15 September 2008

The largest Bankruptcy in US History

One of the world's largest investment banks has filed for bankruptcy protection, making it the biggest casualty yet of the ongoing credit crisis, as well as the largest bankruptcy case in US history.

Despite intensive desperate negotiations in high finance circles over the weekend, involving - among others - the Bank of America and the large British bank Barclay's, no potential buyer could be found for New York-based Lehman Brothers, the fourth-largest US investment bank.

Lengthy discussions brokered by the Federal Reserve Bank of New York ended yesterday with no financial suitor willing to buy the once powerful bank. Not a surprise really for people with common sense, as Lehman Brothers have accumulated a bank debt of $ 613 billion, $ 155 billion in bond debt and assets worth only $ 639 billion.

US Treasury Secretary Henry Paulson was reportedly not willing to underwrite any deal in the same way the takeover of Bear Stearns was done earlier this year. Thus one of the former flagships of Wall Street and one of the most influential members of the Jewish financial lobby is left to go to the wall. (Perhaps it might be appropriate to change the name of Wall Street into "Go-to-the-Wall Street"...)

Financial experts, among them Alan Greenspan, the former chairman of the US Federal Reserve Bank, described the collapse of Lehman Brothers as a "once in a century event" and "the worst banking failure since the great Wall Street Crash" (nearly 80 years ago, in October 1929).
An emergency trading session was authorised in New York yesterday - ignoring the fact that it was Sunday - so that other firms could reduce their risks to Lehman Brothers before markets opened today.

Nevertheless the European stock markets - including Dublin's ISEQ index - fell substantially today. The ISEQ shed almost 5%, while the UK's FTSE 100 index closed 3.92% down and the DAX in Frankfurt was 2.74% lower. The CAC 40 index in Paris was down 3.78%.

In the USA the Dow Jones industrial average lost 504.48 points, or 4.42%, to end at 10,917.51, marking the biggest point fall since September 2001. The Standard & Poor's 500 index shed 4.69%, while the Nasdaq composite index was 3.60% lower by close of trade.

Australian shares are down by 1.8%, while several of Asia's major stock exchanges - in Tokyo, Hong Kong, Shanghai and Seoul - were closed for holidays. But in Singapore the STI dropped 3.3% to hit a two-year low. In Taiwan, the benchmark share index closed down 4%, and in India share prices fell by more than 3.35%.

So once again the wreckless gambling and unbelievable stupidity of American bankers has not only destroyed their own business, but created another world-wide economic crisis. I am fed up to my back teeth with these shenanigans of the super-rich, for which everyone else around the globe has to pay the price and suffer. And I wonder what else needs to happen before politicians and bankers in Europe decouple their economic wagons from the US economy, which is racing downhill as fast as if it competed in Formula 1.

To make it a really black day for financial institutions, it was also announced today that Merrill Lynch, another of the leading investment banks, is to be bought out by Bank of America.

Meanwhile, a group of ten major international banks has agreed to establish a fund worth € 50 billion in an effort to shore up banks exposed to the fallout from the property crash in the USA. How much good that will do, and how long this money will last, remains to be seen.
It was also announced that the US Federal Reserve would loosen its lending criteria to banks exposed to the fallout from failing property-backed investments. But there seems to be no longer any willingness to bail out banks that have made bad mistakes and stupid investments.

Today's events mark a new low in the world's economic confidence, and the question needs to be asked if we can afford private banks with their ruthless and wreckless gambling on international 'markets' (which are actually more like huge casinos) any longer. If a bank of the size and wealth of Lehman Brothers can sink as suddenly and easily as the RMS Titanic, something is extremely wrong in the world of international high finance. It becomes clear and obvious that privately organised and barely controlled capitalism does not work.

Lehman Brothers is one of the oldest US banks and was established in 1850 by Henry, Emanuel and Mayer Lehman, three sons of a Jewish cattle dealer from the Kingdom of Bavaria (now Germany) who emigrated one by one to America. The firm was founded in Montgomery, Alabama, where Henry Lehman - the eldest of the three brothers - had owned and run a shop since 1844. In the first 50 years of its existence the company was not a bank, but a trading firm for cotton. In 1883 coffee was added to the portfolio, and - having moved to New York by now - financial deals became more and more part of the business as well.
In 1899, Lehman Brothers underwrote their first public offering, the preferred and common stock of the International Steam Pump Company. But the complete change from a commodities dealer to a bank took place only in 1906, when the firm partnered with Goldman, Sachs & Co., to bring the General Cigar Company to market.

Since then many more followed, among them a long list of top US companies, who are often even household names outside the USA. Somehow the company survived the great Wall Street Crash with only little damage, but during the following decades their business was a mixed bag of highs and lows, often combined with strong emotions. This was especially the case after 1969, when the last chairman from the Lehman family died and outsiders began to run the business.

After a personality clash between two chief executives, the bank was eventually sold to the US credit card company American Express in 1984. But ten years later, when the conglomerate was restructured, it sold the investment bank again and the name Lehman Brothers returned to the market place.
Overall, the bank grew stronger and stronger over the years, but some extremely risky and in many ways unbelievably stupid investment decisions created problems as well. But there is one bad decision that broke Lehman Brothers eventually: their massive participation in the US 'sub-prime' mortgage market, where greedy bankers, ruthless salesmen and naive house buyers who could not really afford to buy a house created the most dangerous economic time bomb since the infamous 'South Sea Bubble' of the early 18th century.

This time bomb has now exploded, destroyed Lehman Brothers and damaged many other banks and financial institutions (including Bear Stearn, Fannie Mae, Freddie Mac and Merill Lynch, who escaped annihilation only by a whisker, thanks to the US government's great fear of a total collapse of the whole financial sector).

Financial experts warn that the crisis is not over yet, and many expect more banks - perhaps with similar well-established names - to go to the wall before the world's economy will be in a sound and proper balance again.

The Emerald Islander


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