Research Paper: Financial Analysis of Lehman

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[. . .] It further closed its offices in three states which were related to its mortgage business. By now, it was becoming evident the claims of the CFO of the form remain to be untrue as firm was being drastically affected by the slump in the housing market. The firm still continued to remain one of the major contributors in the mortgage market. In the year 2007, Lehman seemed to be unaware of its current environmental threats that were posed to it due to financial crisis in the housing market as it underwrote the highest amount of mortgage backed securities with a portfolio of $85 billion which was around four times the firm's shareholder equity. (Murphy, 2010)

In late 2007, it seemed as if Lehman Brothers would pull out drastically from its mortgage business by making divestments as there was a temporary rebound in the equity markets and Lehman's stock price rebounded on account of boom in global equity markets. However, as opposed to the expectation, Lehman did not take the benefit of one its last chance to get out of the crisis and it remained to have its massive mortgage portfolio.

Ratios and Move Towards Bankruptcy

Lehman's ratio analysis and the analysis of its balance sheet both vertical and horizontal showed serious investor concerns. The firm had a very high degree of leverage with its total assets to shareholders equity at a figure of 2007 which showed that despite the high number of defaults in the mortgage markets, the company continues to hold a high level of mortgage business which made it increasingly sensitive to the deteriorating market conditions.

It was not far away when Bear Sterns, the country's second largest underwriter of mortgage backed securities collapsed which lead to a 48% fall in the stock price of Lehman Brothers. The confidence in the company's stock regained when Lehman was able to raise $4 billion on account of its preferred stock which was convertible into Lehman's shares at a premium. However, as usual the company seemed to be entangled in the vicious cycle of the credit crunch as another set-back was evidenced when the firm's hedge fund managers began to question the valuation of Lehman's mortgage portfolio. In June 2008, the company gave evidence of its high risk policies when it posted its second-quarter loss of $2.8 billion which was its first loss after divestment was made by American Express. As the company's financials started to become the subject of doubts and liquidity of the company was questioned by more or less every investor in hedge funds and the stock market, the company took a move towards improving its liquidity position when firm raised another $6 billion from investors, the firm enriched its liquidity pool to an estimated figure of $45 billion, decreased its gross assets by a huge amount of $147 billion, Cut-back its current exposure on account of residential and commercial mortgages by 20% and reduced its leverage factor ratio from 32 to about 25.

The Start of the Final Set-Back

The measures taken by the firm on account of improving its liquidity position and reduction of its leverage and exposure in account of residential and commercial mortgages seemed to be unsuccessful as the company's stocks witnessed a 77% fall in September 2008 due to a world-wide fall in the equity markets. The current CEO announced a measure to keep the firm independent by selling its asset management unit to Korea Development Bank but this hope was no more a part of Lehman's corporate plans when on the 9th of September 2008, the state-owned South Korean Banks decided to delay the talks.

The news of delay in talks with South Korean Bank came as a huge blow to the company's stocks and they plunged at a rate of 45% along with an alarming figure of 66% on credit-default swaps on the company's debts. These ratios resulted in the company's hedge-fund investors divesting their stake in the company along with a cut in its short-term credit lines. In the third quarter of 2008, the firm again reported a loss based on an estimated figure of $3.9 billion which also included a write-down expense of $5.6 billion. This situation was taken as a very risky situation by the credit rating companies and the leading credit rating agency of the country, Moody's Investor Service announced that the credit rating of Lehman Brothers was subject to a review keeping in view the company's current situation. The credit rating agency decided to downgrade the rating of Lehman Brothers after an analysis of its ratios which showed a very risky situation. The credit rating company also gave an option to Lehman Brothers of selling their majority stake to a strategic partner in order to avoid downgrading of their rating. This news led to a further 42% fall in the company's stock price on September 11, 2008.

