Financial Case Studies

"Actually, Jinjiang is still a learning APP". I came across this video on Station B and took a look. I didn't expect that someone actually did this in Jinjiang. Hahaha

Introduction to Lehman Brothers Lehman Brothers Holdings Inc. Is the fourth largest investment bank in the United States. As a global investment bank, Lehman Brothers has a history of 158 years. Its strong financial strength and reputation as "the world's most powerful stock and bond underwriting dealer" can be traced back to a century ago. Lehman's business capabilities have been widely recognized by many world-renowned companies. It not only serves as an important financial advisor to these multinational companies and governments, but also has many of the best international analysts recognized in the industry. As a result, it is a global leader in many business areas, including equities, fixed income, trading and research, investment banking, private banking, asset management and venture capital. All this helped Lehman Brothers consolidate its leadership position in the business. "Business Week" selected Lehman Brothers as the Best Investment Bank in 2000, and "International Financing Review" awarded it the title of Best Investment Bank in 2002. Its overall research strength also topped the list of "Institutional Investor". Such a global diversified investment bank with a reputation resounding throughout the industry lost its armor on September 15, 2008, Beijing time, as the crisis in the subprime mortgage market intensified. According to the U. S. Bankruptcy Law, Lehman Brothers Holdings, the fourth largest investment bank in the United States, submitted an application for bankruptcy protection to the U. S. Federal Bankruptcy Court. Measured by assets, this is the largest corporate bankruptcy in the U. S. Financial industry. Lehman Brothers bankruptcy process Table 1 lists some major events that have occurred in the financial market since the subprime mortgage crisis broke out in the United States in the summer of 2007 and how Lehman Brothers went bankrupt step by step. Table 1 Lehman Brothers bankruptcy process June 22, 2007 Two hedge funds owned by Bear Stearns, the fifth largest brokerage firm and the second largest mortgage bond underwriter, suffered huge losses, and the subprime mortgage crisis began to erupt in full force. July 10, 2007 Credit rating agencies Moody's and Standard & Poor's downgraded the credit rating of MG's mortgage bonds. August 9-10, 2007 Countries (regions) around the world have injected capital into the banking system, and the capital injection in 48 hours has exceeded US$326.2 Billion. September 18, 2007 The Federal Reserve Bank of China significantly cut the federal funds rate by 50 basis points to 4.75%. This was the first interest rate cut by the Federal Reserve Bank of China in more than four years, and led to a rise in global stock markets; the U. S. Subprime debt crisis spread globally. September 31, 2007 Bernanke said that the Federal Reserve will work hard to prevent the credit crisis from damaging economic development, and Bush promised to adopt a package plan to save the subprime mortgage crisis. January 22, 2008 The M Fed made an emergency interest rate cut, lowering the federal funds rate by 75 basis points to 3.5%. This was the largest rate cut by the M Fed since 1980. March 12, 2008 The Fed announced that it will expand its securities lending program and lend up to $200 billion in GUO bonds to its primary dealers. March 16, 2008 Bear Stearns, the fifth largest securities firm in MG, was acquired by JPMorgan Chase Bank due to a liquidity crisis and credit crisis. March 18, 2008 Lehman Brothers announced that its first-quarter net income fell sharply by 57% year-on-year due to the shrinking credit market, and its stock price fell by nearly 20%. April 1, 2008 In order to calm the market's doubts about the shortage of funds, Lehman Brothers issued US$4 billion in convertible special shares. Inspired by this news, Lehman's share price surged 18% to US$44.34 Per share. Investors showed their confidence in Lehman and believed that it could avoid the fate of Bear Stearns being acquired. April 3, 2008 The market expects Wall Street banks, including Lehman Brothers, to follow UBS's lead and separate troubled assets. April 16, 2008 Lehman Brothers CEO Richard said that the worst period of credit market contraction has passed; at the same time, the CEOs of Goldman Sachs and Morgan Stanley also said that the credit market crisis is nearing an end. April 30, 2008 In order to reduce high-risk, high-yield lending positions, Lehman sold US$1.1 Billion of guaranteed loan obligations (CLO). May 10, 2008 The credit-related losses of the world's major banks and securities firms have reached US$323 billion; of which Lehman Brothers' losses were US$3.3 Billion, ranking 24th, and the degree of losses was less than 1/10 of its main competitors. June 4, 2008 Affected by market concerns that Lehman Brothers will need further financing, its credit default swap spread jumped to 272 basis