LehmanBrothers operated as an investment bank, globally offering servicesto corporate, institutional, government and high-net-worth customersand individual clients. It carried out businesses including, raisingcapital for clients via direct placement as well as securitiessubscriptions trading research private equity investments and thetrade of foreign exchange and derivative products and otherparticular commodities among other services. LBI`s headquarters wasin New York and has many other additional offices in variouslocations complementing it.
AIGis an organization that deals with general insurance and propertycasualty. It is a world leading organization that serves over seventymillion clients all over the world. The industry has an extensiverange of services and products, financial strength that is splendidand expertise that claims deep. It enables its insurance clients,both personal and commercial alike, to handle any risks faced withcertainty and self-assurance.
BothAIG and Lehman Brothers experienced a tough financial crisis that wasa defining moment for the rest of the world. Lehman Brothers fellwhereas AIG survived the crisis. Government intervention is seen as akey thing in this essay and the role it plays in ensuring there ismore confidence in the market. This essay gives a general outlook ofboth situations and tries to answer some of the most-asked questionslike, was it a good idea for the federal government to come to AIG’sintervention? Why did they not save LBI instead?
Whatled to the situation at LBI?
LehmanBrothers was documented for bankruptcy on the 15th of September 2008.It had 639 billion dollars in the form of assets and 619 billiondollars as debt. In history, LBI`s bankruptcy was the largest everrecorded since its assets went way beyond those of bankrupt giantswho existed before like, Enron and WorldCom. At the time when itcollapsed, Lehman was number four among all investment banks. It had25000 employees from all over the world. The demise of Lehman alsoput it in the position of the largest victim of subprime-mortgage ofthe U.S. and as a result triggered a financial crisis that affectedfinancial markets globally in the year 2008 (Greenberg, et al. 2013).
Lehmanhad to strive through so many challenges while the firm showedprosperity over those decades that the economy of the U.S. sproutedinto a powerhouse that swept across very many nations in the world.Lehman outlived all those challenges – the 1800s bankruptcies ofthe railroad, the 1930s Great Depression, the Long Term CapitalManagement demise and the 1998 default of the Russian debt (McDonald,et al. 2009). In spite of the survival of all previous disasters,when the U.S housing market collapsed, Lehman was eventually broughtto its knees because its unrestrained croquet into the subprimemortgage market was a calamitous step.
Lehmanattained five lenders of mortgage in 2003 and 2004. This was with theboom in housing in the U.S. that was under way. Among the lenderswere, subprime lender, Aurora Loan Services and BNC Mortgage, whichparticularized in Alt-A loans. These are loans that are offered toborrowers without showing full documentation. In the beginning,Lehman`s accession seemed to exhibit prescience revenues recordedfrom the company`s real estate business conferred sufficient powerupon revenues in the unit of capital markets to increase suddenly by56% from the year 2004 to the year 2006. This growth rate was wayfaster than any other businesses in the management of assets orinvestment banking. The firm put 146 billion dollars as a security ofmortgages in the year 2006, an increase of 10% from 2005. Every year,LBI reported recorded profits from 2005 to 2007. There was apublished record of a net income worth 4.2 billion dollars by thefirm on a 19.3 billion dollar revenue.
Whatmade LBI vulnerable to the market conditions that were fastdeteriorating was the ratio of their assets in total to equity ofshareholders and its colossal documents of loan securities. Lehmanshares dropped as low as 48% on the 17th of March 2008 when BearStearns nearly collapsed (Skeel, 2011). Confidence returned in thecompany to some extent after 4 billion dollars were raised in Aprilthrough the preferred stock issue that could be converted into sharesfrom the Lehman Brothers firm at a higher value of 32%than what itcost at that time. The supply took back to its diminution, however,while managers of the unregistered investment fund raised questionson the liability of mortgage portfolio of LBI.
Lehmanmade an announcement of a 2.8 billion dollar loss on the 9th of June.It was a loss in the second quarter. American Express had off-shotthe previous losses it incurred and had reportedly collected othersix billion dollars from those who invested in the company. Asreported, it had been a boost to the firm’s liquidity poolestimated at 45 billion dollars. It had also abated gross assets andcut down financial torque to a factor of about 25.
LehmanBrothers and regulators.
LehmanBrothers was in a desperate position when they decided to seekfinancial regulators. This was meant to dictate the policy on thefinancial services in the firm including exchanges and market. Theiraim was to ensure that the financial services met some regulationsthat were specific to the firm. The regulators were also meant toprovide information to clients to offer protection against improperpractices. The act of regulation required functions like accountants,marketing professionals, HR, legal representatives and IT.
LBIhad to seek regulators because the firm, at that time was almostcompromising due to the fear of being unable, in future, to satisfyits financial obligations. The firm would also not be able tosuccessfully reorganize according to the Code of bankruptcy.
TheNew York Federal Reserve Bank, led by the SEC prompted topinvestigation teams to look into the situations of the remaininglargest banks in the world, Lehman Brothers inclusive.
