End Game: Lehman Brothers over!

Barclays
Lehman Brothers
#1

…it could be time to take down the [[Lehman Brothers]] interview profile.

On the news this evening Barclays and Bank of America have pulled out of negotiations to buy Lehman Brothers.

Analysts are predicting the share price of the bank will dive even further tomorrow… and for the first time the Amercian government aren’t going to bail out a bank - which is fair, really, because it is a private company and using public money to pay for its mistakes is not fair.

Getting a graduate job in [[investment banking]] for the next couple of years is going to be really tough.

The gossip is that [[Merrill Lynch]] could be next. And, perhaps more worryingly the insurance firm [[AIG]].

#2

All eyes on the financial news tomorrow then…

#3

I have just read the news that Lehman is in trouble but have no idea why. What mistakes did it make?

When you say getting a job at IB is tough does it apply to the whole world or just UK? I am not from a finance background so hope anyone can elaborate a bit!

#4

Bascially - they lent too much money where there was too much risk - sub-prime mortgages. When people couldn’t afford to pay back the money they had indirectly borrowed from Lehman, the firm had to write money off - i.e. they lost money. This caused their share price to tumble.

This created a downward spiral that was exacerbated because many potential advisory clients understandably didn’t trust Lehman’s financial advice any longer - if you’re a massive investment bank and have really screwed up your own financial dealings, it looks really bad.

Lehman were negotiating a [[white knight]] bail about from the Bank of Korea last week, which the Bank of Korea pulled out of. By pulling out of these talks, investors lost even more confidence in Lehman (The Bank of Korea obviously saw a good reason NOT to bail out Lehman) and the share price tumbled further.

Today negotiations with Barclays and Bank of America broke down and these banks pulled out of what was probably the last chance for Lehman to be bought out by a private company. This will result in further loss of confidence in Lehman and their share price will no doubt fall further tomorrow.

Finally - unlike Bear Sterns (the first investment bank to lose tons of cash) and Fannie May/Freddie Mack, the American government have said they will NOT bail out Lehman.

So Lehman have no money because they lent out too much too irresponsibly, their share price is about $3 (when it was about $66 12 months ago), no banks want to buy them and the government isn’t going to support them.

If/when Lehman finally collapse, they’ll be unable to pay money they owe others banks, which means other banks lose money, and may also face difficulties. All this also means the whole stock market is likely to lose value because investors are worried about what will happen. Apparently Merrill Lynch is also in a worrying situation - its likely more rumours will fly about, and rumours and lack of confidence mean less money invested and less money available… crash… burn… war… graduate jobs are the very least of everyone’s worries!

#5

That is a good explanation! It makes me understand more now. Isn’t this situation similar to Northern Rock? In this case where has all the money gone to then? What about those ppl who borrowed money from Lehman?

#6

Merrill Lynch and BoA merged this weekend, creating the worlds largest investment bank!

In other news, I’ve applied for the BoA equity trading scheme this morning as it opened today, and will keep you updated on the process. Not sure how the news will effect graduate recruitment, i.e Dresdner stopped graduate recruitment this year pending the acquisition by Commerzbank.

#7

Yes, it’s a similar situation to Northern Rock. But Northern Rock were bailed out by the government - which in my opinion was a mistake. Public money being used to bail out private companies is highly dubious.

Effectively Lehman lent out money it didn’t have assets to back up. So when people couldn’t afford to pay money back, Lehman lost out. They were over confident, and it cost them.

Lots/most of the money lent out will never be recovered. It debatably didn’t exist in the first place (because Lehman didn’t have the assets to back up loans they made). It certainly doesn’t exist now. It’s just “lost”.

Think of Lehman giving out loans as a bit like you giving out £10 loans to your friends. Lets say you are reasonably well-off and give out £10 loans to your friends quite a lot. Lets say that your friends generally use this money to bet on horse races, and are currently winning most of the time - so they make a profit on the loan from you, and you get your loans repaid with interest. You make money - they make money - everyone is happy.

One day you give a £10 loan to me. I agree to pay you back in two weeks, put your loan and all my other money on one horse race which is a guaranteed winner. Unfortunately, my horse loses, and I have no money - I’m bankrupt. I can’t pay you back. Whatever you do, I have no assets - I cannot pay you. So you have to just accept it as a bad loan. You lost your money.

That’s not so bad, because all your other friends are paying you back - but then gradually they all stop winning. And they all start going bankrupt. Suddenly all the money you lent out is lost. And because things were going so well previously, you’d allowed yourself to lend so many £10’s that you lent out almost all of your life savings. Now you have nothing. The money is gone. You were too greedy - you made irresponsbile loans too easily - and now you lost it all. Woops! In a final last ditch effort, you call your mum and dad and ask for a cash injection (the US government) - but they say no. Not this time. Sorry…

#8

Hahahahha! I love this example! But when you said the money is “lost”, it must have went to someone else…no? Let’s take the horse race example, if you bet all the money on a single horse and the horse lost, then the ppl who receive the bet is earning money! Just like ppl who borrowed money from Lehman, it must have gone somewhere that some other ppl that is benefiting from it?

