A Tragic Story --- The Decline of "The King of Bonds"
It is a sorrowful story about Lehman Brothers. The 158 year old Lehman Brothers Investment Bank came to the tragic end after the subprime mortgage crisis in the United States in 2007.
Later in 2000 after the real estate credit and these non traditional business booming, like the Lehman Brothers and other Wall Street banks, began to get involved in such business, the rate of expansion of Lehman was fast although this was not to blame. (Merrill Lynch, Bell Sten, Morgan Stanley, has had the same problem). In recent years, the Lehman Brothers have been the top sellers and Book managers of residential mortgage bonds and commercial real estate bonds. Despite the decline in the real estate market in 2007, Lehman Brothers commercial real estate bond business is still growing, therefore the systemic risk faced by Lehman Brothers was very large.
In addition, Lehman's "king of bonds" is certainly a compliment, but it also implies that its business is too concentrated, focused on income part. In recent years, although it was in other areas of the business (stock exchange mergers and acquisitions) that were progressing, it lacked the diversification of other competitors. In contrast, Merrill Lynch, in the same predicament, can quickly sell its invested equity and replace it with much-needed cash, but there is no such emergency means of Lehman.
Entering the unfamiliar business and developing too fast, the business is too concentrated, is one of the reasons why Lehman Brothers went bankrupt.
The second point is that the investment banks represented by Lehman are different from those of the integrated banks. They have too little capital and low capital adequacy. In order to raise funds to expand the business, they had to rely on the bond market and the inter-bank lending market; in the bond market to issue bonds to meet the long-term demand for funds in the interbank market, the mortgage repurchase method to satisfy the demand for short-term funds and these funds will be used for business and investment, earn income, deductions to be paid for financing the company is operating costs, return. That is to say, the company uses a small amount of its own capital and a large amount of borrowing to maintain the capital requirements of operations, which makes the Lehman brothers leverage larger. When losses begin to occur, the number of losses increases with leverage because of leverage.
On the other hand, in addition to the Lehman Brothers themselves, the panic of the market has become the pusher of Lehman Brothers bankruptcy.Clients have doubts about Lehman's prospects, cancel and end Lehman's business, and transfer money elsewhere, causing Lehman's assets to decline by about 63% in the short term. At the same time, the creditors in order to reduce the risk, stop providing short-term loans required for the operation of the Lehman; its Clearing Corp accounts frozen, lost its continued operation of the basic conditions and trade; and the main counterparties of Lehman also stop trading with them.
Throughout the process, the top management of the Lehman brothers also had considerable responsibility. First is the influence of past achievements, and the management is blind and optimistic. Lehman's CEO Dick Fuld became the top leader of Lehman in 1993, and is now the longest serving CEO in Wall Street. During this period, he led Lehman on Wall Street has become one of the Big Mac, won the "king of bonds" title, and several times to avoid bankruptcy and bad luck to glory. Because of this, the company can not help but produce a sense of blind optimism and complacency from top to bottom. In the past few years, the company's business expansion too fast, the importance of risk control on the side; poor judgment on the situation in the future, even if the crisis signs appear in the real estate market in 2007 is still expanding this business.
Finally, when the crisis happened, the company's management hesitated and Lehman lost its chances of redemption. It was too late to try to do anything after realizing the seriousness of the problem.
Later in 2000 after the real estate credit and these non traditional business booming, like the Lehman Brothers and other Wall Street banks, began to get involved in such business, the rate of expansion of Lehman was fast although this was not to blame. (Merrill Lynch, Bell Sten, Morgan Stanley, has had the same problem). In recent years, the Lehman Brothers have been the top sellers and Book managers of residential mortgage bonds and commercial real estate bonds. Despite the decline in the real estate market in 2007, Lehman Brothers commercial real estate bond business is still growing, therefore the systemic risk faced by Lehman Brothers was very large.
In addition, Lehman's "king of bonds" is certainly a compliment, but it also implies that its business is too concentrated, focused on income part. In recent years, although it was in other areas of the business (stock exchange mergers and acquisitions) that were progressing, it lacked the diversification of other competitors. In contrast, Merrill Lynch, in the same predicament, can quickly sell its invested equity and replace it with much-needed cash, but there is no such emergency means of Lehman.
Entering the unfamiliar business and developing too fast, the business is too concentrated, is one of the reasons why Lehman Brothers went bankrupt.
The second point is that the investment banks represented by Lehman are different from those of the integrated banks. They have too little capital and low capital adequacy. In order to raise funds to expand the business, they had to rely on the bond market and the inter-bank lending market; in the bond market to issue bonds to meet the long-term demand for funds in the interbank market, the mortgage repurchase method to satisfy the demand for short-term funds and these funds will be used for business and investment, earn income, deductions to be paid for financing the company is operating costs, return. That is to say, the company uses a small amount of its own capital and a large amount of borrowing to maintain the capital requirements of operations, which makes the Lehman brothers leverage larger. When losses begin to occur, the number of losses increases with leverage because of leverage.
On the other hand, in addition to the Lehman Brothers themselves, the panic of the market has become the pusher of Lehman Brothers bankruptcy.Clients have doubts about Lehman's prospects, cancel and end Lehman's business, and transfer money elsewhere, causing Lehman's assets to decline by about 63% in the short term. At the same time, the creditors in order to reduce the risk, stop providing short-term loans required for the operation of the Lehman; its Clearing Corp accounts frozen, lost its continued operation of the basic conditions and trade; and the main counterparties of Lehman also stop trading with them.
Throughout the process, the top management of the Lehman brothers also had considerable responsibility. First is the influence of past achievements, and the management is blind and optimistic. Lehman's CEO Dick Fuld became the top leader of Lehman in 1993, and is now the longest serving CEO in Wall Street. During this period, he led Lehman on Wall Street has become one of the Big Mac, won the "king of bonds" title, and several times to avoid bankruptcy and bad luck to glory. Because of this, the company can not help but produce a sense of blind optimism and complacency from top to bottom. In the past few years, the company's business expansion too fast, the importance of risk control on the side; poor judgment on the situation in the future, even if the crisis signs appear in the real estate market in 2007 is still expanding this business.
Finally, when the crisis happened, the company's management hesitated and Lehman lost its chances of redemption. It was too late to try to do anything after realizing the seriousness of the problem.
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