points. June 9, 2008 Credit rating agencies downgraded Lehman's credit rating; other rating agencies also expressed concerns about its credit outlook. June 10, 2008 Lehman Brothers announced that it expected a net loss of US$2.8 Billion in the second quarter and revealed its latest plan to raise US$6 billion. June 13, 2008 Due to losses, Lehman CEO Richard Fuld fired financial director Erin Call and then president Joseph Gregory. June 19, 2008 Credit-related losses from the world's major banks and securities firms have reached US$396 billion; of which Lehman Brothers' losses were US$13.9 Billion, a sharp increase. August 1, 2008 Reports say Lehman Brothers is trying to sell up to $30 billion worth of commercial mortgage assets and other hard-to-index securities. August 5, 2008 Lehman Brothers announced that it is considering selling its asset management unit Neuberger Berman to seek financing. Reasons for the bankruptcy of Lehman Brothers 3.1 Own reasons 1. Entering an unfamiliar business, developing too fast, and becoming too concentrated. As a top investment bank, Lehman Brothers has focused on traditional investment banking business (securities issuance and underwriting, mergers and acquisitions advisory, etc.) For a long time. After entering the 1990s, with the popularity of fixed income products, financial derivatives and the rapid development of trading, Lehman Brothers also vigorously expanded its business in these areas and achieved great success. It was known as the "Bond King" on Wall Street. After non-traditional businesses such as real estate and credit boomed in the post-2000s, Lehman Brothers, like other Wall Street banks, began to get involved in such businesses. This is understandable, but Lehman expanded too quickly (Merrill Lynch, Bear Stearns, Morgan Stanley, etc. Also had the same problem). In the years leading up to its bankruptcy, Lehman Brothers had been a top underwriter and bookrunner of residential mortgage bonds and commercial real estate bonds. Even in 2007, when the real estate market was in decline, Lehman Brothers' commercial real estate bond business still grew by about 13%. As a result, Lehman Brothers faced very high systemic risks. In years when market conditions were good, the entire market was rising, market liquidity was rampant, investors were blinded by optimism, and huge systemic risks brought huge returns to Lehman; but when the market collapsed, such large systemic risks would inevitably have a huge negative impact. 2. The financial structure is unreasonable, with too little capital, too high leverage and over-reliance on short-term financing. Investment banks represented by Lehman are different from universal banks such as Citigroup, JPMorgan Chase, and Bank of America. Their own capital is too small and their capital adequacy ratio is too low. In order to raise funds to expand their business, they have to rely on the bond market and the inter-bank lending market. They issue bonds in the bond market to meet the needs of medium and long-term funds, and meet the needs of short-term funds through methods such as mortgage repurchase in the inter-bank lending market. They then use these funds for business and investment to earn income. After deducting the financing costs to be paid, this is the return on the company's operations. That is to say, the company uses a small amount of its own capital and a large amount of borrowing to maintain the capital needs of its operations. This is the basic principle of the leverage effect. The more you borrow, the less your own capital, and the greater your leverage ratio (total assets divided by your own capital). The leverage effect is a double-edged sword. When you make money, your profits are magnified with the leverage ratio; but when you lose money, your losses are also magnified by the leverage ratio. In recent years, due to the expansion and development of business, various investment banks on Wall Street have increased their leverage ratios to dangerous levels. The following table shows the balance sheet of Lehman Brothers. Table 2 Lehman Brothers Balance Sheet Unit: million US dollars 2008 second quarter 2008 first quarter 2007 fourth quarter 2007 third quarter loan 37,485 49,213 40,627 35,747 Loans and mortgages 37,485 49,213 40,627 35,747 total assets 639,432 786,035 691,063 659,216 total bonds 516,748 647,943 561,965 546,312 total liabilities 613,156 761,203 668,573 637,483 total net worth 26,276 24,832 22,490 21,733 Source: CICC Research Institute As can be seen from the table, Lehman's leverage ratio has remained relatively high. For example, at the end of the second quarter of 2008, Lehman's leverage ratio was 24.3 (It had been as high as 32 at the beginning of the year), its total assets were $639.4 Billion, but its liabilities also reached $6,132. Of course, a mere 26.3 Billion net assets could not help Lehman survive the crisis. In fact, this situation is not unique to Lehman. Many investment banks and securities firms have this problem. The situation of large commercial banks is much better. The chart below lists the leverage ratios of major banks on Wall Street. Source: CICC Research Institute Figure 1 Leverage ratios of major Wall Street banks and brokerages It can be seen from this data that investment banks represented by Goldman Sachs, Morgan Stanley, and Lehman Brothers generally have much higher leverage ratios than other comprehensive banks. Therefore, when the market falls sharply and liquidity decreases or even disappears, their losses will be relatively greater, and it will be harder for them to raise much-needed cash to tide over the difficulties. This is why people are generally skeptical of the business model of independent securities firms. 