The impact of Lehman Brothers’ Bankruptcy on Individual wealth, explain how the
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The impact of Lehman Brothers’ Bankruptcy on Individual wealth, explain how the bankruptcy of Lehman Brothers affected the wealth and income of many different types of individuals whose money was invested by institutional investors (such as pension fund) in Lehman Brothers’ debt.(3 pages ) The impact of Lehman Brothers’ Bankruptcy on Individual wealth, explain how the bankruptcy of Lehman Brothers affected the wealth and income of many different types of individuals whose money was invested by institutional investors (such as pension fund) in Lehman Brothers’ debt.(3 pages )Explanation / Answer
On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide.Lehman's demise also made it the largest victim of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008.
Bankruptcy of Lehman Brother was seen as a watershedmoment in the global financial crisis which started in 2007 and continued till 2009. Lehmanwas the fourth largest financial service firms before the liquidation, the services provided byit were research and trading, investment banking, private equity, investment management etc.Bankruptcy of Lehman marked the beginning of period of extreme volatility amid alreadyfinancially distressed market. Bankruptcy of the Lehman brother increased the volatility inthe market to such a level that the stock market crashed to all time low leading to thereduction in value of portfolio of the individual investors as well as institutional investors.
Almost 6 million lost jobs. A 5,000-point Dow plunge, the unemployment rate doubled to almost 10%.The free-spending ways of consumers were interrupted. Housing prices in the nation's 20 biggest cities fell 31% since the July 2006 peak and 12% since Lehman's bankruptcy. Coupled with a weak job market and a stock market still down 33% from its October 2007 peak, and resulted in consumers spending less and saving more.The unwillingness of consumers to spend was due largely to huge debt loads which necessitated more savings.
"This shook market confidence to its core and caused people to believe the whole system could blow up," said Garvey. "I don't think anyone fully understood the impact of confidence and what it means to the proper functioning of the system."
The consumer savings rate, which turned negative in the years leading up to the financial crisis, shot up to almost 7% in May, the Commerce Department said. This closely watched metric measures savings as a percent of disposable income. In July, the most recent reading, it dipped to 4.2%. This return to old-fashioned saving, however, acts as a depressant on economic growth at the very time consumption is needed most.
Once-aggressive investors turn conservative. Investors who once chased big returns are now more concerned with protecting their money. At the retail level, investors became slow to jump back into the stock market. A 57% drop in stock prices from the 2007 peak, coupled with homes worth tens of thousands of dollars less, left investors feeling burned.
As a result, many investors in search of a good night's sleep parked their money in safe places, such as certificates of deposit and money market funds, even though they were getting little, if any, return. According to data compiled by the Investment Company Institute and the Federal Reserve, there were $9.3 trillion sitting in cash or cash-equivalent accounts despite the average yield of 0.98% on a one-year CD and 0.06% on money market funds.The more money consumers directed to low-yielding investments, the more saving they would have to do to make up for the smaller investment returns.
"My sense is, individuals will be more sensitive to building their nest eggs via savings as opposed to speculation," says Bob Barbera, chief economist at ITG.
Days of easy money became a thing of the past. It got difficult to obtain loans. The 0% introductory offerings for credit cards or no-money-down mortgages banks dangling in front of potential home buyers — even those with limited means, they all became thing of the past.
"In the current environment, lenders are looking for reasons to say no, not yes," says Greg McBride, analyst at Bankrate.com. "Lenders became increasingly selective as to who got credit and at what price."Credit card issuers also got stingier. Many banks scaled back credit limits, closing unused credit lines and raising rates on borrowers, even those with good track records of paying on time. Tighter credit reduces consumption, which places a drag on the economy.
Employment picture turned cloudy. The U.S. economy underwent structural changes. Many former job-generating businesses, such as the auto industry, basic manufacturing, financial services and traditional media such as newspapers generated fewer jobs than they usually did."The employment situation has changed," Richard Bernstein, founder of Richard Bernstein Capital Management was quoted as saying. A consolidation in retail sector resulted in fewer stores and jobs; it took longer than usual to for jobs to come back.
As a consequence of the crisis, the U.S. economy lost nearly 9 million jobs from 2007 to 2009. Over a particular eight-month period spanning 2008 and 2009, the average U.S. household lost nearly $100,000 from its property and retirement portfolio values combined. Approximately 11 million homebuyers faced foreclosure from 2008 to mid-2012, accounting for about one of every four mortgages in the United States. Tens of millions were made poorer, if not “officially” poor. Clearly, the massive loss of speculative financial wealth on Wall Street (much of it related to depressed MBS, CDO, and CDS values) translated to a comparable loss of real wealth on “Main Street.” The financial crisis had turned into a broadbased economic crisis. Although many families experienced hardship, certain groups were affected disproportionately. Young people, for example, suffered a heavy impact from the unemployment crisis. Each year brought a new wave of recent graduates into the workforce, adding to the masses of young people already facing dismal job prospects. Certain industries, such as Text 342 Chapter 15 — The Financial Crisis and the Great Recession construction and manufacturing, were hit particularly hard. Construction unemployment rates nearly tripled from 2007 to 2010, while manufacturing unemployment jumped from 4.3 percent in 2007 to 12.1 percent in 2009. The economic impact of the financial crisis persisted for an unusually long period.Many families were therefore compelled to cut their spending further; in the period from 2008 to 2011, U.S. consumers on average reported spending $175 per month less than they would have in the absence of a recession. Thus the crisis that began in 2007 led to a recession and very slow recovery that lasted more than five years
The pension funds of the employees who held bond in the firm, had lost most of their values causing a risk of losing their pensions. Stocks were down. People lost $11 trillion since the peak in the market. Pension funds, charities, families and small businesses suffered loss. Pension firm were down $17 billion.The moral hazard created by “too big to fail” in effect divorced the public’s interests from those of the banks, creating a situation in which the pensions or portfolios owned by many millions of households suffered large losses while major banks were bailed out.
World markets fell, and the dollar wavered as investors everywhere sold assets across the board and sought refuge in the safest securities they could find, government bonds.In particular, fear spread Monday on trading desks that one of the large hedge funds with ties to Lehman Brothers might be caught in the position of having assets at the firm that they would not be able to access - thus increasing fears of a run for the doors by panicky clients.
Despite Lehman entering bankruptcy, Fuld was still rewarded with a staggering $34m pay out in 2007. By 2011, he – along with other senior former Lehman executives – paid out around $90m as a settlement in a shareholder lawsuit.
Lehman's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. It also led to more than $46 billion of itsmarket value being wiped out.
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