the institutional investors who had bought the financial securities stopped, leading to huge losses.
The problem primarily began with the United States keeping its interest rates very low for a very long time, thus encouraging Americans to go in for housing loans, or mortgages. Lower interest rates led to buyers wanting to take on bigger loans, and thus bigger and better homes.
But life was fine. With the American economy doing well at that time and housing prices soaring on the back of huge demand for real estate and bigger and better homes, financial institutions saw a mouthwatering opportunity in the mortgage market.
In their zeal to make a quick buck, these institutions relaxed the strict regulatory procedures before extending housing loans to people with unstable jobs and weak credit standing.
Few controls were put in place to handle the situation in case the housing ?bubble' burst. And when the US economy began to slow down, the house of cards began to fall.
The crisis began with the bursting of the United States housing bubble.
A slowing US economy, high interest rates, unrealistic real estate prices, high inflation and rising oil tags together led to a fall in stock markets, growth stagnation, job losses, lack of consumer spending, a virtual halt to new jobs, and foreclosures and defaults.
Sub-prime homeowners began to default as they could no longer afford to pay their EMIs. A deluge of such defaults inundated these institutions and banks, wiping out their net worth. Their mortgage-backed securities were almost worthless as real estate prices crashed. The moment it was found out that these institutions had failed to manage the risk, panic spread. Investors realised that they could hardly put any value on the securities that these institutions were selling. This caused many a Wall Street pillar to crumble.
As defaults kept rising, these institutions could not service their loans that they had taken from banks. So they turned to other financial firms to help them out, but after a while these firms too stopped extending credit realizing that the collateral backing this credit would soon lose value in the falling real estate market. Now burdened with tons of debt and no money to pay it back, the back of these financial entities broke, leading to the current meltdown. The problem worsened because institutions giving out sub-prime home loans could easily securitise it. Once an institution securitises a loan, it does not remain on the books of the institution. Hence that institution does not take the risk of the loan going bad. The risk is passed onto the investors who buy the financial securities issued for securitising the home loan. Another advantage of securitisation, which has now become a disadvantage, is that money keeps coming in.
Once an institution securitises the first lot of home loans and repays the bank it has borrowed from, it can borrow again to give out loans. The bank having been repaid and made its money does not have any inhibitions in lending out money again.
Given the fact that institutions giving out the loan did not take the risk, their incentive was in just giving out the loan. Whether the individual taking the home loan had the capacity to repay the loan or not, wasn't their problem. Thus proper due diligence to give out the home loan was not done and loans were extended to individuals who are more likely to default. Other than this, greater the amount of loan that the institution gave out, greater was the amount it could securitise and, hence, greater the amount of money it could earn. After borrowers started defaulting, it came to light that institutions giving out loans in the sub-prime market had been inflating the incomes of borrowers, so that they could give out greater amount of home loans.
By giving out greater amounts of home loan, they were able to securitise more, issue more financial securities and earn more money. Quite a vicious cycle.... And so the story continued, till the day borrowers stop repaying. Investors who bought the financial securities could be serviced.
Well, that still does not explain, why stock markets in India, fell? Here's why. . .
Institutional investors who had invested in securitised paper from the sub-prime home loan market in the US, saw their investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world. So
Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion.
In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well.
So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world. Since the amount of selling in the market is much higher than the amount of buying, the Sensex began to tumble.
The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar.
Any other reason, apart from sub-prime crisis?
Of course! Sub-prime crisis alone could not have caused such mayhem, although it is to blame for the beginning of the end.
This crisis is spreading from sub-prime to prime mortgages, home equity loans, to commercial real estate, to unsecured consumer credit (credit cards, student loans, auto loans), to leveraged loans that financed reckless debt-laden leveraged buy outs, to municipal bonds, to industrial and commercial loans, to corporate bonds, to the derivative markets whose risk are indeterminate, etc. It has been a total systemic failure that has its roots in the US real estate and the sub-prime loan market. Some analysts say that the worst might not be over. . .
Saturday, September 27, 2008
Thursday, September 18, 2008
America's Largest Bankruptcies
1.Lehman Brothers Holdings Inc; $639 billion
The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion! What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks. The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman. Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers.
The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008.
Why it collapsed?
The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.
It was the exaggerated but misplaced confidence of Wall Street's longest serving chief executive officer, Richard Fuld of Lehman, that finally led to Lehman's demise. Over 14 years, Richard Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. An international squash player, Fuld could not master the final stroke as he failed to keep the 158-year-old banking major alive.
2. Worldcom Inc; $103.91 billion
Founded in 1983 as LDDS Communications, Worldcom became America's second-largest long-distance company and the largest handler of Internet data. It is also the US's second largst bankruptcy ever at $103.91 billion!
WorldCom growth was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998.
On November 10, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the then largest merger in the US. On September 15, 1998 the new company, MCI WorldCom, opened for business. Later, in 2000, MCI WorldCom renamed itself 'WorldCom'.
WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, filed for bankruptcy on July 21, 2002.
Why it collapsed?
· The company was found guilty of underreporting 'line costs' (interconnection expenses with other telecommunication companies) by capitalising these costs on the balance sheet rather than properly expensing them, and
· Inflating revenues with bogus accounting entries from 'corporate unallocated revenue accounts'.
Wall Street referred to him as the 'telecom cowboy'. Worldcom CEO Bernard Ebbers became very wealthy from the rising price of his holdings in the company's stock.
By 2000, WorldCom's stock declined and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others).
Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls.
Ebbers was finally ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNet Technologies, Inc.
Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford 'Buddy' Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom's stock.
On March 15, 2005 Bernard Ebbers was found guilty and convicted of fraud, conspiracy and filing false documents with regulators - all related to the $11 billion accounting scandal at the telecommunications company he founded. He was sentenced to 25 years in prison.
The others, including , Sullivan were also found guilty of fraud and were served sentences.
3. Enron Corp; $63.39 billion
Fortune named it 'America's Most Innovative Company' for six consecutive years. It was on the Fortune's '100 Best Companies to Work for in America' list in 2000. It was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud.
Enron Corporation, the Houston based energy giant was originally involved in transmitting and distributing electricity and gas throughout the United States. It remains US's third largest bankruptcy till date: $63.39 billion.
The company developed, built, and operated power plants and pipelines. It owned a large network of natural gas pipelines which stretched ocean to ocean and border to border.
Enron filed for bankruptcy on December 2, 2001.
Why it collapsed?
It was discovered that many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent.
Debts and losses were put into entities formed 'offshore' that were not included in the firm's financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to take unprofitable entities off the company's books
Kenneth Lay, the former chairman of the Board of Enron and chief executive officer and Jeffrey Skilling, former chief executive officer and chief operating officer, went on trial for their part in the Enron scandal in January 2006.
The 53-count, 65-page indictment covers a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, conspiracy and insider trading.
Lay was convicted on all six counts and Skilling on 19 of 28 counts on May 25, 2006.
On July 5, 2006, Lay died at age 64 while vacationing in Aspen, Colorado, after suffering a heart attack on July 4.
Skilling was convicted and sentenced to 24 years, 4 months in a federal prison on October 23, 2006.
4. Conseco Inc; $61.39 billion
From a small company set up in 1979, Conseco became one of the largest US home lenders and personal insurers by the late 1990s. Unfortunately, it collapsed under the weight of debts caused by it ambitious expansion and mounting bad loans. At $61.39 billion, Conseco filed for what is US's 4th largest bankruptcy petition.
The Carmel, Indiana-based company has struggled since piling up massive debts in a 1990s acquisition binge under flamboyant founder and chief executive Stephen Hilbert, capped by a disastrous purchase in 1998 of loan firm Green Tree Financial.
That deal exposed Conseco to a mountain of bad loans -- largely on mobile homes and manufactured housing -- which worsened as the economy turned sour.
Conseco piled on even more debt and made problems for itself in the late 1990s by aggressively accounting for gains from securitizing its loans. It later abandoned that practice under pressure from investors, which led to a restatement of several years' profits. That shook Wall Street's confidence in the company, and eventually led to Hilbert quitting in 2000.
The bankruptcy was filed to the United States Bankruptcy Court for the Northern District of Illinois on December 18, 2002.
5. Texaco Inc; $35.89 billion
Founded in 1901 in Beaumont, Texas by Joseph S Cullinan, Thomas J Donoghue, Walter Benona Sharp and Arnold Schlaet upon discovery of oil at Spindletop, Texaco began its journey as the Texas Fuel Company.
For many years, Texaco was the only company selling gasoline in all the 50 states of America.
