1. 1 Lehman’s Bankruptcy GSIS IS502 International Finance 092SIS71 Wang Nana

2. Agenda About Lehman Bankruptcy process review Bankruptcy analysis Bankruptcy reasons Why Lehman not rescued Conclusion 2

3. 3 About Lehman Headquarters in New York, Operating in North America, Asia-Pacific and Europe, employed more than 25,000 people Leading global equity and fixed income sales, trading and research, Fourth largest investment banking and securities firm, One of the largest private investment management, asset management and private equity.

4. 4 Shareholders Jun 30,2008

5. 5 Executives in Lehman NameProfiles Richard S. FuldChairman and Chief Executive Officer Jasjit S. BhattalChief Executive Officer, Asia-Pacific Erin M. CallanChief Financial Officer Scott J. FreidheimCo-Chief Administrative Officer Dave Goldfarb Global Head of Strategic Partnerships, Principal Investing and Risk Joseph M. GregoryPresident and Chief Operating Officer Jeremy M. Isaacs Chief Executive Officer, Europe, Middle East and Asia-Pacific Theodore P. JanulisGlobal Head of Mortgage Capital

6. 6 Business and Performance

7. 7 Lehman’s Major Competitors Company Market cap Revenue Net Income EPS($) P/E ratio Debt/E quity Employee Lehman Brothers148.2M35.90B-5.63 B-8.70n/a23.3328,600 Goldman Sachs55.55B34.54B7.49B16.647.88.9437,478 Merrill Lynch45.18B-6.99B-19.84B-21.37n/a14.1764,900 Morgan Stanley30.18B22.34B0.4B0.4461.7012.9746,390 Nomura24.81B5.06B-2.07B-1.08n/a8.618,995 CITIC CS18.9B1.6B0.69B0.1113.73.31,396 JPMorgan Chase161.71B116.4 B10.63B3.0415.4711.6195,594 Sep 18,2008

8. 8 Bankruptcy Review

9. 9 Lehman History Founded in Montgomery, Alabama in 1850 as a cotton broker In the 1860s, after civil war, Lehman moved to New York Beginning venture beyond cotton to other commodities and securities In 1887 it became member of the New York Stock Exchange In the 1930s, Lehman became a securities firm under Glass-Steagall Act Post-War prosperity fueled the growth of Lehman Opened offices in Paris in 1960, London 1972 and Tokyo 1973 1984 American Express acquiring the Firm and merged it with Shearson 1994 The Firm became independent through a IPO on the NYSE 1998 Lehman Brothers joins the S&P 500 Index 2002 moved into its new global headquarters in Midtown Manhattan 2005 achieved record revenues, net income and earnings per share Sep 15, 2008, Lehman filed bankruptcy protection with total debts of $613 bn

10. 10 Bankruptcy Process 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%

11. 11 Bankruptcy Process Sep 11,2008Lehman’s months-long talks with KDB broke down. JP Morgan asked Lehman for additional $5bn collateral Lehman disclosed plan of spin-off its commercial real estate about $30bn and disposal of a 55% stake in its asset management unit. Shares plunged 40% and investors, customers and counterparties signalled deep concern CDS cost on Lehman reach record high of 790 basis points Rating Agencies warned Downgrade of Lehman’s rating. Sep 12,2008Share price closes at $3.83 down 93% from Sep 1,2007 Sep 13,2008Bank of America with JC Flowers, CIC and Barclays are contacting Lehman for possible takeover Paulsen,Treasury Secretary, refused financial support for Lehman’s take over. Sep 15,2008Top Wall Street executives and regulators failed to agree a rescue plan for the Lehman’s troubled assets. Lehman filed bankruptcy with debts of $613bn including $128bn bonds

12. 12 Stock Quote During Crisis Sep 9,10,11 share plunged

13. 13 CDS Quote Sep 9,2008

14. 14 Systemic Ramifications of Lehmans 1.Operates in major markets around US, EU and Asia. 2.Total balance sheet size of $639 bn at end May 2008. Equity of $29 bn. Unsecured bond issue of $180 bn. 3.One-eighth market share in Fixed Income in US. 4.Assets under management of $277 bn. 5.Key prime broker to Hedge funds and asset managers. #$

15. 15 Lehmans Domino effect Major operator in Fixed Income markets, shut down inter-bank market, because counterparty failure Every domestic bank that borrows from global interbank market cannot get liquidity, so CDS spreads go up. Banks will not lend to each other. Large foreign banks withdraw dollars from their large facilities abroad. #$

16. 16 Bankruptcy Analysis

17. 17 Bankruptcy Reasons Market disordered since subprime crisis Finance business model Large quantities of real estate assets Speculation and market fears Senior management mistakes No government rescue

18. 18 Market disorder Since May 2007, global financial market crunch. Lehman wrote down $13.8bn after the crisis unfolded. Lehman had mortgage portfolio and asset backed portfolio worth $72.5bn including $20.6bn level 3 assets close to its equity as of May 31,2008. The credit crunch pervaded all markets including inter-bank, equity, bonds, mortgage and consumer credit.

