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.