Its logo features a white star in a red circle (a reference to the lone star of Texas).
On November 19, 1985 Pennzoil, another oil company, won a $10.53 billion verdict from Texaco. over the later's controversial acquisition of Getty Oil. It was the largest civil verdict in US history.
To obtain the billions required to pay the verdict, Texaco sold 50 per cent of its interests in marketing east of the Mississippi and Texas and its three Gulf Coast refineries to Saudi Aramco.
Texaco also withdrew from marketing gasoline in the Chicago area by selling its service stations and distribution facilities to Mobil in an exchange agreement.
On April 12, 1987, Texaco filed for bankruptcy, but continued to function under protection of US bankruptcy laws.
Texaco was an independent company until it merged into Chevron Corporation in 2001. The curreent CEO is David J O'Reilly.
6. Financial Corp of America; $33.86 billion
Not enough material is available about the reasons that led to its collapse. It filed for bankruptcy on September 9, 1988.
7. Refco Inc; $33.33 billion; Oct. 17, 2005,
Founded in 1969 as Ray E Friedman and Co, Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts.
Prior to its collapse, the firm had over $4 billion in approximately 200,000 customer accounts, and it was the largest broker on the Chicago Mercantile Exchange.
The firm's balance sheet at the time of the collapse showed about $75 billion in assets and a roughly equal amount in liabilities. Refco entered crisis on October 10, 2005 when it announced that its chief executive officer and chairman, Phillip R Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence.
Apparently, Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off, and was paying for the bad loans with money borrowed by Refco itself. Between 2002 and 2005, he arranged at the end of every quarter for a Refco subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings.
Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. On October 20, Liberty announced plans to sue Refco.
on October 12 Bennett was arrested and charged with one count of securities fraud for using US mail, interstate commerce, and securities exchanges to lie to investors.
Refco filed for Chapter 11 bankruptcy on October 17, 2005.
On July 3, 2008,Bennett was sentenced to 16 years in Federal prison.
8. Global Crossing Ltd; $30.19 billion
Founded by Gary Winnick and three business associates in 1997 through Pacific Capital Group, Winnick's personal venture group, Global Crossing Limited is a telecommunications company that provides computer networking services worldwide.
The company is legally domiciled in Bermuda, although its administrative headquarters are in New Jersey. Global Crossing's rapid rise and fall attracted tremendous attention and it was quickly revealed that the company, particularly its executives, lavishly spent money on "themselves and their digs."
Four of Global Crossing's CEOs received at least $23 million in personal loans from the company, some of which were forgiven entirely even when bankruptcy was becoming a greater possibility. These same CEOs also received over $13.5 million in after-tax signing bonuses along with lucrative stock options. Between 1998 and 2001, Winnick sold approximately $420 million in Global Crossing stock.
Even as the company's financial situation went from questionable to grim, work continued on Winnick's Bel Air mansion, valued at $92 million and considered the most expensive home purchased in Los Angeles.
The company, inevitably, filed for bankruptcy on January 28, 2002.
In 2004, Global Crossing settled a class action lawsuit over the losses the employees incurred from their pensions and 401Ks. Investors and former employees received $325 million in settlement. Winnick contributed $30 million to the settlement.
Since emerging from bankruptcy, the company has attempted to re-focus its business.
9. Pacific Gas and Electric Co; $29.77 billion
Pacific Gas and Electric incorporated on October 10, 1905, was a consolidation of more than two dozen power and water concerns around the State of California.
PG&E began delivering natural gas to San Francisco and northern California in 1930 through the longest pipeline in the world, connecting the Texas gas fields to northern California.
With the introduction of natural gas, the company began retiring its polluting gas manufacturing facilities, though it kept some plants on standby.
With little generating capacity of its own, and unable to sell electricity to consumers for more than it could buy it on the open market, PG&E was forced to enter Chapter 11 bankruptcy on April 6, 2001.
The State of California bailed out the utility, the cost of which worsened an already bad state budget situation.
PG&E emerged from bankruptcy in April 2004, after distributing $10.2 billion to hundreds of creditors. Today it provides natural gas and electricity to most of Northern California. Its 4.8 million electricity customers are expected to pay an average $1,300 to $1,700 each in above-market prices through 2012.
PG&E was one of the most profitable companies on the Fortune 500 list for 2005 with $4.5 billion in profits out of $11 billion in revenue
10. UAL Corp; $25.2 billion
United Airlines Corporation UAL Corporation is an airline holding company, incorporated in Delaware with headquarters in Chicago, Illinois. The CEO of UAL Corporation since September 2002 is Glenn Tilton.
The promise of continued success in the new millennium quickly evaporated as the 'perfect storm' began to develop in 2000.
An economic downturn of global proportions, protracted labour negotiations, a proposed merger with US Airways and the tragedy of September 11, 2001, hit United hard.
For the year 2001, the company suffered a record loss of $2.1 billion. By mid-2002, United was asking employees to make wage concessions and asking the US government for a loan to help the company back to financial stability.
By early December, the company had reached agreements with most of its unions for wage reductions, but its loan application was rejected on December 4.
On December 9, 2002, UAL Corp filed for Chapter 11 bankruptcy. The company quickly received debtor-in-possession financing to allow it to continue 'business as usual' while it reorganized its debt, capital and cost structures. It came out of bankruptcy on February 1, 2006.
11. Delta Air Lines Inc; $21.8 billion
Based and headquartered in Atlanta, Georgia, Delta operates an expansive domestic and international network, spanning North America, South America, Europe, Asia, Africa, the Middle East and the Caribbean.
In 2004, in an effort to avoid bankruptcy, Delta announced a restructuring of the company that included job cuts, and an aggressive expansion of Atlanta operations by some 100 new flights. This was known to all Delta employees as 'Operation Clockwork'.
Further, by mid-2004 the airline announced it would be closing its fourth busiest hub (Dallas-Fort Worth International Airport). In a huge concessionary move, the pilots at Delta agreed to across-the-board 32.5 per cent reductions in hourly pay rates in order to help the company stave off a bankruptcy filing.
On September 14, 2005, Delta filed for Chapter 11 bankruptcy protection for the first time in its 76-year history. The company cited high labour costs and record-breaking jet fuel prices as factors in its filing.
At the time of the filing, Delta had $20.5 billion in debt, $10 billion of which accumulated since January 2001.
On April 30, 2007, Delta Air Lines emerged from bankruptcy protection as an independent carrier.
12. Adelphia Communications; $21.5 billion
John Rigas founded Adelphia with a $300 license in 1952, in the town of Coudersport, Pennsylvania. Named after the Greek word 'brothers', Adelphia was the fifth largest cable company in the United States before it filed for bankruptcy on June 25, 2002. The headquarters for the company was moved to Greenwood Village, Colorado shortly after bankruptcy was filed.
Rigas took the company public in 1986 and built it by acquiring other systems in the 1990s.
Majority of Adelphia's revenue-generating assets were officially acquired by Time Warner Cable and Comcast on July 31, 2006. As a result of this acquisition, Adelphia no longer exists as a cable provider.
The founders of Adelphia were charged with securities violations. Five officers were indicted and two (John Rigas and Timothy Rigas) were found guilty.
Federal prosecutors proved that the Rigases used complicated cash-management systems to spread money around to various family-owned entities and as a cover for stealing $100 million for themselves.
John and Timothy Rigas started their prison sentence at the Butner Federal Correctional Complex near Raleigh, North Carolina on August 13, 2007. John received 15 years and Timothy received 20 years.
The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion! What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks. The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman. Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers.
The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008.
Why it collapsed?
The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.
It was the exaggerated but misplaced confidence of Wall Street's longest serving chief executive officer, Richard Fuld of Lehman, that finally led to Lehman's demise. Over 14 years, Richard Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. An international squash player, Fuld could not master the final stroke as he failed to keep the 158-year-old banking major alive.
2. Worldcom Inc; $103.91 billion
Founded in 1983 as LDDS Communications, Worldcom became America's second-largest long-distance company and the largest handler of Internet data. It is also the US's second largst bankruptcy ever at $103.91 billion!
WorldCom growth was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998.
On November 10, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the then largest merger in the US. On September 15, 1998 the new company, MCI WorldCom, opened for business. Later, in 2000, MCI WorldCom renamed itself 'WorldCom'.
WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, filed for bankruptcy on July 21, 2002.
Why it collapsed?