3. Holding too many non-performing assets and suffering huge losses. A large part of the real estate mortgage bonds held by Lehman Brothers are third-level assets. Securities investments and short-term mortgage contracts account for more than 80% of its assets. Among its securities investments and financial instruments, mortgage loans and real estate-related assets account for the largest proportion, which was still as high as 35.5% When the subprime mortgage crisis broke out in 2007. Lehman's non-performing assets depreciated sharply in a short period of time, missed opportunities at critical moments, and failed to take effective measures to resolve the crisis. These were important reasons for Lehman's collapse. 4. Risk control relies too much on quantitative models, is seriously out of touch with the real economy, and fails to effectively control risks. After the emergence of financial innovation, financial investment began to rely too much on quantitative models. Theoretical assumptions were seriously out of touch with market reality, and predictions of future changes in capital gains were also seriously distorted. Although Lehman Brothers has always been famous for its advanced credit derivatives model analysis technology, during the subprime mortgage crisis, its model technology failed to play its due prediction role, resulting in credit derivatives losses that far exceeded expectations, and ultimately led to the risk being completely out of control. Lehman Brothers also missed many opportunities to save the country because it failed to detect problems in time and was still intoxicated with its past glory. It eventually collapsed because the U. S. Government refused to cover the bottom line. Real economic life is ever-changing. No matter how sophisticated and large a mathematical model is, it is difficult to cover all situations and risk characteristics. If you worship mathematical models excessively and use a number of parameters to completely describe the changes in market risks and replace rational market investment decisions, it will inevitably lead to crises. 5. Management's risk awareness and crisis handling capabilities are insufficient. In the process of the gradual formation of the bankruptcy of Lehman Brothers, Lehman's top management also bore considerable responsibility. The blind optimism of Lehman Brothers management resulted in its risk control awareness and concepts not being fully implemented, leading to mishandling of critical situations. First, management was overly optimistic about the situation due to previous good performance. For example, Lehman CEO Richard Fuld became the top leader of Lehman in 1993. He is considered the longest-serving CEO on Wall Street. He led Lehman to avoid bankruptcy many times and to achieve glory again and again. Because of this, complacency and optimism inevitably arise in the company. Second, in the past few years, the company's business has expanded too quickly and has put aside the importance of risk control. Lehman Brothers seriously misjudged the future situation and continued to expand its business even in 2007 when the real estate market was showing signs of crisis. In the early stages of the subprime mortgage crisis, Lehman suffered very little losses and was even praised by the industry as a model for successfully handling crises in extraordinary times. This paved the way for Lehman's subsequent crisis. Third, Lehman's senior management was indecisive and missed opportunities when the crisis occurred. When Bear Stearns collapsed in March 2008, Lehman Brothers should have clearly realized the seriousness of the problem. In fact, at that time, the market speculated that the next one to fall would be one of Lehman and Merrill Lynch. However, Lehman Brothers management repeatedly came forward to refute the rumors and tried to prove to the market that they were in good condition. In addition, Lehman Brothers asked for too high a price in the acquisition negotiations with the Korea Development Bank and missed the opportunity to get emergency financing to tide over the difficulties, which also led to a further loss of investor confidence. External causes 1. The impact of the U. S. Subprime mortgage crisis on Lehman Brothers and its financial institutions. The subprime mortgage crisis led to the complete liquidation of financial institutions, of which Lehman Brothers was a typical