Understanding Lehman Brothers bankruptcy

We are living in highly eventful times and there is just so much happening. The biggest problem is to follow and read up on so many happening events. The reading material just keeps piling up.

I had posted on last Thursday that Lehman is next firm on the firing line after Fannie Freddie mess. All were expecting Fed/Treasury to do something over the weekend but Fed/Treasury declined to help Lehman. The reasons are unknown but most say the desires help was way too  much. Moreover AIG also joined the firing line making it more difficult to Fed/Treasury  to intervene.

The result is Lehman filed for Bankruptcy. It said in a press release that it intends to file for Chapter 11 Bankruptcy. In a separate press release later in the day it said it has filed for one. It says:

AS PREVIOUSLY ANNOUNCED, LEHMAN BROTHERS HOLDINGS INC. FILED CHAPTER 11; NO OTHER U.S. SUBSIDIARY OR AFFILIATE, INCLUDING ITS BROKERDEALER AND INVESTMENT MANAGEMENT SUBSIDIARIES, WAS INCLUDED IN THE FILING

None of the brokerdealer subsidiaries or other subsidiaries of LBHI was included in the Chapter 11 filing and all of the U.S. registered broker-dealers will continue to operate.  LBHI is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment  Management Division (“IMD”). LBHI intends to pursue those discussions as well as a number of other strategic alternatives.

The press release also says that its international subsidiaries in Europe are also facing trouble as support from parent company stops.

I am puzzled though.

Lehman has three business segments – Capital Markets, I-Banking and Investment Management. Out of the three it is Capital Markets which has been bleeding profusely and losses have doubled from USD 2. 4 billion in Q2 20008 to USD 4.2 billion in Q3 2008. Infact the other two have made profits in Q3 2008- Ibanking USD 0.6 billion ( USD 0.9 billion in Q2 2008) and I-management – USD 0.6 billion (USD 0.9 billion in Q2 2008).

But the press release on bankruptcy says it Broker dealer and I-managment will continue to operate. Broker -Dealer is nothing but capital markets segment. I just saw Lehman’s factbook and it said its capital markets division is divided into four markets – equity, fixed income, prime services and mortgage capital. As far as I understand this is nothing but the functions of Broker-Dealer. The division which is bleeding the most and has got into trouble continues to run its operations. Why should this be?

Again, to recall Lehman Brothers Holding Inc (LBHI) has filed for bankruptcy. This takes up back to the concepts of Holding Company:

A holding company is a company that owns part, all, or a majority of other companies’ outstanding stock. It usually refers to a company which does not produce goods or services itself, rather its only purpose is owning shares of other companies. Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies. In the U.S., 80% or more of voting stock must be owned before tax consolidation benefits such as tax-free dividends can be claimed.

As I understand it, LBHI owns all these seperate subsidiaries under the three segments – capital markets/broker-dealer, i-banking and i-management. It provides capital to run all these seperate segments and these three businesses are its assets. As overall position of these segments deteriorated, there were losses.  

LBHI had to either sell its assets or get more capital. It could not got any buyers for its assets (I-management business is on the block, Barclays is interested in broker-dealer business) nor was able to infuse new capital ( Korea Development Bank declined). Treasury/Fed declined  to help. There was only one way out- bankruptcy filing.

This brings me back to the original problem. Even if it is a holding company, how will it manage by keeping the broker-dealer business running. The way the financial markets are it is only going to be more losses for the same. It could have allowed i-banking and i-management to function but put broker-dealer in a freeze.

Another problem is if it manages to sell off both dealer-broker and i-management business, what remains in the holding company? Only I-banking? How will they service the What happens to the foreign operations? Would they file for bankruptcy as well in their respective countries? As I see the recent financial results closely, I realise out of the total expecetd revenue loss of 2.9 billion, Europe and Middle East had losses of USD 0.9 billion and US conributed about 2.0 USD to the loss. so, surely concerns are going to be felt in Europe divisions as the bankruptcy press release also says.

Interesting times surely.

Addendum: 1. The one organisation which muct be having the last laugh at this concept of holding companies.

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5 Responses to “Understanding Lehman Brothers bankruptcy”

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