· The company was found guilty of underreporting 'line costs' (interconnection expenses with other telecommunication companies) by capitalising these costs on the balance sheet rather than properly expensing them, and
· Inflating revenues with bogus accounting entries from 'corporate unallocated revenue accounts'.
Wall Street referred to him as the 'telecom cowboy'. Worldcom CEO Bernard Ebbers became very wealthy from the rising price of his holdings in the company's stock.
By 2000, WorldCom's stock declined and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others).
Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls.
Ebbers was finally ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNet Technologies, Inc.
Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford 'Buddy' Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom's stock.
On March 15, 2005 Bernard Ebbers was found guilty and convicted of fraud, conspiracy and filing false documents with regulators - all related to the $11 billion accounting scandal at the telecommunications company he founded. He was sentenced to 25 years in prison.
The others, including , Sullivan were also found guilty of fraud and were served sentences.
3. Enron Corp; $63.39 billion
Fortune named it 'America's Most Innovative Company' for six consecutive years. It was on the Fortune's '100 Best Companies to Work for in America' list in 2000. It was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud.
Enron Corporation, the Houston based energy giant was originally involved in transmitting and distributing electricity and gas throughout the United States. It remains US's third largest bankruptcy till date: $63.39 billion.
The company developed, built, and operated power plants and pipelines. It owned a large network of natural gas pipelines which stretched ocean to ocean and border to border.
Enron filed for bankruptcy on December 2, 2001.
Why it collapsed?
It was discovered that many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent.
Debts and losses were put into entities formed 'offshore' that were not included in the firm's financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to take unprofitable entities off the company's books
Kenneth Lay, the former chairman of the Board of Enron and chief executive officer and Jeffrey Skilling, former chief executive officer and chief operating officer, went on trial for their part in the Enron scandal in January 2006.
The 53-count, 65-page indictment covers a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, conspiracy and insider trading.
Lay was convicted on all six counts and Skilling on 19 of 28 counts on May 25, 2006.
On July 5, 2006, Lay died at age 64 while vacationing in Aspen, Colorado, after suffering a heart attack on July 4.
Skilling was convicted and sentenced to 24 years, 4 months in a federal prison on October 23, 2006.
4. Conseco Inc; $61.39 billion
From a small company set up in 1979, Conseco became one of the largest US home lenders and personal insurers by the late 1990s. Unfortunately, it collapsed under the weight of debts caused by it ambitious expansion and mounting bad loans. At $61.39 billion, Conseco filed for what is US's 4th largest bankruptcy petition.
The Carmel, Indiana-based company has struggled since piling up massive debts in a 1990s acquisition binge under flamboyant founder and chief executive Stephen Hilbert, capped by a disastrous purchase in 1998 of loan firm Green Tree Financial.
That deal exposed Conseco to a mountain of bad loans -- largely on mobile homes and manufactured housing -- which worsened as the economy turned sour.
Conseco piled on even more debt and made problems for itself in the late 1990s by aggressively accounting for gains from securitizing its loans. It later abandoned that practice under pressure from investors, which led to a restatement of several years' profits. That shook Wall Street's confidence in the company, and eventually led to Hilbert quitting in 2000.
The bankruptcy was filed to the United States Bankruptcy Court for the Northern District of Illinois on December 18, 2002.
5. Texaco Inc; $35.89 billion
Founded in 1901 in Beaumont, Texas by Joseph S Cullinan, Thomas J Donoghue, Walter Benona Sharp and Arnold Schlaet upon discovery of oil at Spindletop, Texaco began its journey as the Texas Fuel Company.
For many years, Texaco was the only company selling gasoline in all the 50 states of America.
Its logo features a white star in a red circle (a reference to the lone star of Texas).
On November 19, 1985 Pennzoil, another oil company, won a $10.53 billion verdict from Texaco. over the later's controversial acquisition of Getty Oil. It was the largest civil verdict in US history.
To obtain the billions required to pay the verdict, Texaco sold 50 per cent of its interests in marketing east of the Mississippi and Texas and its three Gulf Coast refineries to Saudi Aramco.
Texaco also withdrew from marketing gasoline in the Chicago area by selling its service stations and distribution facilities to Mobil in an exchange agreement.
On April 12, 1987, Texaco filed for bankruptcy, but continued to function under protection of US bankruptcy laws.
Texaco was an independent company until it merged into Chevron Corporation in 2001. The curreent CEO is David J O'Reilly.
6. Financial Corp of America; $33.86 billion
Not enough material is available about the reasons that led to its collapse. It filed for bankruptcy on September 9, 1988.
7. Refco Inc; $33.33 billion; Oct. 17, 2005,
Founded in 1969 as Ray E Friedman and Co, Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts.
Prior to its collapse, the firm had over $4 billion in approximately 200,000 customer accounts, and it was the largest broker on the Chicago Mercantile Exchange.
The firm's balance sheet at the time of the collapse showed about $75 billion in assets and a roughly equal amount in liabilities. Refco entered crisis on October 10, 2005 when it announced that its chief executive officer and chairman, Phillip R Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence.
Apparently, Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off, and was paying for the bad loans with money borrowed by Refco itself. Between 2002 and 2005, he arranged at the end of every quarter for a Refco subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings.
Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. On October 20, Liberty announced plans to sue Refco.
on October 12 Bennett was arrested and charged with one count of securities fraud for using US mail, interstate commerce, and securities exchanges to lie to investors.
Refco filed for Chapter 11 bankruptcy on October 17, 2005.
On July 3, 2008,Bennett was sentenced to 16 years in Federal prison.
8. Global Crossing Ltd; $30.19 billion
Founded by Gary Winnick and three business associates in 1997 through Pacific Capital Group, Winnick's personal venture group, Global Crossing Limited is a telecommunications company that provides computer networking services worldwide.
The company is legally domiciled in Bermuda, although its administrative headquarters are in New Jersey. Global Crossing's rapid rise and fall attracted tremendous attention and it was quickly revealed that the company, particularly its executives, lavishly spent money on "themselves and their digs."
Four of Global Crossing's CEOs received at least $23 million in personal loans from the company, some of which were forgiven entirely even when bankruptcy was becoming a greater possibility. These same CEOs also received over $13.5 million in after-tax signing bonuses along with lucrative stock options. Between 1998 and 2001, Winnick sold approximately $420 million in Global Crossing stock.
Even as the company's financial situation went from questionable to grim, work continued on Winnick's Bel Air mansion, valued at $92 million and considered the most expensive home purchased in Los Angeles.
The company, inevitably, filed for bankruptcy on January 28, 2002.
In 2004, Global Crossing settled a class action lawsuit over the losses the employees incurred from their pensions and 401Ks. Investors and former employees received $325 million in settlement. Winnick contributed $30 million to the settlement.
Since emerging from bankruptcy, the company has attempted to re-focus its business.
9. Pacific Gas and Electric Co; $29.77 billion
Pacific Gas and Electric incorporated on October 10, 1905, was a consolidation of more than two dozen power and water concerns around the State of California.
PG&E began delivering natural gas to San Francisco and northern California in 1930 through the longest pipeline in the world, connecting the Texas gas fields to northern California.
With the introduction of natural gas, the company began retiring its polluting gas manufacturing facilities, though it kept some plants on standby.
With little generating capacity of its own, and unable to sell electricity to consumers for more than it could buy it on the open market, PG&E was forced to enter Chapter 11 bankruptcy on April 6, 2001.
The State of California bailed out the utility, the cost of which worsened an already bad state budget situation.
PG&E emerged from bankruptcy in April 2004, after distributing $10.2 billion to hundreds of creditors. Today it provides natural gas and electricity to most of Northern California. Its 4.8 million electricity customers are expected to pay an average $1,300 to $1,700 each in above-market prices through 2012.
PG&E was one of the most profitable companies on the Fortune 500 list for 2005 with $4.5 billion in profits out of $11 billion in revenue
10. UAL Corp; $25.2 billion
United Airlines Corporation UAL Corporation is an airline holding company, incorporated in Delaware with headquarters in Chicago, Illinois. The CEO of UAL Corporation since September 2002 is Glenn Tilton.
The promise of continued success in the new millennium quickly evaporated as the 'perfect storm' began to develop in 2000.
An economic downturn of global proportions, protracted labour negotiations, a proposed merger with US Airways and the tragedy of September 11, 2001, hit United hard.
For the year 2001, the company suffered a record loss of $2.1 billion. By mid-2002, United was asking employees to make wage concessions and asking the US government for a loan to help the company back to financial stability.
By early December, the company had reached agreements with most of its unions for wage reductions, but its loan application was rejected on December 4.
