Archive for the “Lehman Brothers” Category

First there were auction-rate securities, then collateral debt obligations (CDOs). Now, credit-default swaps are making news. On Oct. 20, U.S. federal prosecutors and New York Attorney General Andrew Cuomo jointly announced that their two agencies had launched an investigation into the $58 trillion credit-default swaps market and whether Wall Street investment firms manipulated the instruments for their own financial gain.

Among other things, regulators are looking to determine if traders used the credit swaps to artificially lower share prices of various financial companies, which then resulted in large sell-offs and a downward spiral of company stock.

According to an Oct. 20 article in the New York Times, the New York Attorney General’s office issued subpoenas to stock exchanges, investment firms and three companies involved in processing trades in swaps and stocks. The firms are: the Depository Trust Clearing Corporation, Markit and Bloomberg.

Credit-default swaps have been the source of problems for several high-profile companies recently, including Bear Stearns, Lehman Brothers, American International Group (AIG), Morgan Stanley and others.

A credit-default swap is a contract for insurance on certain types of debt. Buyers of credit swaps pay a fee in exchange for having their losses covered in the event the debt defaults. The problem is the credit-default swap market itself. It is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover losses.

That may be changing in the future, however. Joint investigations between federal prosecutors and the New York attorney general are a rarity. That fact alone suggests the investigation into credit-default swaps is going to be a big one - and that fundamental changes involving transparency and oversight could be coming sooner rather than later.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

It was everyone’s fault but Richard Fuld’s. Appearing before the House Committee on Oversight and Government Reform to testify on the bankruptcy of the once-venerable investment powerhouse Lehman Brothers, the CEO’s comments were punctuated with halted dialogue and the occasional “uh” and I don’t know.”

During the course of 13-pages of prepared statements, Fuld defended his actions as the leader of Lehman Brothers, along with the $500 million salary and bonus payments he received over the past eight years. After taking “full responsibility” for the decisions he made at the bank, Lehman said the real blame for the downfall of the company was on short-sellers, credit agency downgrades and loss of confidence by clients and business partners.

Fuld also reiterated that he was not alone in misjudging the impact of the subprime mortgage crisis on the global economy, citing comments made by Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson, both of whom had once downplayed the severity of the problems.

At one point during the testimony, the chairman of the panel, Henry Waxman (D-Calif.), asked Fuld about an internal memo from Lehman’s compensation committee that recommended bonuses totaling more than $20 million for several executives who were leaving the company. The memo was dated Sept. 11, 2008 - four days before Lehman filed for bankruptcy.

“In other words, even as Mr. Fuld was pleading with the government for a federal rescue, Lehman continued to squander millions on executive compensation,” Waxman said.

Before his testimony concluded, Fuld expressed appreciation for the employees of Lehman Brothers, adding that he felt “horrible for what happened” to them.

No doubt Lehman’s 25,000 employees would express a similar sentiment. As with many Wall Street banks, compensation for Lehman Brothers employees is provided partially in stock. Many of these employees not only have lost their job now, but are likely to see much of the life savings disappear, as well.

Upon leaving the courthouse on Capitol Hill, Fuld was greeted by protestors carrying signs that read “Crook” and “Fuld is a criminal.”

Richard Fuld’s complete testimony, as well as other testimony and documents relating to Lehman Brothers, can be found on the House Committee on Oversight and Government Reform Web site at: http://oversight.house.gov/story.asp?ID=2208.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The historic bankruptcy filing of Lehman Brothers is likely to have repercussions for months, even years to come. And no one knows this better than investors who own Lehman Brothers bonds. In just the short time since the nation’s fourth-largest investment firm filed for bankruptcy protection, the value of its bonds has plummeted, with some analysts predicting bondholders may be facing losses of $110 billion when all is said and done.

Lehman’s bankruptcy filing means its assets will be sold, with the proceeds distributed to lenders and bondholders. Anything left over then goes to preferred shareholders, followed by common stock shareholders.