example. The most fundamental reason for the subprime mortgage problem and the resulting payment crisis is the decline in the solvency of subprime loan recipients caused by the decline in U. S. Housing prices. After the crisis broke out, except for Merrill Lynch, whose share price accounted for 1/5 of the 52-week highest share price, the share prices of all other institutions fell by 98% or more from their 52-week highest value. The six financial institutions have combined assets of more than $4.8 Trillion. The total assets of Bear Stearns, Lehman Brothers and Merrill Lynch were devalued by US$3.2 Billion, US$13.8 Billion and US$52.2 Billion respectively during the subprime mortgage crisis, totaling nearly US$70 billion, while the global financial market's impairment was as high as US$557.3 Billion. So far, 12 banks have collapsed, with total assets of approximately US$42 billion. Due to insufficient capital due to impairment, major banks and securities firms around the world are seeking new investors to inject new capital in an attempt to tide over the difficulties. 2. Special market conditions before the bankruptcy of Lehman Brothers Before Lehman Brothers went bankrupt, the market was severely panicked and opponents terminated transactions with Lehman Brothers. Clients became suspicious of Lehman Brothers' prospects, canceled and terminated business with Lehman Brothers, and transferred funds elsewhere on a large scale, forming a de facto run on Lehman Brothers. Lehman Brothers' main counterparty also stopped trading with Lehman Brothers, which actually dealt a fatal blow to Lehman Brothers. 3. Wall Street fails to rescue, and the impact of short-sellers on Lehman One family's crises and hardships often represent opportunities for others. For an investment bank like Lehman Brothers, if short selling caused it to collapse, its assets would be sold at a huge discount. Based on this judgment, many Wall Street investors short-sold Lehman Brothers' stocks in large quantities and all financial derivatives that could profit from the collapse of Lehman Brothers. This kind of short selling is tantamount to overwhelming a financial institution. In fact, under such strong short selling pressure, Lehman Brothers' stock price fell by half in one day. 4. Rating agencies add insult to injury Before the subprime mortgage crisis broke out, rating agencies gave the highest ratings to bond products backed by approximately US$3.2 Trillion in bad credit mortgages. With the outbreak of the subprime mortgage crisis, the ratings of bond products were significantly downgraded. The irresponsibility of rating agencies has concealed the existence of risks to some extent and exacerbated the critical situation. Lehman Brothers was forced to pay more funds as collateral for derivatives transactions due to the continuous downgrading of its ratings by rating agencies, which led to excessive liquidity tightening, a break in the capital chain, and ultimately had to file for bankruptcy protection. 5. The U. S. Government "fails to save lives" The deep involvement of large financial institutions in the market causes their collapse to have a chain reaction. In order to block this domino effect, the government often has to intervene, which also intensifies moral hazard. Out of fear of moral hazard, the Federal Reserve was unwilling to expend too much government funds to exacerbate the "moral crisis" in the market, so it chose to abandon Lehman Brothers. Countermeasures and suggestions Management should establish crisis awareness and pay attention to risk control. Bill Gates once said: "Microsoft is always only 18 months away from bankruptcy." Lehman Brothers' large-scale subordinated debt was the main reason for its bankruptcy. Before the outbreak of the subprime mortgage crisis, the company's employees had suggested to the management that Lehman Brothers' excessive subordinated debt had exposed the company to huge risks. At that time, the subordinated debt market was booming, and the management completely ignored these pertinent opinions. Therefore, management should always maintain crisis awareness, treat opportunities and risks in the company's development rationally, and avoid blind optimism and arbitrary leadership. 2. Continuously improve and improve the company's internal management and risk resistance capabilities. As a company that has survived for 158 years, Lehman Brothers' internal management has reached a fairly standardized level, but it still went bankrupt in difficult circumstances, which shows that the company's ability to resist risks is a comprehensive factor, so companies should constantly review their own internal management and check their ability to resist risks, and always remain cautious. Attitude, promptly discover existing problems and improve them, continuously strengthen the internal management of the enterprise, especially strengthen the risk prevention mechanism, ensure timely discovery of risks, timely reflection of problems and timely resolution, so as to improve the ability of the enterprise to survive