On December 9, 2002, UAL Corp filed for Chapter 11 bankruptcy. The company quickly received debtor-in-possession financing to allow it to continue 'business as usual' while it reorganized its debt, capital and cost structures. It came out of bankruptcy on February 1, 2006.
11. Delta Air Lines Inc; $21.8 billion
Based and headquartered in Atlanta, Georgia, Delta operates an expansive domestic and international network, spanning North America, South America, Europe, Asia, Africa, the Middle East and the Caribbean.
In 2004, in an effort to avoid bankruptcy, Delta announced a restructuring of the company that included job cuts, and an aggressive expansion of Atlanta operations by some 100 new flights. This was known to all Delta employees as 'Operation Clockwork'.
Further, by mid-2004 the airline announced it would be closing its fourth busiest hub (Dallas-Fort Worth International Airport). In a huge concessionary move, the pilots at Delta agreed to across-the-board 32.5 per cent reductions in hourly pay rates in order to help the company stave off a bankruptcy filing.
On September 14, 2005, Delta filed for Chapter 11 bankruptcy protection for the first time in its 76-year history. The company cited high labour costs and record-breaking jet fuel prices as factors in its filing.
At the time of the filing, Delta had $20.5 billion in debt, $10 billion of which accumulated since January 2001.
On April 30, 2007, Delta Air Lines emerged from bankruptcy protection as an independent carrier.
12. Adelphia Communications; $21.5 billion
John Rigas founded Adelphia with a $300 license in 1952, in the town of Coudersport, Pennsylvania. Named after the Greek word 'brothers', Adelphia was the fifth largest cable company in the United States before it filed for bankruptcy on June 25, 2002. The headquarters for the company was moved to Greenwood Village, Colorado shortly after bankruptcy was filed.
Rigas took the company public in 1986 and built it by acquiring other systems in the 1990s.
Majority of Adelphia's revenue-generating assets were officially acquired by Time Warner Cable and Comcast on July 31, 2006. As a result of this acquisition, Adelphia no longer exists as a cable provider.
The founders of Adelphia were charged with securities violations. Five officers were indicted and two (John Rigas and Timothy Rigas) were found guilty.
Federal prosecutors proved that the Rigases used complicated cash-management systems to spread money around to various family-owned entities and as a cover for stealing $100 million for themselves.
John and Timothy Rigas started their prison sentence at the Butner Federal Correctional Complex near Raleigh, North Carolina on August 13, 2007. John received 15 years and Timothy received 20 years.
9 Great Management Lessons from Dhirubhai Ambani
9 Great Management Lessons from Dhirubhai Ambani
Dhirubhai Ambani, founder of the Reliance Industries, was no ordinary leader. He was a man who gave management a whole new "ism".
There is a new "ism" that I've been meaning to add to the vast world of words for quite a while now. Because, without exaggeration, it's a word for which no synonym can do full justice: "Dhirubhaism".
Inspired by the truly phenomenal Dhirubhai H Ambani, it denotes a characteristic, tendency or syndrome as demonstrated by its inspirer. Dhirubhai, on his part, had he been around, would have laughed heartily and declared, "Small men like me don't inspire big words!"
There you have it - now that is a classic Dhirubhaism, the tendency to disregard one's own invaluable contribution to society as significant.
I'm sure everyone who knew Dhirubhai well will have his or her own little anecdote that illustrates his unique personality. He was a person whose heart and head both worked at peak efficiency levels, all the time. And that resulted in a truly unique and remarkable work philosophy, which is what I would like to define as Dhirubhaism.
Dhirubhaism No 1: Roll up your sleeves and help.
You and your team share the same DNA.
Reliance, during Vimal's heady days had organized a fashion show at the Convention Hall, at Ashoka Hotel in New Delhi.
As usual, every seat in the hall was taken, and there were an equal number of impatient guests outside, waiting to be seated. I was of course completely besieged, trying to handle the ensuing confusion, chaos and protests, when to my amazement and relief, I saw Dhirubhai at the door trying to pacify the guests.
Dhirubhai at that time was already a name to reckon with and a VIP himself, but that did not stop him from rolling up his sleeves and diving in to rescue a situation that had gone out of control. Most bosses in his place would have driven up in their swank cars at the last moment and given the manager a piece of their minds. Not Dhirubhai.
When things went wrong, he was the first person to sense that the circumstances would have been beyond his team's control, rather than it being a slip on their part, as he trusted their capabilities implicitly. His first instinct was always to join his men in putting out the fire and not crucifying them for it. Sounds too good a boss to be true, doesn't he? But then, that was Dhirubhai.
Dhirubhaism No 2: Be a safety net for your team.
There used to be a time when our agency Mudra was the target of some extremely vicious propaganda by our peers, when on an almost daily basis my business ethics were put on trial. I, on my part, putting on a brave front, never raised this subject during any of my meetings with Dhirubhai.
But one day, during a particularly nasty spell, he gently asked me if I needed any help in combating it. That did it. That was all the help that I needed. Overwhelmed by his concern and compassion, I told him I could cope, but the knowledge that he knew and cared for what I was going through, and that he was there for me if I ever needed him, worked wonders for my confidence.
I went back a much taller man fully armed to face whatever came my way. By letting us know that he was always aware of the trials we underwent and that he was by our side through it all, he gave us the courage we never knew we had.
Dhirubhaism No 3: The silent benefactor.
This was another of his remarkable traits. When he helped someone, he never ever breathed a word about it to anyone else. There have been none among us who haven't known his kindness, yet he never went around broadcasting it.
He never used charity as a platform to gain publicity. Sometimes, he would even go to the extent of not letting the recipient know who the donor was. Such was the extent of his generosity. "Expect the unexpected" just might have been coined for him.
Dhirubhaism No 4: Dream big, but dream with your eyes open.
His phenomenal achievement showed India that limitations were only in the mind. And that nothing was truly unattainable for those who dreamed big.
Whenever I tried to point out to him that a task seemed too big to be accomplished, he would reply: " No is no answer!" Not only did he dream big, he taught all of us to do so too. His one-line brief to me when we began Mudra was: "Make Vimal's advertising the benchmark for fashion advertising in the country."
At that time, we were just a tiny, fledgling agency, tucked away in Ahmedabad, struggling to put a team in place. When we presented the seemingly insurmountable to him, his favourite response was always: "It's difficult but not impossible!" And he was right. We did go on to achieve the impossible.
Both in its size and scope Vimal's fashion shows were unprecedented in the country. Grand showroom openings, stunning experiments in print and poster work all combined to give the brand a truly benchmark image. But way back in 1980, no one would have believed it could have ever been possible. Except Dhirubhai.
But though he dreamed big, he was able to clearly distinguish between perception and reality and his favourite phrase "dream with your eyes open" underlined this.
He never let preset norms govern his vision, yet he worked night and day familiarizing himself with every little nitty-gritty that constituted his dreams constantly sifting the wheat from the chaff. This is how, as he put it, even though he dreamed, none of his dreams turned into nightmares. And this is what gave him the courage to move from one orbit to the next despite tremendous odds.
Dhirubhai was indeed a man of many parts, as is evident. I am sure there are many people who display some of the traits mentioned above, in their working styles as well, but Dhirubhai was one of those rare people who demonstrated all of them, all the time.
. Dhirubhaism: Leave the professional alone!
Much as people would like to believe, most owners (even managers and clients), though eager to hire the best professionals in the field, do so and then use them as extensions of their own personality. Every time I come across this, which is much too often, I am reminded of how Dhirubhai's management techniques used to be (and still remain) so refreshingly different.
For instance, way back in the late 1970s when we decided to open an agency of our own, he asked me to name it. I carried a short list of three names, two Westernised and one Indian. It was a very different world back then. Everything Anglicised was considered "upmarket."
There were hardly any agencies with Indian names barring my own ex-agency Shilpi and a few others like Ulka and Sistas. He looked at the list and asked me what my choice was. I said "Mudra": it was the only name that suited my personality. And the spirit of the agency that I was to head.
I was very Indian and an Anglicised name on my visiting card would seem pretentious and contrived. No further questions were asked. No suggestions offered, just a plain and simple "Go ahead and do it." That was just the beginning.
He continued to give me total freedom -- no supervision, no policing -- in all my decisions thereafter. In fact, the only direction that he gave me, just once, was this: "Produce your best."
His utter trust in me was what pushed me to never, ever let him down. I guess the simplest strategies are often the hardest to adopt. That was the secret of the Dhirubhai legend. It was not out of a book. It was a skillful blend of head and heart.