Things are not looking good for Lehman bondholders, however. As reported Sept. 22 in the Financial Times, Lehman bonds were prevalent among pension funds and mutual funds. That means any losses will have a significant impact on untold numbers of ordinary individuals.

Making matters even worse for bond investors is the potential of additional losses on Lehman’s derivatives positions, which are still being unwound.

Typically, when a company declares bankruptcy, senior debt holders usually are first in line to collect their claims. Prior to its bankruptcy filing, Lehman had $110 billion of unsecured senior bonds that were valued at approximately 95 cents on the dollar. Now they are trading at about 20 cents to the dollar.

Subordinated notes, which are among the last to paid and of which Lehman holds more than $17 billion worth - were trading for as little as 3.5 cents on the dollar.

Lehman Brothers was forced into bankruptcy on Sept. 15, following massive losses on mortgage-backed securities and insufficient capital reserves. In total, the company lost 94% of its market value in 2008. At the time of its bankruptcy, Lehman listed $631 billion of debt, including $110.69 billion in unsecured debt and $17.6 billion in unsecured, subordinated obligations.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Four of the firms at the heart of the nation’s growing financial crisis - Fannie Mae, Freddie Mac, American International Group (AIG) and Lehman Brothers - are now the subject of an investigation by the Federal Bureau of Investigation (F.B.I.) for potentially committing acts of fraud. The investigation is addition to a number of other probes being conducted by the F.B.I. in connection with the collapse of the subprime mortgage market.

Few details have been released regarding the F.B.I.’s investigation into Fannie, Freddie, Lehman and AIG, but reportedly the focus is on whether executives at those companies deliberately misled the financial markets about the health of their respective businesses.

Earlier in the month, Lehman’s chief executive officer, Richard Fuld, and AIG CEO Robert Willumstad received notice to testify before the U.S. House Oversight and Government Reform Committee in early October over the events leading up to the bankruptcy filing by Lehman Brothers and the government bailout of AIG.

Meanwhile, U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke remain embroiled in a battle with lawmakers over the government’s $700 billion emergency rescue plan for the nation’s ailing financial system. In the second day of answering questions on Capitol Hill, both men continued to meet resistance to the bail-out plan, which would give the federal government the green light to buy up billions of dollars in subprime-related debt from financial institutions.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

There will be no more curtain calls for Wall Street. On Sunday night, the era of investment banking came to a stunning and dramatic conclusion as investment icons Goldman Sachs and Morgan Stanley - Wall Street’s two remaining independent investment firms - agreed to become bank holding companies regulated by the Federal Reserve.

Abandoning their investment banking status means Goldman and Morgan Stanley will no longer rely on leveraged money and instead have access to more stable funding avenues in the future, including bank deposits from retail customers and the Federal Reserve’s Discount Lending Window. It also means they will face much stricter oversight and regulation by the federal government.

Prior to announcing the changeover, Goldman Sachs and Morgan Stanley had been submerged with massive losses on subprime mortgages and other risky real estate holdings. Shares in the two companies have lost nearly half of their value this year.

Last week’s chaos in the financial markets only added to Goldman and Morgan Stanley’s troubles. After 158 years, Lehman Brothers Holdings was forced to file for bankruptcy; Merrill Lynch, fearing a similar fate for its future, was purchased by Bank of America; and the federal government announced an $88 billion bailout of insurance giant American International Group (AIG).

Then, in a meeting that began at 9 p.m. on a Sunday night, the Federal Reserve and the U.S. Treasury laid out the most sweeping - and expensive - rescue plan for the country’s financial system since the Great Depression. The centerpiece of the plan focuses on cleaning up the balance sheets of financial institutions with the U.S. Treasury taking on hundreds of billions of dollars in toxic mortgages. The price tag to taxpayers could be as high as $1 trillion.

U.S. Treasury Secretary Henry Paulson is urging Congress to pass the bailout plan this week.

