1. 092SIS97 So yoon, Jang 092SIS94 Ko eun, Lim

2.  About Lehman  Background - Breakup Process  The bankruptcy filing  Causes of Lehman’s bankruptcy  Lehman’s financial policy  Conclusion

4. Type Public Fate Chapter 11. Bankruptcy Founded Mongomery, Alabama, U.S (1850) Founder Henry Lehman Emanuel Lehman Mayer Lehman Headquarters New York city, New York, U.S Area served Worldwide Key people Richard S. Fuld.Jr (chairman & CEO) Industry Investment services, Financial services Products Investment Banking, Investment management

5. Market cap U.S $130 Million ( As of September 15.2008) Revenue ▲U.S $59.003 Billion (2007) Operating Income ▲U.S$6.013 Billion (2007) Net Income ▼U.S $ 6.7 Billion (2008) Total Asset ▲U.S $691.063 Billion (2007) Total equity ▲ U.S $22.490 Billion (2007) Employees 26.200(2008) Website www.lehman.com

6. 2006. The rate for delinquency and default started to rise quickly. Bank conduct financial system (resell mortgage backed securities) 2007. June, Bear Steams was the first fall Rate of default on prime mortgage sill rise A result for the mortgage market crisis

7. June 10,2008The firm reported $2.87bn 2nd quarter loss June 16,2008It raised $6bn capital from pension funds, hedge funds and investors. Aug 16,2008Lehman was in talks to sell $40bn real estate portfolio Aug 21,2008Began talks with KDB and China CITIC for stake sale Aug 23,2008PE firms expressed interested in Lehman’s asset management division Aug 26,2008Korean FSA expressed cautious attitude on KDB’s takeover of Lehman. Aug 27,2008Lehman tells KKR and Hellman they remain in running for unit Sep 3,2008KDB confirmed ongoing talks over taking stake in Lehman Sep 4,2008Ospraie, a hedge fund under Lehman, collapsed suddenly Sep 8,2008Lehman replace 3 top men, including COO Sep 9,2008Announced expected 3 rd quarter $3.9 bn loss or -$5.92 Per Share. Sep 10,2008Share fall 45%

8. On September 13, 2008, Timothy F. Geithner, the president of the Federal reserve bank of New York called a meeting on the future of Lehman  On September 14, 2008, The New York Times reported, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed.  Finally on September 15,2008 Lehman Brothers filed for bankruptcy protection after failing to find a buyer.

10. 1. Market Complacency - Low interest rate Rise in house prices - Availability of innovative mortgage option allowed to purchase buyer 2. Bad regulation -ultra short-term bond -zero capital loans 3.Lack of transparency - Credit default swap(CDS) grew unregulated from almost zero to more than $44 trillion.

11.  Internal factors 1. The extremely high level of leverage (asset- to-equity ratio) 2. The strong reliance on short-term debt financing

13. 3. Repurchase agreement to sell a financial security as collateral and buy it back “Repo 105” A short-term loan is classified as a sale. ->Lehman used the loophole in Financial Accounting Standard and falsified the company’s situation.

14.  The Dow Jones closed down over 500 points on September 15, 2008  Major operator in fixed income markets shut down inter-bank market due to counterparty failure  Every domestic bank that borrows from global interbank market cannot get liquidity, so CDS spreads go up.  Speculation and market fears

15.  What is CDS? to hedge the credit exposure to a particular asset or issuer by buying and selling credit risk

17.  Government bail out -Less involved in CDS market than Bear Stearns -Markets should have time to prepare for Lehman’s bankruptcy -Moral hazard to rescue Lehman with public fund

18.  No institution is ‘too big to fail’. A government-funded bailout is likely to be the exception, not the norm.  Lehman episode has ramped up the level of risk aversion in the global financial system

19.  High financial leverage ratio -> to rise fragile confidence on the company’s liquidity and capital  Need fair value accounting valuation  Sufficient regulation & system wide supervision

20.  References http://www.scribd.com/doc/11096014/Causes-and- Effects-of-the-Lehman-Brothers-Bankruptcy http://www.articlesbase.com/business-articles/the- causes-for-the-collapse-of-lehman-brothers- holdings-inc-664202.html Fabozzi & Modigliani, capital market institutions and instruments www.wikipeida.org