6. Dhirubhaism: Change your orbit, constantly!
To understand this statement, let me explain Dhirubhai's "orbit theory."
He would often explain that we are all born into an orbit. It is up to us to progress to the next. We could choose to live and die in the orbit that we are born in. But that would be a criminal waste of potential. When we push ourselves into the next orbit, we benefit not only ourselves but everyone connected with us.
Take India's push for development. There was once a time our country's growth rate was just 4 per cent, sarcastically referred to as the "Hindu growth rate." Look at us today, galloping along at a healthy 7-8 per cent.
This is no miracle. It is the product of a handful of determined orbit changers like Dhirubhai, all of whose efforts have benefited a larger sphere in their respective fields.
In a small way, I too have experienced the thrill of changing orbits with Mudra. In the 1980s, we leapt from the orbit of a small Ahmedabad ad agency to become the country's third largest ad agency -- in just under a decade.
However, when you change orbits, you will create friction. The good news is that your enemies from your previous orbit will never be able to reach you in your new one. By the time resentment builds up in your new orbit, you should move to the next level. And so on.
Changing orbits is the key to our progress as a nation.
7. The arm-around-the-shoulder leader
I have never seen any other empire builder nor the CEO of any big organisation do this (why, I never adopted this myself!).
It was Dhirubhai's very own signature style. Whenever I went to meet him and if on that day, all the time that he could spare me was a short walk up to his car, he would instantly put his arm around me and proceed to discuss the issues at hand as we walked.
With that one simple gesture, he managed to achieve many things. I was put at ease instantaneously. I was made to feel like an equal who was loved and important enough to be considered close to him. And I would walk away from that meeting feeling so good about myself and the work I was doing!
This tendency that he had, to draw people towards him, manifested itself in countless ways. This was just one of them. He would never, ever exude an air of aloofness and exclusivity. He was always inviting people into sharing their thoughts and ideas, rather than shutting them out.
On hindsight I think, it must have required phenomenal generosity of spirit to be that inclusive. Yes, this was one of the things that was uniquely Dhirubhai -- that warm arm around my shoulder that did much more than words in letting me know that I belonged, that I had his trust, and that I had him on my side!
8. The Dhirubhai theory of Supply creating Demand
He was not an MBA. Nor an economist. But yet he took traditional market theory and stood it on its head. And succeeded.
Yes, at a time when everyone in India would build capacities only after a careful study of market expectations, he went full steam ahead and created giants of manufacturing plants with unbelievable capacites. (Initial cap of Reliance Patalganga was 10,000 tonnes of PFY way back in 1980, while the market in India for it was approx. 6000 tonnes).
No doubt his instinct was backed by years and years of reading, studying market trends, careful listening and his own honed capacity to forecast, but yet despite all this preparation, it required undeniable guts to pioneer such a revolutionary move.
The consequence was that the market blossomed to absorb supply, the consumer benefited with prices crashing down, the players increased and our economic landscape changed for the better. The Patalganga plant was in no time humming at maximum capacity and as a result of the plant's economies of scale, Dhirubhai's conversion cost of the yarn in 1994 came down to 18 cents per pound, as compared to Western Europe's 34 cents, North America's 29 cents and the Far East's 23 cents and Reliance was exporting the yarn back to the US!
A more recent example was that of Mukesh Ambani taking this vision forward with Reliance Infocomm (which is now handled by Anil Ambani). In India's mobile telephony timeline there will always be a very clear 'before Infocomm and after Infocomm' segmentation. The numbers say it all. In Jan 2003, the mobile subscriber base was 13 million, about 16 months later, shortly after the launch, it had reached 30 million.
In March 2006, it has touched 90 million ! Yes, this was yet another unusual skill of Dhirubhai's -- his uncanny knack of knowing exactly how the market is going to behave.
9. Money is not a product by itself, it is a by-product, so don't chase it
This was a belief by which Dhirubhai lived all his life. For instance when he briefed me about setting up Mudra, his instruction was clear: 'Produce the best textile advertising in the country,' he said.
He did not breathe a word about profits, nor about becoming the richest ad agency in the country. Great advertising was the goal that he set for me. A by-product is something that you don't set out to produce. It is the spin off when you create something larger.
When you turn logs into lumber, sawdust is your by-product and a pretty lucrative one it can be too! It is a very simple analogy but extremely effective in driving the point home. Work toward a goal beyond your bank balance.
Success in attaining that goal will eventually ring in the cash. For instance, if you work towards creating a name for yourself and earning a good reputation, then money is a logical outcome.
People will pay for your product or service if it is good. But if you get your priorities slightly mixed up, not only will the money you make remain just a quick buck it would in all likelihood blacklist you for good. Sounds too simplistic for belief? Well, look around you and you will know exactly how true it is.
Image: Dhirubhai passed away on July 6, 2002.
Dhirubhai Ambani, founder of the Reliance Industries, was no ordinary leader. He was a man who gave management a whole new "ism".
There is a new "ism" that I've been meaning to add to the vast world of words for quite a while now. Because, without exaggeration, it's a word for which no synonym can do full justice: "Dhirubhaism".
Inspired by the truly phenomenal Dhirubhai H Ambani, it denotes a characteristic, tendency or syndrome as demonstrated by its inspirer. Dhirubhai, on his part, had he been around, would have laughed heartily and declared, "Small men like me don't inspire big words!"
There you have it - now that is a classic Dhirubhaism, the tendency to disregard one's own invaluable contribution to society as significant.
I'm sure everyone who knew Dhirubhai well will have his or her own little anecdote that illustrates his unique personality. He was a person whose heart and head both worked at peak efficiency levels, all the time. And that resulted in a truly unique and remarkable work philosophy, which is what I would like to define as Dhirubhaism.
Dhirubhaism No 1: Roll up your sleeves and help.
You and your team share the same DNA.
Reliance, during Vimal's heady days had organized a fashion show at the Convention Hall, at Ashoka Hotel in New Delhi.
As usual, every seat in the hall was taken, and there were an equal number of impatient guests outside, waiting to be seated. I was of course completely besieged, trying to handle the ensuing confusion, chaos and protests, when to my amazement and relief, I saw Dhirubhai at the door trying to pacify the guests.
Dhirubhai at that time was already a name to reckon with and a VIP himself, but that did not stop him from rolling up his sleeves and diving in to rescue a situation that had gone out of control. Most bosses in his place would have driven up in their swank cars at the last moment and given the manager a piece of their minds. Not Dhirubhai.
When things went wrong, he was the first person to sense that the circumstances would have been beyond his team's control, rather than it being a slip on their part, as he trusted their capabilities implicitly. His first instinct was always to join his men in putting out the fire and not crucifying them for it. Sounds too good a boss to be true, doesn't he? But then, that was Dhirubhai.
Dhirubhaism No 2: Be a safety net for your team.
There used to be a time when our agency Mudra was the target of some extremely vicious propaganda by our peers, when on an almost daily basis my business ethics were put on trial. I, on my part, putting on a brave front, never raised this subject during any of my meetings with Dhirubhai.
But one day, during a particularly nasty spell, he gently asked me if I needed any help in combating it. That did it. That was all the help that I needed. Overwhelmed by his concern and compassion, I told him I could cope, but the knowledge that he knew and cared for what I was going through, and that he was there for me if I ever needed him, worked wonders for my confidence.
I went back a much taller man fully armed to face whatever came my way. By letting us know that he was always aware of the trials we underwent and that he was by our side through it all, he gave us the courage we never knew we had.
Dhirubhaism No 3: The silent benefactor.
This was another of his remarkable traits. When he helped someone, he never ever breathed a word about it to anyone else. There have been none among us who haven't known his kindness, yet he never went around broadcasting it.
He never used charity as a platform to gain publicity. Sometimes, he would even go to the extent of not letting the recipient know who the donor was. Such was the extent of his generosity. "Expect the unexpected" just might have been coined for him.
Dhirubhaism No 4: Dream big, but dream with your eyes open.
His phenomenal achievement showed India that limitations were only in the mind. And that nothing was truly unattainable for those who dreamed big.
Whenever I tried to point out to him that a task seemed too big to be accomplished, he would reply: " No is no answer!" Not only did he dream big, he taught all of us to do so too. His one-line brief to me when we began Mudra was: "Make Vimal's advertising the benchmark for fashion advertising in the country."
At that time, we were just a tiny, fledgling agency, tucked away in Ahmedabad, struggling to put a team in place. When we presented the seemingly insurmountable to him, his favourite response was always: "It's difficult but not impossible!" And he was right. We did go on to achieve the impossible.