Theywere not necessarily primary regulators from the firms. The New YorkFed purposed to supervise each firm`s health assessing whether thereare similarities in risks of ruin faced by any of the firms thatcould cause a lasting effect throughout the global financial markets.
Inless than six months, however, Lehman Brothers fell victim of a fatesimilar to Bear Stearns. The government did not offer a bailout thattime (Fridson, 2006). The fall had adverse effects on the creditmarkets and sent waves of shock throughout the world`s financialsystems.
Governmentintervention in LBI situation
Thequestion that is frequently asked is, did the government fail to actbefore Lehman Brothers posed the risks that were embedded and spreadworldwide? Why did the government not do much in saving LehmanBrothers?
Regulators,were to become Treasury secretaries later, Geithner included, statedthat they did their best with the data they had by the time.Interviews carried out with some officials who were in the frontlineof looking into the matter and other documents, however, reveal anunknown side of the same story. There is evidence of regulatorsdeclining to look deep enough into the information and a series ofwarnings that were missed. These would have helped them anticipatethe trajectory of the risk posed by Lehman. Phil Angelides, who wasthe chairman of the FCIC, a commission that was set up by theCongress to look into the crash causes, told FRONTLINE that those incharge knew very little about the crisis that was about to hit. Healso went ahead to state that by the time the unsoundness and shakynature of the system revealed itself clearly, lack of defined actionsteps and action to attempt to control the situation was catastrophicto the country.
LehmanBrothers could not be saved at that time because the Treasury had nocapability to put money belonging to the government into Lehmanoperations and had no power to assure its operations for acquirersthat are private for example, the British Bank and Barclays that wasconsidering to purchase Lehman.
Whatthe federal government learned from the LBI situation that helpedsave AIG
TheAmerican International Group also got into a huge financial crisisthat almost led to bankruptcy. The Federal Reserve, however, bailedthem out. The crisis that struck in 2008 sent many companies into asystem of bankruptcy, but when AIG met a similar destiny, theAmerican Federal Reserve stepped in and saved it (Greenberg, et al.2013). The reason for saving AIG was that in case it filed for beingbankrupt, the effects would have been worse since AIG isinterconnected with other companies globally.
Thefederal government learned their lesson in the sense that, after theyhad experienced the effects all over the world when Lehman Brothersfiled for bankruptcy, they were not ready to let the whole world downby letting AIG go bankrupt because of the impact it had on many otherbig companies in the world (Savona, et al. 2011). They learned toperceive effects of the crisis before it hit and as a resultprevented it. The FT stated that AIG is the top stone of thefinancial system. A UBS analyst known as David Havens went ahead toexpress that nobody was aware of what the fall of AIG would havemeant.
Thegovernment received criticism from all over, but it defended itselfby stating that it had no prediction of the crisis that was to befaced by Lehman Brothers and could not assist them with a bailout,therefore. Failing to bail AIG out would put the economic situationof the world at stake. This would be an addition to the significantlevels of fragility LIB had caused, borrowing costs would besubstantially high, household wealth would reduce and economicperformance would weaken materially.
Governmentrole in the market.
Aminimal role is played by the government in the market. Most of therole is played by consumers and the companies involved in themarketing of goods. There are however roles that can be taken up bythe government to ensure confidence in the market. An example isoffering security to goods and consumers (McDonald, 2015). It canalso be done by regulation of taxes on the companies and provision ofstatements outlining modes of service and laws that govern business.
Discussionsabout whether the government should assist banks or not have beenraised severally. Some people have the opinion that if firms facingcrises are helped, they will fail to be careful including othercompanies as they will be reliant on federal help. Others also arguethat the consequences might be more severe when a failing company isignored. Saving a company is more important than using it as alesson. As in the case of Lehman Brothers. The government saved theworld a great deal by choosing to help AIG. Today the firm is not thesame anymore. It had a smooth transition back to being owned byprivate investors. AIG’s happy ending is, however, yet to come. Ithardly stands as a world-beater. It is widely known as America’sbattened giant.
Fridson,M. S. (2006). Unwarrantedintrusions: The case against government intervention in themarketplace.Hoboken, N.J: J. Wiley.
Greenberg,M. R., & Cunningham, L. A. (2013). TheAIG story.Hoboken, N.J: John Wiley & Sons
McDonald,L. G., & Robinson, P. (2009). Acolossal failure of common sense: The inside story of the collapse ofLehman Brothers.New York: Crown Business.
McDonald,O. (2015). LehmanBrothers: A crisis of value.
Savona,P., Kirton, J. J., & Oldani, C. (2011). Globalfinancial crisis: Global impact and solutions.Farnham, Surrey, England: Ashgate
Skeel,D. A. (2011). Thenew financial deal: Understanding the Dodd-Frank Act and its(unintended) consequences. Hoboken, N.J:Wiley.