19. 19 US Housing Price Index August 26, 2008

20. 20 Business Model Broker-dealer model has no backstop of liquidity, while universal banks with retail deposit-taking activities and their investment banking have more stable funding base; Stand-alone investment banks face two fundamental challenges: capital and liquidity. Investment banking depend crucially on the short-term Repo market for secured funding.

21. 21 Balance Sheet (in Millions USD)2004200520062007 May 31,2008 Cash and cash equivalents5,4404,9005,9877,2866,513 Cash and securities for regulatory purpose 4,0855,7446,09112,74313,031 Financial instruments144,468177,438226,596313,129269,409 Securities purchased to resell95,535106,209117,490162,635169,684 Securities borrowed74,29478,455107,666138,599124,842 Receivables18,76322,64327,97143,27741,721 Goodwill & Intangibles,3,2843,2563,3624,1274,101 Total Assets357,168410,063503,545691,063639,432 Short Term Borrowings2,8572,94120,63828,06635,302 Financial instruments Sold to repurchase 96,281110,577125,960149,617141,507 Collateralized financings131,735152,425176,557258,031207,922 Payables50,14060,04258,60980,34670,888 Long-term borrowings56,48662,30981,178123,150128,182 Total stockholders’ equity14,92016,79419,19122,49026,276 Liabilities &Equity357,168410,063503,545691,063639,432

22. 22 Liquidity Items 20042005200620072 nd Q.08 Financial instruments218,762255,893334,262451,728394,251 Total assets357,168410,063503,545691,063639,432 Per cent of total assets61%62%66%65%62% Short term financing230,873265,943323,155435,714384,731 Per cent of the total debts67%68%67%65%63% Long term borrowing56,48662,30981,178123,150128,182 Per cent of the total debts17%16%17%18%21% Lehman’s liquidity relied heavily on its short term financing including Short Term Borrowings, Repo and collateral financing.

23. 23 Leverage Ratios Items 200320042005200620072 nd Q.083 rd Q.08 Total assets312,061357,168410,063503,545691,063600,000 Total equity13,17414,92016,79419,19122,49028,443 Gross Leverage ratio23.723.924.426.230.721.1 Net assets163,182175,221211,424268,936372,959310,915 Tangible equity capital10,68112,63615,56418,56723,10329,277 Net leverage ratio15.313.913.614.516.110.6 We calculate net assets by excluding from total assets: (i) cash and securities segregated and on deposit for regulatory and other purposes; (ii) collateralized lending agreements; and (iii) identifiable intangible assets and goodwill.

24. 24 Real Estate Assets Lehman still had martgage portfolio and asset back portfolio worth $72.5bn including $20.6bn level 3 assets close to its equity as of May 31,2008. Its $33bn portfolio of troubled commercial property loans has been largely responsible for heavy losses in the past two quarters. Uncertainty about the true value of those loans undermined the bank's share price and scared off potential new investors.

25. 25 Speculation and Market Fears Aug 26 2008, South Korean regulator expressed caution on KDB’s takeover of Lehman. Lehman shares fall 6.9%. Sep 10 2008, Lehman shares fall 45% valued on fears about its ability to raise capital sparked by a report that KDB decided against investing in Lehman. Sep 11 2008 Shares plunge 40% and investors, customers and counterparties signal deep concerns

26. 26 Management Missed Steps Lehman didn’t sell quickly its real estate assets and recapitalized after Bear Stearns takeover; It took a long time for its stake sale and Lehman asked too much on the price and term. Senior management underestimated the serious situation of market crisis.

27. 27 Search for Help Advanced talks with insurer AIG. Sought out partners ranging from General Electric to HSBC and Morgan Stanley. Abu Dhabi Investment were finally quit the deal. Bank of America. Barclays and,UK regulator didn’t approve the deal without Fed’s backing. In July Lehman failed to get approval of Fed to convert to a traditional bank holding company.

28. 28 Why Rescue Fannie and Freddie? – They account for about three-quarters of all new US mortgages; – Their hybrid structure as “government- sponsored” private companies

29. Why guarantee Bear Stearns? – Bear’s failure would create systemic risks, as Bear was important player in fixed income market – Bear Stearns is highly involved in the systemically important credit default swaps market, 29

30. 30 Why no rescue for Lehman? less involved in credit default swaps market than Bear Stearns; Markets should have time to prepare for the possibility of Lehman’s bankruptcy; A new Fed facility ensures that it cannot suddenly run out of liquidity; Moral hazard to rescue Lehman with public fund.

31. 31 Why bail out AIG? At its peak AIG was the world’ largest insurer with a market value of $239 billion; 74 million customers, 700,000 agents and 116,000 staff. Had AIG gone bust, its millions of customers would have been left wondering if their car and home insurance policies were still valid, at a time when consumers are already twitchy about the safety of their bank deposits.

32. 32 Possible Crisis Management and Resolution Tools Injection of Liquidity Isolate Insolvent Player Inject capital into banks Guarantee of Deposits and Bank Debts Lower interest rates Fiscal Prime-pumping Create Resolution Trust Company to deal with banks or borrowers

33. 33 Conclusion High financial leverage ratio gave rise to fragile confidence on the company’s liquidity and capital; Sufficient regulation and system-wide supervision; Fair value accounting Valuation of Financial Senior management underestimated market difficulties; US government did not realize complexity of situation