Now the situation seemed to out of control of the management of Lehman Brothers as it has witnessed a continuous fall in its stock price in the last 2 years followed by a downgrading of its rating, cutting of its credit lines, no investor confidence in the company and news of Korean Bank's talks on hold. By the end of first week of September, 2008, Lehman Brothers was left with only $1 billion remaining in cash. The company had almost no time to take any decision. Lasting efforts were made by the company's management when talks were held with between Lehman, Barclays PLC and Bank of America which aimed at facilitating a takeover of Lehman Brothers. But the trend of bad news for the company never ended and the talks remained unsuccessful. On September, 15 2008 Lehman filed bankruptcy and stock plunged by 93% compared to its last day closing price.

The Impact of the Bankruptcy on Industry and Global Markets

The case of Lehman Brothers bankruptcy was the largest in the history of United States with over $639 billion in assets and $613 billion in liabilities. This bankruptcy remained to be traumatic for the global financial markets as its adverse impact on global financial markets was immense followed by changes in rules and regulations regarding hedge-fund accounting and credit risk policies and procedures of the company. Many company's financial situation was questioned after the bankruptcy of the investment giant Lehman brothers while many investment banks and hedge funds became subject to investigation. The global footprint of Lehman Brothers was immense and it impacted thousands of participants in the financial markets. Lehman's bankruptcy led to more than 75 separate and distinct bankruptcy proceedings. Lehman's major impact in global financial markets was in relation to change in policies, rules and regulations with respect to future credit and liquidity-based losses.

Further, as investors in Lehman Brother's stocks and hedge funds suffered huge losses, the bankruptcy led to worldwide investors and counterparties requiring increased level of assurance regarding the safety of their assets. Investors attitude following bankruptcy of Lehman Brothers have forced companies to move their assets away from arrangements and institutions perceived as less secure or have lead to the modification of existing contractual arrangements. Firms have started to identify and implement risk measurement and mitigation techniques along with addressing of changing regulatory landscape.

The collapse of Lehman Brothers had a far reaching consequence on the U.S. financial and equity markets which witnessed a continuous declining trend for around a year after the bankruptcy of Lehman Brothers. The U.S. government was questioned on account of bankruptcy of Lehman Brothers and the responsibility of the state with respect to the huge losses suffered by stake holders of Lehman Brothers.

The economic figures of the country started to worsen following the bankruptcy of Lehman Brothers. Six million jobs were lost and Dow experienced the most tragic 5000 points decline followed by General Motors and Chrysler declaring their financial status as near to bankruptcy and asking U.S. government for a bailout. Therefore, all these statistics reveal a change in attitude of investors and regulatory bodies to a risk-averse approach.

Finally, the bankruptcy of the Lehman Brothers has taught a lesson to each and every one from the government to even a small investor in an economy.

Bibliography

1. Bebchuk, L.A., Cohen, A., & Spamann, H. (2010). The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008. Yale Journal on Regulation,27(2), 257+.

2. Blake, D. (2000). Financial Market Analysis. New York: Wiley. Cetorelli, N., Mandel, B.H., & Mollineaux, L. (2012). The Evolution of Banks and Financial Intermediation: Framing the Analysis. Federal Reserve Bank of New York Economic Policy Review, 1+.

3. Dwyer, G.P., & Tkac, P. (2009). The Financial Crisis of 2008 in Fixed Income Markets.Federal Reserve Bank of Atlanta, Working Paper Series, 2009(20), 1+.

4. Fitzpatrick, T.J., & Thomson, J.B. (2011). How Well… [END OF PREVIEW]

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Financial Analysis of Lehman.  (2012, December 8).  Retrieved July 19, 2019, from https://www.essaytown.com/subjects/paper/financial-analysis-lehman/6774334

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"Financial Analysis of Lehman."  8 December 2012.  Web.  19 July 2019. <https://www.essaytown.com/subjects/paper/financial-analysis-lehman/6774334>.

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"Financial Analysis of Lehman."  Essaytown.com.  December 8, 2012.  Accessed July 19, 2019.
https://www.essaytown.com/subjects/paper/financial-analysis-lehman/6774334.