Meanwhile, the immediate future of Goldman Sachs and Morgan Stanley is a bit brighter today, as the move to shed their investment bank status lets them steer clear of the road to disaster that overtook many of their counterparts recently - including Bear Stearns, Lehman Brothers and Merrill Lynch. Goldman and Morgan Stanley appear to be safe - for now, anyway.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Years of egregious actions on the part of Wall Street - from corporate arrogance, to incompetent accounting principles, to lax regulatory rules and oversight, to blatant criminality - are now taking their toll on the nation’s financial markets, and it’s Main Street paying the ultimate price. With the bankruptcy of Lehman Brothers Holdings, the fall of Fannie Mae and Freddie Mac, the IndyMac Bank failure, and now an $85 billion government bailout for insurance giant American International Group (AIG), investors and consumers alike are growing increasingly concerned about what lies ahead.

And they have good reason. The insanity happening on Wall Street means borrowing just went up in price. Financing a new car, paying for college, starting a business, building a hospital - all are likely to become more challenging in the months, even years, ahead.

Then there’s the psychological effect of Wall Street’s meltdown. As the financial crisis deepens and taxpayer-supported bailouts apparently becoming more commonplace, more investors - already distrustful of Wall Street and whose very existence they deem synonymous with greed and excess - will be prone to jump ship entirely, dumping their stocks, halting contributions to 401Ks and liquating mutual funds and other securities for safer investment vehicles.

Investors’ need to “do something,” anything, in the face of a crisis is warranted. At the same time, the ramifications of letting emotions guide decisions can often lead to even more uncertainty - in this case, for individual investors and the economy at large, say a number of financial experts.

“It’s like planning a road trip to California but then jumping in a car and heading east,” says one UBS broker, who requested anonymity. “Everyone is running to do something - which is understandable given the state of the markets and the 24/7 media coverage on the subject. Clearly, though, the ‘something’ that people need to do should be given much more forethought.”

Surprisingly, it’s not retirees who seem to be panicking, but rather younger 40-somethings, according to this UBS broker. “The older investors have been through this before,” she explains. “They remember the events of the past.”

Cases in point: On Oct. 19, 1987 - otherwise known as “Black Monday” - the Dow Jones Industrial Average was down 22.61% in a single day. On Oct. 26, 1987, it fell 8.04%; Oct. 13, 1989, 6.91%; Sept. 17, 2001, 7.13%.

By comparison, the Dow fell 4.4% on Sept. 16, 2008.

Still, when news that 158-year-old Lehman Brothers, one of the most established and respected investment firms on Wall Street, has filed for bankruptcy or that major money market funds - long considered to the safest of investments – are breaking the buck and falling below $1 a share, it’s almost impossible for investors not to feel powerless.

What’s Next?

Now the question on everyone’s mind is how do we get out of this mess? As reported Sept. 19 in a Wall Street Journal commentary by William Isaac, former chairman of the Federal Deposit Insurance Corporation, fixing the current financial crisis obviously will be a long-term process, but nonetheless contingent on a radical facelift for Wall Street.

Isaac contends that the financial problems gripping the country today are a direct result of something called Fair Value Accounting practices. Simply put, Fair Value Accounting means financial institutions that have financial instruments to sell - i.e. mortgage-backed securities - must mark those assets to market. “But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices,?” writes Isaac.

So far, says Isaac, the answer from the Securities and Exchange Commission (SEC) and the federal government has been to mark the assets to market even though no meaningful market exits.

Indeed, in his speech to the National Black MBA Association on Sept. 19, Bank of America CEO Kenneth Lewis strongly urged federal regulators to radically restructure the operating environment of Wall Street investment banks, instituting more of the oversight, capital requirements and business restrictions that are imposed on commercial banks today.

Short Selling

Another culprit behind the nation’s financial crisis: short selling, an act that until recently, the federal government has been exceedingly lax in regulating.

Short sellers make money when a company’s shares go down in price. They “borrow” shares from brokers and then resell them. When the share price on the stock becomes lower, short sellers give back the shares at the lower price and keep the difference.

While legal, critics of short selling say the method is at least partially to blame for the downfall and financial troubles of several Wall Street mavericks and other banking heavyweights in recent months, including Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Morgan Stanley.