Both in its size and scope Vimal's fashion shows were unprecedented in the country. Grand showroom openings, stunning experiments in print and poster work all combined to give the brand a truly benchmark image. But way back in 1980, no one would have believed it could have ever been possible. Except Dhirubhai.
But though he dreamed big, he was able to clearly distinguish between perception and reality and his favourite phrase "dream with your eyes open" underlined this.
He never let preset norms govern his vision, yet he worked night and day familiarizing himself with every little nitty-gritty that constituted his dreams constantly sifting the wheat from the chaff. This is how, as he put it, even though he dreamed, none of his dreams turned into nightmares. And this is what gave him the courage to move from one orbit to the next despite tremendous odds.
Dhirubhai was indeed a man of many parts, as is evident. I am sure there are many people who display some of the traits mentioned above, in their working styles as well, but Dhirubhai was one of those rare people who demonstrated all of them, all the time.
. Dhirubhaism: Leave the professional alone!
Much as people would like to believe, most owners (even managers and clients), though eager to hire the best professionals in the field, do so and then use them as extensions of their own personality. Every time I come across this, which is much too often, I am reminded of how Dhirubhai's management techniques used to be (and still remain) so refreshingly different.
For instance, way back in the late 1970s when we decided to open an agency of our own, he asked me to name it. I carried a short list of three names, two Westernised and one Indian. It was a very different world back then. Everything Anglicised was considered "upmarket."
There were hardly any agencies with Indian names barring my own ex-agency Shilpi and a few others like Ulka and Sistas. He looked at the list and asked me what my choice was. I said "Mudra": it was the only name that suited my personality. And the spirit of the agency that I was to head.
I was very Indian and an Anglicised name on my visiting card would seem pretentious and contrived. No further questions were asked. No suggestions offered, just a plain and simple "Go ahead and do it." That was just the beginning.
He continued to give me total freedom -- no supervision, no policing -- in all my decisions thereafter. In fact, the only direction that he gave me, just once, was this: "Produce your best."
His utter trust in me was what pushed me to never, ever let him down. I guess the simplest strategies are often the hardest to adopt. That was the secret of the Dhirubhai legend. It was not out of a book. It was a skillful blend of head and heart.
6. Dhirubhaism: Change your orbit, constantly!
To understand this statement, let me explain Dhirubhai's "orbit theory."
He would often explain that we are all born into an orbit. It is up to us to progress to the next. We could choose to live and die in the orbit that we are born in. But that would be a criminal waste of potential. When we push ourselves into the next orbit, we benefit not only ourselves but everyone connected with us.
Take India's push for development. There was once a time our country's growth rate was just 4 per cent, sarcastically referred to as the "Hindu growth rate." Look at us today, galloping along at a healthy 7-8 per cent.
This is no miracle. It is the product of a handful of determined orbit changers like Dhirubhai, all of whose efforts have benefited a larger sphere in their respective fields.
In a small way, I too have experienced the thrill of changing orbits with Mudra. In the 1980s, we leapt from the orbit of a small Ahmedabad ad agency to become the country's third largest ad agency -- in just under a decade.
However, when you change orbits, you will create friction. The good news is that your enemies from your previous orbit will never be able to reach you in your new one. By the time resentment builds up in your new orbit, you should move to the next level. And so on.
Changing orbits is the key to our progress as a nation.
7. The arm-around-the-shoulder leader
I have never seen any other empire builder nor the CEO of any big organisation do this (why, I never adopted this myself!).
It was Dhirubhai's very own signature style. Whenever I went to meet him and if on that day, all the time that he could spare me was a short walk up to his car, he would instantly put his arm around me and proceed to discuss the issues at hand as we walked.
With that one simple gesture, he managed to achieve many things. I was put at ease instantaneously. I was made to feel like an equal who was loved and important enough to be considered close to him. And I would walk away from that meeting feeling so good about myself and the work I was doing!
This tendency that he had, to draw people towards him, manifested itself in countless ways. This was just one of them. He would never, ever exude an air of aloofness and exclusivity. He was always inviting people into sharing their thoughts and ideas, rather than shutting them out.
On hindsight I think, it must have required phenomenal generosity of spirit to be that inclusive. Yes, this was one of the things that was uniquely Dhirubhai -- that warm arm around my shoulder that did much more than words in letting me know that I belonged, that I had his trust, and that I had him on my side!
8. The Dhirubhai theory of Supply creating Demand
He was not an MBA. Nor an economist. But yet he took traditional market theory and stood it on its head. And succeeded.
Yes, at a time when everyone in India would build capacities only after a careful study of market expectations, he went full steam ahead and created giants of manufacturing plants with unbelievable capacites. (Initial cap of Reliance Patalganga was 10,000 tonnes of PFY way back in 1980, while the market in India for it was approx. 6000 tonnes).
No doubt his instinct was backed by years and years of reading, studying market trends, careful listening and his own honed capacity to forecast, but yet despite all this preparation, it required undeniable guts to pioneer such a revolutionary move.
The consequence was that the market blossomed to absorb supply, the consumer benefited with prices crashing down, the players increased and our economic landscape changed for the better. The Patalganga plant was in no time humming at maximum capacity and as a result of the plant's economies of scale, Dhirubhai's conversion cost of the yarn in 1994 came down to 18 cents per pound, as compared to Western Europe's 34 cents, North America's 29 cents and the Far East's 23 cents and Reliance was exporting the yarn back to the US!
A more recent example was that of Mukesh Ambani taking this vision forward with Reliance Infocomm (which is now handled by Anil Ambani). In India's mobile telephony timeline there will always be a very clear 'before Infocomm and after Infocomm' segmentation. The numbers say it all. In Jan 2003, the mobile subscriber base was 13 million, about 16 months later, shortly after the launch, it had reached 30 million.
In March 2006, it has touched 90 million ! Yes, this was yet another unusual skill of Dhirubhai's -- his uncanny knack of knowing exactly how the market is going to behave.
9. Money is not a product by itself, it is a by-product, so don't chase it
This was a belief by which Dhirubhai lived all his life. For instance when he briefed me about setting up Mudra, his instruction was clear: 'Produce the best textile advertising in the country,' he said.
He did not breathe a word about profits, nor about becoming the richest ad agency in the country. Great advertising was the goal that he set for me. A by-product is something that you don't set out to produce. It is the spin off when you create something larger.
When you turn logs into lumber, sawdust is your by-product and a pretty lucrative one it can be too! It is a very simple analogy but extremely effective in driving the point home. Work toward a goal beyond your bank balance.
Success in attaining that goal will eventually ring in the cash. For instance, if you work towards creating a name for yourself and earning a good reputation, then money is a logical outcome.
People will pay for your product or service if it is good. But if you get your priorities slightly mixed up, not only will the money you make remain just a quick buck it would in all likelihood blacklist you for good. Sounds too simplistic for belief? Well, look around you and you will know exactly how true it is.
Image: Dhirubhai passed away on July 6, 2002.
LEHMAN FALLS, MERRILL SOLD AIG TOTTERING WHAT NEXT?
Lehman falls, Merrill sold, AIG tottering. What next?
A chronological review of developments in the last two days
Dr. S.K.PRASAD
A series of events in United States, including Bank of America agreeing to buy Merrill Lynch for $44 billion and Lehman Brothers' move to file a bankruptcy protection, has shaken up the global financial markets. About 10 major banks, comprising Citigroup and Credit Suisse Group, reached an agreement to create a $70 billion borrowing facility committing their own money, which could be used to tide over the financial crisis.
Lehman Brothers thought of bankruptcy after it failed to find a buyer and financial media reports said that AIG could survive for only a few days without infusion of the capital. The giants of financial markets have been shaken up by losses of hundreds of billions of dollars in bad mortgages in the housing markets.
Lehman Brothers began considering bankruptcy after Barclays and Bank of America, the top suitors, walked away apparently following Federal authorities declining to provide financial backup to them, declaring bankruptcy would allow Lehman's subsidiaries to continue to function as the company itself is wound down.
"The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence," the New York Times said.
Lehman Brothers Holdings Inc; $639 billion
The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion! What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks. The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman. Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers.
The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008.
Why it collapsed?
The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.
It was the exaggerated but misplaced confidence of Wall Street's longest serving chief executive officer, Richard Fuld of Lehman, that finally led to Lehman's demise. Over 14 years, Richard Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. An international squash player, Fuld could not master the final stroke as he failed to keep the 158-year-old banking major alive.
