Definitely Saw This Coming
EDIT: In case you haven't been following the fallout I thought I would post an update.
The following is copied from THIS wiki article.
In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27-million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". [31]
In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets.[32] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[32] In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third- quarter-reporting deadline in September.[32]
On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank. [33] Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal."[34] It culminated on September 9, when its shares plunged 44.95% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.[35]
Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank.[36] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.[37]
On September 10, 2008, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman.[38][39] The stock slid 7 percent that day.[39][40] Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.[40]
Bankruptcy
On September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.[41] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale.[41] The New York Times reported on September 14, 2008, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed.[42] Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure.[42] Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.[42] Also on September 14, 2008, The New York Times reported that Lehman will file for bankruptcy protection for its parent company, Lehman Brothers Holdings, while keeping its subsidiaries solvent during the bankruptcy proceedings.[43] A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government.[43] Lehman's bankruptcy would be the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years earlier.[43] The International Swaps and Derivatives Association (ISDA) offered an exceptional trading session on Sunday, September 14, 2008, to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day.[44][45]
In New York, on September 15, 2008, shortly before 1 a.m., Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection, although its subsidiaries will continue to operate as normal.[46] The Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant however, after clearing-houses terminated their contracts with the firm.[47] Former Lehman Brothers workers were shown leaving the Lehman Brothers building in Times Square, New York, with boxes of their belongings.[48]
Lehman Brothers (LEH) shares tumbled 80% in U.S. pre-open trade. Macquarie Private Wealth associate director Marcus Droga stated: "You've probably seen more in one day of financial history than we've seen since the great crash of 1929. I'm not suggesting the US market will crash tonight, but in terms of landmark events, it's an historic day."[49][50]
In the UK, the investment bank has gone into administration with PricewaterhouseCoopers appointed as administrators.[51]
Ok, I really should have just shut down the blog after the Talent Show posts because how in the world do I top that?
So anyway, back to reality and a serious topic for today. Unless you have been living on a remote tropical island (in which case you can totally ignore this post) by now you have probably heard about what many are calling the Mortgage Mess
The subprime mortgage financial crisis refers to the sharp rise in foreclosures in the subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July 2007. Rising interest rates increased newly-popular adjustable rate mortgages and property values suffered declines from the demise of the housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses.
Of course with any difficult situation comes finger pointing.
- Predatory Practices of Subprime Lenders (my daughter gets applications in the mail)
- Mortgage Brokers directing people to unaffordable loans (Adjustable rates = $$$)
- Inflated housing prices largely from appraisers (you mean my house isn't worth 400k)
- New home buyers overstating income (people would never do that)
Well, here is my opinion. GREED! and the illusion that everyone can live the American Dream.
Individual home buyers with already maxed out credit cards being told "of course you can afford that new home" This in turn gives the buyers unrealistic expectations of what they can afford and with very little checks and balances what is the end result? In the next few months/years thousands of homes will sit empty waiting for the market to rebalance.
Don't get me wrong the buyers are just as guilty if not more for complete lack of self control. First of all, how many new "neighborhoods" have you seen lately? Brand new house after brand new house popping up like pills at a Lindsay Lohan party.
What the mortgage companies and realtors conveniently forget to mention is the total cost of ownership of that fancy new house. Yes, people can probably scrape by with just the house payment itself but the moment they move in all hell breaks loose.
Curtains, furniture, appliances, BBQ grills...Where does it end? The spiral is out of control and as long as consumers continue to have ridiculously aggressive spending behaviors we will continue to have these problems.
As with any finger pointing what always comes next? LEGISLATION of course, because "people are just too darn stupid to control their own finances. " (let me make it clear this is not my view)
Congress to probe credit crisis
The Sept. 5 hearing will examine fall-out for U.S. consumers and economy, with Fed and Treasury officials set to testify; lawmakers demand answers from ratings agencies too.
So, where does this lead us? Are we headed for a recession? Personally I don't know, but I don't think it's time to panic. One possible solution would be for consumers to simply get the credit under control, allowing the rates to come back down and ultimately the equity to return to the housing market. Of course this is just my opinion and what do I know, all I can do is solve a Rubik's cube while standing on foot reciting Green Eggs and Ham.
posted by Cordell @ 6:30 AM
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