Is everything dictate by the oil prices? or it is a totally different thing?

Since Lehman has gone bust, will it affect the currency exchange? or it is not related? Sorry for shooting so many questions but I really find this very interesting! I tried to find information online but from a science background, I think everything on the net is a little bit too complicated for me to understand!

#9

Not necessarily. For example, if I’d bought a house 12-months ago in London for £500,000 - this house would probably be worth £400,000 ish at today’s value. This house has lost value - but no one has gained this money. The money has disappeared because a dodgy economy and lack of demand means it is worth less. See what I mean?

Consider the previous example, but instead of horse bets, consider you were lending money to friends who were buying houses. When house prices were increasing - everyone was winning. But when house prices start falling - money is just… lost. This is more like what actually happened with Lehman.

Oil prices play a part in all this - the economy is all inter-linked but it’s not at the heart of this matter - although I suppose you could argue it was a root cause of all this.

Exchange rates will be affected.

#10

Ahh…okok. That makes it clearer to me. In your second post you mentioned “the firm had to write money off”? What does that actually means?

Speaking of exchange rates, I know dollars had plunged but what about pounds and euros then? Will it be affected? or it is just dollars that plunge more than euros and pounds so you will have more dollars when you exchange it with pounds?

#11

No… we’re all f88ked. Euro - UK - US economies are all very closely inter-linked. China, far east and middle east will be less affected.

Write off - I mean accepting that they have lost money and will not get it back…

#12

Since euros, dollars and pounds are inter-linked like you said, wouldn’t the exchange rate between the 3 are almost the same since all the of them plunge together? Wouldn’t that cancel out? But of course they will be weaker against other currencies…???

#13

They are inter-linked, but not equal. There are many, many other factors affecting each currency all the time.

#14

If Fuld decided to sell off Lehman earlier, Lehman wouldn’t be in this state. Yes, the credit crunch can be seen as major factor, but Lehman never really fully recovered from when it last folded (when we were still in nappies). As John Gapper said in his FT blog: “hubris, followed by nemesis”. At least Thain is learning from the Fulds mistake (you can have that pun for free), and let BofA to come in.

But despite all of this, I don’t think anyone should be put off from applying. Just make sure you have a contingency plan, and accept that in all probability it’ll be put to use.

#15

Applying for what?! …they’re about to sack 1,000’s of staff! Their graduate recruitment programme has been frozen since March! …you’d have more chance getting an Analyst role at Ryman’s than Lehman Brothers right now!

#16

Redsuperted, you have the patience of a saint! The explanations provided here are so useful!!!

Yeah, Lehman brothers is well and truly over. PwC has started winding the business down as we speak… It’s such a shock though! Two big investment banks just gone in the space of two hours (apparently)!

#17

It’s truly monumental. And the next 12-months will be incredibly interesting, unless there is total collapse… which there may well be.

Lehman is bankrupt. Merril bought out. AIG (insurance firm) is seriously suffering and may go under… if they do, then serious shift is going to happen. One banker on newsnight this evening commented that the current economic shifts are like huge techtonic plates re-adjusting - this is very true. Worryingly, when huge techtonic plates re-adjust, you get earthquakes, volcanoes and tsunamis. Let’s hope Lehman and Merrill are the last of these catastrophes!

Another interesting point from the news this evening was that the long period of growth stretching from the mid-80’s to 2007 was actually very unusual. Bankers starting to feel that it was natural and got over-confident which lead to many of the problems we see now. The credit crunch needed to happen to put the markets in order, but it could really hurt large organisations.

Apart from the banks, and the insurance firms, expect to see major retail firms falling down pretty soon. Dixons (DSG group) hasn’t been doing well for ages, Woolworths, Curry’s, the Home Retail group (homebase/Argos), Monsoon/Accessorise …music retailers/electronics retailers/clothing retailers, Ryannair … watch this space … !

#18

I meant, applying for investment banking roles in general. Sorry if that wasn’t clear.

#19

Sorry HTale, I was being facetious :stuck_out_tongue:

#20

I’ve just got back from travelling for a month - what an incredible amount of things that has happened! I’ve got a backlog of news to read over and an interview on the 2nd October!

Redsuperted - brilliant summary of things and you’ve helped my understanding (although I’m still reading through financial news to get the little details).

I have one question though - How does this affect professional service firms? I’m applying for an actuarial graduate placement in investments (it was originally pensions but the office changed operations while I was away??) with Deloitte. For audit you can see they have to be a lot more careful when checking the financial statements for companies making sure they have the assets etc to back up what they owe (if they owe anything) or can meet the forecasts they’re giving for the year ahead. For consulting, the advice needs to be more sound and things need to be gone over in more detail. For tax - not 100% sure on this one, but I was reading how some companies had “cheated” by putting taxes they’d receieve on profits which didn’t yet exist (would they fall under audit?). But for actuarial stuff it’s harder to see how they will be affected. More work will come their way, lots of mergers happening they will be required to help with - but how are they mainly affected?

Thanks for the help! I’ll go back to my reading now. =)