On Sept. 18, New York Attorney General Andrew Cuomo announced that his office would be launching an investigation into the practice of short selling and, specifically, into the activities of short sellers regarding shares of Lehman Brothers and American International Group (AIG).

The SEC is cracking down on short sellers, as well. On Friday, Sept. 19, the regulatory agency issued a temporary ban on short selling in shares of 799 financial institutions. The ban will be in effect until Oct. 2, and could be extended pending market conditions.

Meanwhile, also on Friday morning, Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke unveiled a series of billion-dollar rescue plans aimed at salvaging the nation’s financial markets. Among the initiatives: creating a temporary asset relief program that would remove illiquid mortgage securities from the balance sheets of financial institutions and a federal guarantee on assets in money-market mutual funds whose values fall below $1 a share.

Officials are still working out details of the overall plan, and expect to meet with various members of Congress this weekend.

Keep in mind that Paulson’s plan - while no doubt a much-needed move in light of the current financial crisis - is a taxpayer-funded plan. Its cost doesn’t come cheap. The anticipated price tag: a whopping $1 trillion.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

After walking away from buying Lehman Brothers outright some 72 hours ago - a move that sealed the 158-year-old investment firm’s bankruptcy fate - British bank Barclays has now handpicked Lehman’s most desirable business segments, agreeing to purchase the investment banking and capital markets units for a fire sale price of $250 million in cash. Barclays also will buy up Lehman’s New York headquarters and two data centers in New Jersey for $1.5 billion.

Ironically, at the same time Barclays’ deal with Lehman came to fruition, the U.S. federal government was unveiling its plan to bail out ailing insurance giant American International Group (AIG) with an $85 billion loan. Three days ago, U.S. Treasury Secretary Henry Paulson was steadfast in his refusal to use taxpayer dollars for a rescue of Lehman Brothers.

The Fed’s decision is Barclays gain. Its $1.75 billion purchase includes businesses with trading assets estimated at more than $70 billion and trading liabilities of $68 billion. Reportedly, Barclays is considering a deal to buy additional parts of Lehman this week, including its prized investment management division.

For many people, Lehman Brothers’ journey into bankruptcy was not entirely unexpected. In recent years, Richard Fuld, Chairman and CEO, had made more and more bets on risky mortgage-backed securities. When the U.S. housing market began to crumble last summer, so too did Lehman. Having gambled nearly four times the firm’s shareholder equity on the mortgage securities, Fuld suddenly found himself - and Lehman - barely treading water. On Sept. 14, the nation’s fourth-largest U.S. investment bank was forced into bankruptcy.

For Lehman’s 25,000-plus employees, the final chapter of the venerable firm is especially painful. Not only will many lose their jobs, but they’ve witnessed their savings evaporate, as well, because a huge portion of their pay packages was tied to the firm’s stock - a decision orchestrated by Fuld.

On Sept. 25, the House Oversight and Government Reform Committee will hold a special hearing on Lehman Brothers, examining the regulatory mistakes and financial excesses leading to the company’s untimely bankruptcy. Fuld, who has received more than $465 million in compensation between the years of 1993 and 2007 - and who stands to take home millions more via an executive payout package - has been asked to testify.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

As it became more apparent that the 158-year-old investment firm of Lehman Brothers would succumb to bankruptcy, Merrill Lynch’s CEO John Thain saw the writing on the wall. Already pummeled by toxic mortgages, falling stock prices and nearly $20 billion in losses over the past four quarters, Merrill Lynch was likely next in line to fail.

To prevent a fate similar to Lehman, within 42 hours Thain and others orchestrated a plan to sell the 94-year-old brokerage firm - the world’s largest - to Bank of America in all-stock deal worth $50 billion. The transaction is the seventh-largest bank acquisition to be announced, according to Thomson Reuters.

The deal itself is expected to close in early 2009. Under the terms of the transaction, three directors of Merrill Lynch will join Bank of America’s Board of Directors. Bank of America will retain the Merrill Lynch name for the retail brokerage.