Fuld never changed. He remained the obstinate Lehman loyalist whose pride stood in the way of the firm. If he had sold out earlier, Lehman could have survived. Fuld earned a BA from the University of Colorado and an MBA from New York University's Stern School of Business. He started at Lehman in 1969.
Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many an economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse of Long-Term Capital Management in the 1990s. Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged after Lehman filed a Chapter 11 petition with US Bankruptcy Court in Manhattan. The $613 billion (some estimates put the size at $639 billion) bankruptcy thus throws up the question: why did the Wall Street giant go bust? Why did Lehman Brothers go bankrupt?
The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices. The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.
However, the fall of the 158-year-year institution that started cotton trade in US before the American Civil War and financed the railroad that built a nation, got hit by a large dose of bad luck, pride, arrogance and greed. Primarily, the pride of its chief executive office Richard Fuld.
Here's why. . .
Lehman's collapse was also triggered by the refusal of other banks to do business with it because of its complex and, at times, opaque ways of trading. Housing loans made by the bank to people with little support made these loans very risky, and when interest rates rose, these borrowers could no more repay Lehman. This led to huge losses, the extent of which is not yet clear. Thus other banks stopped trading with Lehman. This led to it losing almost all business and triggered its fall. The final straw for Lehman was the fact that both Barclays Plc of the United Kingdom and Bank of America Corp pulled out of takeover talks. BofA bought out Merrill Lynch for $50 billion.
However, Barclays has now said that it is in discussions with Lehman Brothers about buying certain assets of the stricken US investment bank. "Barclays confirms that it is discussing with Lehman Brothers the possible acquisition of certain Lehman Brothers assets on terms that would be attractive to Barclay's shareholders," Britain's third largest bank said in a statement.
When other banks do not want to buy Lehman, why is Barclays interested?
Barclays wanted to buy Lehman out at a discount, so to speak. But when Lehman CEO Fuld decided that his bank was worth much more than what Barclays had apparently offered, Barclays stepped back. Now that Lehman has filed for bankruptcy, its assets are available fairly cheap. However, the biggest problem is to take on Lehman's enormous liabilities.
How far is the CEO of the company responsible for Lehman's fall?
Wall Street analysts believe that it was the 'hubris' of Richard Fuld, the 62-year-old CEO of Lehman, who did not take the telltale signs of impending doom very seriously. Fuld, nicknamed The Gorilla for his foul temper, intimidating presence and tough talk, rejected many bids to save Lehman because he thought that the sinking giant was much bigger than Wall Street was giving it credit for, and wanted to get more price for the sale of the company. Analysts say if the bank was sold just a week before it went kaput, it could have been saved the ignominy of a bankruptcy, but Fuld was far too adamant to see reason. Result: the end of a 158-year-old financial giant.
Could the United States government helped, like it helped Bear Stearns in May this year, and Fannie Mae and Freddie Mac earlier this month?
The US government could have helped, but US Treasury Secretary Henry Paulson said that it would not use up any more taxpayer dollars to bail out Lehman Brothers as it would lead to investment banks getting away with their gambling ways. Paulson had bailed out Fannie Mae, Freddie Mac and Bear Stearns, saying that if the government had not done so, the US housing loan market would have collapsed leading to gigantic losses for hundreds of banks all over the globe that have invested in US property. Paulson, however, believes that a brokerage major like Lehman, which does not have a direct connection with ordinary people who have taken on home loans, need not be bailed out as it would not cause any systemic damage to the US
Will everyone in Lehman lose their jobs?
The bankruptcy administrators, PricewaterhouseCoopers, feels that as Lehman's operations were essentially centralized at New York, the folding up of the investment banker in the US will have a telling impact on all its operations globally. Over 5,000 employees in the UK have already lost their jobs, while about 20,000 in the US might as well forget going back to their work stations. About 2,500 Lehman employees in India too face the axe.
Will the whole bank be liquidated?
Unlikely, at least for now. The US Chapter 11 that deals with bankruptcy says that PwC, the administrators, can go about taking its time to find good offers and buyers for Lehman's 'least affected businesses.' The entire exercise can take months before all of Lehman's assets are sold, given the complexities linked to the bankruptcy.
What about the Bank of America and Merrill Lynch deal?
Merrill Lynch's buy out by Bank of America is also a shocking development. ML, saw the writing on the wall once it guessed that Lehman was going bust, and decided to sell out before it actually has to file a bankruptcy petition..
What about the insurance giant AIG?
The world's largest insurer, American International Group, has been downgraded by credit rating agencies and is racing against time to find a multi billion dollar infusion to stay afloat. US Federal Reserve officials and two leading banks, JPMorgan Chase and Goldman Sachs, were negotiating to put together $75 billion package to save the insurance giant to stave off crisis.
AIG has sought $40 billion in bridge loan to stave off the crisis. But the Fed rebuffed the request. AIG's ills came to fore, when three leading credit rating agencies - Standard and Poor's Moody's and Fitch - lowered the company's credit scores.
Who could be the next to fall?
Some Wall Street analysts, reports The Guardian, name Washington Mutual as the next financial major to 'find itself in serious trouble.' However, the even bigger worry is whether the world's largest securities firms, Goldman Sachs and Morgan Stanley, would be able to survive this brutal financial crisis. But many say that these two gaints will not melt down as they have 'done a better job of spreading their bets across world markets and are also more diversified, less leveraged and have managed such risks much better.'
What do Indian markets fear?
The fall of two global financial behemoths -- Lehman Brothers and Merrill Lynch -- is expected to dent India Inc's ability to raise resources via the equity route. Experts feel that such events significantly increase the risk perception, which in turn will put all future investments by institutional investors such as pension or endowment funds, on the back burner.
While the public issue market has already dried up, the private equity funds are also becoming conservative in terms of pricing. This is resulting in either inordinate delays in concluding deals or transactions being called off. There are many instances of private equity fund managers refusing to go ahead with deals after signing the term sheet. Sources said that a leading fund conducted due diligence on two companies in the last fortnight but did not close either deal primarily because of the developments in the US, their home country. The crisis faced by Merrill Lynch and Lehman Brothers is expected to have a cascading effect on PE firms too.
Will it hit the Indian growth story?
The ongoing financial sector crisis in the United States and its repercussions on developed markets worldwide will result in lower capital inflows into emerging markets like India, economists and government officials said today. At the same time, they called for the government to make it easier for Indian companies to borrow overseas by easing the restrictions that have been imposed in the past to reduce excessive liquidity in the system and control inflation. This will, in turn, lead to a slowing in investment growth in the months ahead. As lending gets tighter and investment flows dry, corporate India will find it more difficult to raise both equity and debt.
Technology firms are shivering
Lehman Brothers' bankruptcy filing may well prove to be the last straw for Indian IT firms, which were expecting the second half of FY09 to be better. As a result of the US financial market crisis, analysts do not expect Indian IT firms to sign any significant contracts in the banking, financial services and insurance (BFSI) space in the months to come. While IT firms do not disclose client-specific details, it's estimated that Lehman Brothers has outsourced deals amounting to anywhere between Rs 550 crore and Rs 700 crore (annually) to numerous IT firms, including majors like Tata Consultancy Services, Satyam Computer Services and Wipro. Lehman Brothers, say sources, works with 14 services providers in India - Wipro and TCS being the largest. It also has investments in a few IT firms. It's not clear if these holdings will be liquidated to raise funds. Moreover, the sources add that Lehman Brothers' unit in India has issued termination letters to a majority of its 2,500 employees
What kind of investment does Lehman have in India?
Lehman does not have direct large holding in the Indian stock markets. These holdings are estimated at around $200 million, including Participatory Notes. This figure is not enough to cripple the Indian stock markets. But Lehman has exposure to the Indian stock market through special purpose vehicles. This exposure to real estate stocks is said to be of about $1.5 billion, enough to shake up the markets.
A chronological review of developments in the last two days
Dr. S.K.PRASAD
A series of events in United States, including Bank of America agreeing to buy Merrill Lynch for $44 billion and Lehman Brothers' move to file a bankruptcy protection, has shaken up the global financial markets. About 10 major banks, comprising Citigroup and Credit Suisse Group, reached an agreement to create a $70 billion borrowing facility committing their own money, which could be used to tide over the financial crisis.
Lehman Brothers thought of bankruptcy after it failed to find a buyer and financial media reports said that AIG could survive for only a few days without infusion of the capital. The giants of financial markets have been shaken up by losses of hundreds of billions of dollars in bad mortgages in the housing markets.
