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Tuesday 04th of May 2010
September 15, 2008    

Lehman Brothers files bankruptcy

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by Brian Turner
Lehman Brothers files bankruptcy

Lehman Brothers is filing for Chapter 11, creating the largest bankruptcy in US corporate history.

The move comes as Barclays and Bank of America withdraw from talks on acquiring the company as it became clear that any buyer would not be protected against Lehman’s debt obligations.

Lehman Brothers CEO Richard Fuld had refused to raise capital through share options or asset sales when other financial companies had, leaving Lehman increasingly vulnerable to mortgage backed securities it held.

When investors began to question Lehman Brothers’ ability to protect against losses if commercial mortgages began to collapse, the company was doomed.

According to Bloomberg, Lehman Brothers had $639 billion of assets and $613 billion of debt.

However, Lehman Brothers would need to refinance $20 billion of that debt over the coming year, but had already been told by credit rating agencies that Lehman needed to act fast or face downgrades - that would results in Lehman Brothers having difficulty refinancing that debt.

Talks with the South Korea Development Bank collapsed last week, in what was seen as Lehman’s last chance to stay solvent. Lehman CEO Richard Fuld was chastised by analysts for refusing to value the company realistically under prevailing conditions.

US regulators made it clear that the lesson learned from their rescue of Bear Stearns was “never again”, and after the Fed took on Fannie Mae and Freddie Mac, already had too much to deal with already, and demanded a commercial solutions to Lehman’s commercial problem.

While the collapse of Lehman Brothers is spooking already bearish markets, other events at the weekend suggest that some of the worst outcomes from the Credit Crunch are already played out.

The rescue of Merrill Lynch by Bank of America puts hold on a potential domino effect, and a group of ten banks, including Goldman Sachs and JP Morgan have created a $70 billion liquidity reserve alongside an increase in Federal loans to help shore up financial markets as they reel from the Lehman fall out.

On Bloomberg TV, investment fund leaders such as Marc Faber and Mark Mobius reacted positive the the weekend’s news, suggesting that despite immediate volatility, the markets have likely bottomed out and they are buying.

They described September to October as regarded as a slow season at best under normal circumstances, and that while we are likely to see near-term volatility, they see a general uptrend of financials into October.

In addition, US financials report quarterly results during the middle of October, which is likely to encourage investors.

When the last set of quarterly reports for US financials were issued from July 15th, most saw their share price rise over the period after. While volatility still showed strong over the period since, very few banks and insurers in the US actually saw a decline in market capitalisation after July 15th.

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