For Bank of America, already the largest retail bank and credit card issuer in the country, the acquisition of Merrill Lynch is viewed as strategic business move. The combined company will now have leadership positions in retail brokerage and wealth management. By adding on Merrill Lynch’s 16,000 financial advisers, Bank of America becomes the largest brokerage in the world, with more than 20,000 advisers and $2.5 trillion in client assets.

The acquisition of Merrill Lynch is not the first major purchase for BofA this year. In January, the company agreed to buy troubled mortgage lender Countrywide Financial Corp. for $2.5 billion. As in the purchase of Merrill Lynch, it was an all-stock transaction.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

It survived a stock market crash and the Great Depression, but Lehman Brothers could not triumph over the subprime mortgage problems of the 21st century.

Seconds before midnight on Sunday, Sept. 14, the 158-year-old investment banking firm agreed to file for Chapter 11 bankruptcy, officially ending a weekend of rumors and speculation on its demise. As employees began arriving for work on Monday morning, many were told not to return the following day.

Lehman Brothers was the nation’s fourth-largest investment bank, and the biggest underwriter of mortgage-backed securities. Its historic collapse is attributed to some $60 billion in toxic real estate holdings, along an inability to raise much-needed capital in recent weeks. In its filing for bankruptcy protection, Lehman reported total debts of $613 billion against total assets of $639 billion.

Lehman’s debt ratings were another key source of its problems. All three rating agencies had warned last week that rating downgrades were likely unless Lehman could come up with a solid restructuring plan or a buyer.

Many people are asking why the U.S. federal government, which intervened in the Bears Stearns case in March to orchestrate its sale to JP Morgan Chase and, more recently, prevented mortgage giants Fannie Mae and Freddie Mae from going under, failed to save Lehman Brothers. Reportedly, U.S. Treasury Secretary Henry Paulson was unwilling to use taxpayer money once again to resolve a Wall Street banking crisis.

For the time being, only Lehman’s parent company, Lehman Brothers Holdings, will seek Chapter 11 bankruptcy protection. The filing does not include any of Lehman’s subsidiaries or investment banking and asset management operations. Those units will continue to operate as usual for now. Analysts say Lehman is likely to either find a buyer - or buyers - for those business segments or unwind them gradually.

In addition, Wall Street’s major banks have created a $70 billion fund to ease the effects on the financial markets from the Lehman bankruptcy. Among the firms participating: Citigroup, Barclays, UBS, Bank of America, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch and Morgan Stanley.

By 9:30 a.m. on Monday, Sept. 15, Lehman’s shares had fallen more than 90%, from $3.65 last Friday to just 29 cents. It was only six days ago that Lehman’s CEO Richard Fuld said the investment firm was poised for a comeback and that it had ample capital and liquidity.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

As Lehman Brothers headed into liquidation territory late Sunday evening, Sept. 14, another dramatic event was unfolding on Wall Street: the sale of Merrill Lynch to Bank of America for $44 billion.

The boards of directors of both companies have approved the deal, and Bank of America will pay nearly $30 for each share of Merrill Lynch stock.

The surprise announcement arrived on the heels of a flurry of weekend meetings between officials at the New York Federal Reserve Bank, the U.S. Treasury, the Securities and Exchange Commission (SEC) and various Wall Street banks regarding a rescue plan for Lehman Brothers.

Like Lehman, Merrill Lynch has been mired down by toxic real estate holdings this year. In total, the 94-year-old firm has posted more than $45 billion in losses. In August, Merrill’s financial crisis became so severe that CEO John Thain announced the liquidation of $31 billion in collateralized debt obligations (CDOs) for pennies on the dollar. The CDOs were sold to the private equity firm of Lone Star Funds for $6.7 billion. Fourteen days prior to the sale, Merrill stated the assets to be worth $11.1 billion.

The sale of Merrill Lynch to Bank of America was unexpected on Wall Street. Over the course of the weekend, BofA was thought to be one of the lead suitors for Lehman Brothers. As of late Sunday afternoon, however, Bank of America apparently walked away from those discussions - reportedly because U.S. Treasury Secretary Henry Paulson would not offer any government backstop as part of the deal.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.