Lehman Brothers began considering bankruptcy after Barclays and Bank of America, the top suitors, walked away apparently following Federal authorities declining to provide financial backup to them, declaring bankruptcy would allow Lehman's subsidiaries to continue to function as the company itself is wound down.
"The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence," the New York Times said.
Lehman Brothers Holdings Inc; $639 billion
The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion! What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks. The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman. Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers.
The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008.
Why it collapsed?
The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.
It was the exaggerated but misplaced confidence of Wall Street's longest serving chief executive officer, Richard Fuld of Lehman, that finally led to Lehman's demise. Over 14 years, Richard Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. An international squash player, Fuld could not master the final stroke as he failed to keep the 158-year-old banking major alive.
Fuld never changed. He remained the obstinate Lehman loyalist whose pride stood in the way of the firm. If he had sold out earlier, Lehman could have survived. Fuld earned a BA from the University of Colorado and an MBA from New York University's Stern School of Business. He started at Lehman in 1969.
Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many an economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse of Long-Term Capital Management in the 1990s. Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged after Lehman filed a Chapter 11 petition with US Bankruptcy Court in Manhattan. The $613 billion (some estimates put the size at $639 billion) bankruptcy thus throws up the question: why did the Wall Street giant go bust? Why did Lehman Brothers go bankrupt?
The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices. The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.
However, the fall of the 158-year-year institution that started cotton trade in US before the American Civil War and financed the railroad that built a nation, got hit by a large dose of bad luck, pride, arrogance and greed. Primarily, the pride of its chief executive office Richard Fuld.
Here's why. . .
Lehman's collapse was also triggered by the refusal of other banks to do business with it because of its complex and, at times, opaque ways of trading. Housing loans made by the bank to people with little support made these loans very risky, and when interest rates rose, these borrowers could no more repay Lehman. This led to huge losses, the extent of which is not yet clear. Thus other banks stopped trading with Lehman. This led to it losing almost all business and triggered its fall. The final straw for Lehman was the fact that both Barclays Plc of the United Kingdom and Bank of America Corp pulled out of takeover talks. BofA bought out Merrill Lynch for $50 billion.
However, Barclays has now said that it is in discussions with Lehman Brothers about buying certain assets of the stricken US investment bank. "Barclays confirms that it is discussing with Lehman Brothers the possible acquisition of certain Lehman Brothers assets on terms that would be attractive to Barclay's shareholders," Britain's third largest bank said in a statement.
When other banks do not want to buy Lehman, why is Barclays interested?
Barclays wanted to buy Lehman out at a discount, so to speak. But when Lehman CEO Fuld decided that his bank was worth much more than what Barclays had apparently offered, Barclays stepped back. Now that Lehman has filed for bankruptcy, its assets are available fairly cheap. However, the biggest problem is to take on Lehman's enormous liabilities.
How far is the CEO of the company responsible for Lehman's fall?
Wall Street analysts believe that it was the 'hubris' of Richard Fuld, the 62-year-old CEO of Lehman, who did not take the telltale signs of impending doom very seriously. Fuld, nicknamed The Gorilla for his foul temper, intimidating presence and tough talk, rejected many bids to save Lehman because he thought that the sinking giant was much bigger than Wall Street was giving it credit for, and wanted to get more price for the sale of the company. Analysts say if the bank was sold just a week before it went kaput, it could have been saved the ignominy of a bankruptcy, but Fuld was far too adamant to see reason. Result: the end of a 158-year-old financial giant.
Could the United States government helped, like it helped Bear Stearns in May this year, and Fannie Mae and Freddie Mac earlier this month?
The US government could have helped, but US Treasury Secretary Henry Paulson said that it would not use up any more taxpayer dollars to bail out Lehman Brothers as it would lead to investment banks getting away with their gambling ways. Paulson had bailed out Fannie Mae, Freddie Mac and Bear Stearns, saying that if the government had not done so, the US housing loan market would have collapsed leading to gigantic losses for hundreds of banks all over the globe that have invested in US property. Paulson, however, believes that a brokerage major like Lehman, which does not have a direct connection with ordinary people who have taken on home loans, need not be bailed out as it would not cause any systemic damage to the US
Will everyone in Lehman lose their jobs?
The bankruptcy administrators, PricewaterhouseCoopers, feels that as Lehman's operations were essentially centralized at New York, the folding up of the investment banker in the US will have a telling impact on all its operations globally. Over 5,000 employees in the UK have already lost their jobs, while about 20,000 in the US might as well forget going back to their work stations. About 2,500 Lehman employees in India too face the axe.
Will the whole bank be liquidated?
Unlikely, at least for now. The US Chapter 11 that deals with bankruptcy says that PwC, the administrators, can go about taking its time to find good offers and buyers for Lehman's 'least affected businesses.' The entire exercise can take months before all of Lehman's assets are sold, given the complexities linked to the bankruptcy.
What about the Bank of America and Merrill Lynch deal?
Merrill Lynch's buy out by Bank of America is also a shocking development. ML, saw the writing on the wall once it guessed that Lehman was going bust, and decided to sell out before it actually has to file a bankruptcy petition..
What about the insurance giant AIG?
The world's largest insurer, American International Group, has been downgraded by credit rating agencies and is racing against time to find a multi billion dollar infusion to stay afloat. US Federal Reserve officials and two leading banks, JPMorgan Chase and Goldman Sachs, were negotiating to put together $75 billion package to save the insurance giant to stave off crisis.
AIG has sought $40 billion in bridge loan to stave off the crisis. But the Fed rebuffed the request. AIG's ills came to fore, when three leading credit rating agencies - Standard and Poor's Moody's and Fitch - lowered the company's credit scores.
Who could be the next to fall?
Some Wall Street analysts, reports The Guardian, name Washington Mutual as the next financial major to 'find itself in serious trouble.' However, the even bigger worry is whether the world's largest securities firms, Goldman Sachs and Morgan Stanley, would be able to survive this brutal financial crisis. But many say that these two gaints will not melt down as they have 'done a better job of spreading their bets across world markets and are also more diversified, less leveraged and have managed such risks much better.'
What do Indian markets fear?
The fall of two global financial behemoths -- Lehman Brothers and Merrill Lynch -- is expected to dent India Inc's ability to raise resources via the equity route. Experts feel that such events significantly increase the risk perception, which in turn will put all future investments by institutional investors such as pension or endowment funds, on the back burner.
While the public issue market has already dried up, the private equity funds are also becoming conservative in terms of pricing. This is resulting in either inordinate delays in concluding deals or transactions being called off. There are many instances of private equity fund managers refusing to go ahead with deals after signing the term sheet. Sources said that a leading fund conducted due diligence on two companies in the last fortnight but did not close either deal primarily because of the developments in the US, their home country. The crisis faced by Merrill Lynch and Lehman Brothers is expected to have a cascading effect on PE firms too.
Will it hit the Indian growth story?
The ongoing financial sector crisis in the United States and its repercussions on developed markets worldwide will result in lower capital inflows into emerging markets like India, economists and government officials said today. At the same time, they called for the government to make it easier for Indian companies to borrow overseas by easing the restrictions that have been imposed in the past to reduce excessive liquidity in the system and control inflation. This will, in turn, lead to a slowing in investment growth in the months ahead. As lending gets tighter and investment flows dry, corporate India will find it more difficult to raise both equity and debt.
Technology firms are shivering
Lehman Brothers' bankruptcy filing may well prove to be the last straw for Indian IT firms, which were expecting the second half of FY09 to be better. As a result of the US financial market crisis, analysts do not expect Indian IT firms to sign any significant contracts in the banking, financial services and insurance (BFSI) space in the months to come. While IT firms do not disclose client-specific details, it's estimated that Lehman Brothers has outsourced deals amounting to anywhere between Rs 550 crore and Rs 700 crore (annually) to numerous IT firms, including majors like Tata Consultancy Services, Satyam Computer Services and Wipro. Lehman Brothers, say sources, works with 14 services providers in India - Wipro and TCS being the largest. It also has investments in a few IT firms. It's not clear if these holdings will be liquidated to raise funds. Moreover, the sources add that Lehman Brothers' unit in India has issued termination letters to a majority of its 2,500 employees
What kind of investment does Lehman have in India?
Lehman does not have direct large holding in the Indian stock markets. These holdings are estimated at around $200 million, including Participatory Notes. This figure is not enough to cripple the Indian stock markets. But Lehman has exposure to the Indian stock market through special purpose vehicles. This exposure to real estate stocks is said to be of about $1.5 billion, enough to shake up the markets.
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