The
majority, including me, do not like banks. Banks are considered as our enemies
who are constantly trying to get benefits from us. Especially when loans are
taken, we are required to pay them back plus the interest and been stressed
about the set deadlines for every instalment loan. I do not have a loan but
still don’t like when the bank is on charge of my own money. For example, I
wanted to sign a phone contract with O2, however Lloyds did not approve it. The
reason??? Well, I have no idea why I was not allowed to use my own money for
the transaction I needed them for.
On the one
hand economic crisis terrifies us but on the other hand is a nice feeling
knowing that your “antipathy”, in this case the banks, is on discomfort like in
2008 economic crisis. From 2000 till 2007 mortgages and credit cards
were in fashion. Every individual wanted this “easy” money without worrying the
repayment since it would be requested in the future.
But why
were the banks sharing these “easy” money?? The more money were given to public, especially for mortgages, the greater banks’
cash generation were. Price of houses indicated a constant
increase, without salaries following the same upward trend, and ultimately
reached the peak on 2007.
Lehman
Brothers Bank, the fourth largest investment bank in U.S, was the one
introducing 2008 crisis and the largest bankruptcy recording a 75% stock drop
in five days. Lehman used to be a
high-class profile company, which is generating profit and keeps its
shareholders happy (premium risk). However, its first quarter on 2008 had a $3bn
net loss and started selling its assets to cover its financial gaps. Lehamn liquidated its assets in order to keep its WACC stable, in order lenders who have priority to be paid while shareholders to be happy with their returns.
These losses were the first sign of its
tumble. Its constant negative financial performance indicated a very high
default risk. Share prices were reduced as long as shareholders were eliminated.
The main
problem was mortgages offered to everyone, even to those who were not able
to repay them. Mortgages were categorised according to their risk, and sold to investors. The investors' benefit were the
securities. However, the majority of clients lied about their
financial situation and as a sequence not being to repay it. Consequently, security holders neither were getting any benefits back nor
could sell the houses at the original price.
Now Lehman
had a huge loan on its back while was constantly
loosing investors. Probably the company’s
accountants did not pay attention on the financial distress occured since 2006. CEOs should probably create a happy, colourful environment for its
accountants instead of allocating them to dark and depressing rooms causing them “chemical
imbalances”. One day they will destroy everything, as history has
taught!
Fed
organised three days before the bankruptcy a meeting with Lehman’s main
competitors. The purpose was to rescue Lehman. Either to
invest at SpinCo, Lehman’s possible subsidiary in order its
poisoned assets to be assigned at. Or Lehman to be sold to Barclays. Knowing Lehman’s
financial position none of the competitors wanted to put in danger their own
shareholders and participate to this investment. Ultimately, its sale to Barclays was decided. However, due to legislation it
could not be accomplished in one-day time.
I guess, it was meant to be!
I guess, it was meant to be!
The main
conclusion after watching “The Last Days of Lehman Brothers” is to predict
before it happens. There
were figures indicating a downward trend of the bank's ratios. Why the CEO did not
changed his strategy to the new data released? For example, decreasing mortgages while increasing their securities. They would have loose customers and
investors indeed but would have survived, probably!!
The conclusion is that an empire requires years to be build but could be destroyed in just three
days.
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