in difficulties and be ready to face difficulties that cause the enterprise to close down at any time. Prudently promote financial derivatives and products. The bankruptcy of Lehman Brothers was caused by the subprime mortgage crisis, which in turn was caused by asset securitization of housing mortgages. Asset securitization is a financial derivative product. Financial derivatives and derivatives are a double-edged sword. The risks they carry are multiplied by leverage, and under certain market conditions, local risks can be expanded into global risks, and individual market risks can be transformed into systemic risks. Although housing mortgage securitization can diversify bank credit risks and borrower credit risks, it will also spread mortgage risks to securities markets, stock markets and other fields. Therefore, financial derivatives and products should be viewed and used with caution, and careful analysis and evaluation should be conducted based on actual market conditions before making decisions. It is best to set up relevant regulatory authorities to manage and review investments in financial derivatives. Optimize the corporate asset structure and continuously improve the company's ability to resist risks. Enterprises should take timely measures to control risks, keep leverage within an appropriate range, and pay attention to capital structure and asset quality. Lehman Brothers went bankrupt because its capital chain was broken. Subordinated bonds accounted for a large proportion of the company's balance sheet, and its large holdings of commercial real estate made Lehman Brothers' ability to liquidate assets extremely weak when the subprime mortgage crisis came. In the end, Lehman Brothers had no choice but to borrow money and had to declare bankruptcy. Maintain a sound business structure. In the face of fierce competition, business diversification has become the choice for investment banks to maintain profits. However, a reasonable business structure is the balance weight between the safety and profitability of investment banks. Businesses with different risks and different advantages have not only differentiated needs for investment banks, but also security needs. Potential risks caused by an unstable business structure may suddenly erupt due to external circumstances. Therefore, enterprises should maintain a reasonable business structure and balanced business development, Management must recognize the situation and seize the opportunity. If Lehman Brothers had negotiated the acquisition of Korea Development Bank, it would not have suffered the fate of bankruptcy later on. The reason why Lehman Brothers management rejected the acquisition by Korea Development Bank was that the bid was too low, but as we know from the next situation, Lehman Brothers' market value shrank sharply, so much so that it declared bankruptcy a few days later. Therefore, when facing a crisis, enterprises should recognize their situation and situation, consider the problem from the actual situation, seize all opportunities that may turn the crisis into safety, and not be blindly optimistic and have high ambitions but short intentions. Carry out necessary external supervision Many investment banks in the United States believe that they are fully capable of controlling risks, and relevant U. S. Regulatory agencies also believe so, so they rarely interfere in the company's operations. This is understandable under market economy conditions. However, the question is, can those investment institutions really overcome the temptation of high returns when the economy is booming? Considering the potential risks, Lehman Brothers gave a negative answer. Therefore, in order to stabilize economic development, financial regulatory agencies should carry out appropriate supervision, such as stipulating financial leverage ratios, investment ratios, etc. Of course, the supervision of financial institutions should not affect the normal business operations and profit maximization goals of individual financial institutions, but should be based on stabilizing the entire macro-finance. Prevent moral hazard. Investment bankers exacerbated systemic risk in order to obtain high returns. Therefore, investment banks need to set up a reasonable salary incentive system and pay attention to the quality of their business while focusing on the quantity of performance. In addition, financial institutions should standardize the professional ethics of employees at the institutional level and form a good industry image and professionalism.

Author, are you really making me cry to death?

This weird little guy actually uses Jinjiang to take notes and study. Isn't he afraid of wearing a book?

Help, I searched the Herstatt incident on Baidu and came in hahahahahaha

? ? ? I thought it was a novel based on a financial case, but I didn't expect it to be a real case.

Listen to me, thank you, you warm the four seasons

May I ask if the author has any financial English vocabulary?

Business school students drift by

Wow! ! ! ! ! ! So awesome! ! ! ! ! ! !