Lehman Brothers, the U.S.’s fourth largest investment bank, filed a Chapter 11 petition in U.S. Bankruptcy Court in Manhattan today. Lehman, which was the biggest underwriter of mortgage-backed securities during the recent real estate bubble, simply could not survive the resulting credit crunch. Lehman’s recent reports indicated that the firm expected to realize a $3.9 billion loss for the quarter ended August, 2008. Much of this loss was attributable to extensive write downs on the valuation of subprime mortgage securities and other structured finance securities that were “fair valued.” Among other things, Lehman wrote down its “Alt-A” mortgage securities portfolio from 63% of face value to 39% of face value. Similarly, it wrote down the value of its subprime securities and second loan securities portfolios from 55% of face value to 34% of face value. These losses were simply too much for the firm to overcome. Attempts to sell the firm or raise additional capital failed.
Obviously, Lehman’s creditors (including its bondholders), customers, employees and counterparties to trades, are all confronting substantial uncertainty. Recent speculation was that that Lehman bondholders may get approximately $.60 on the dollar in any liquidation scenario. Lehman employees are certainly left in a complete state of uncertainty. While some will continue to be employed to wind down Lehman’s operation, they have no long-term job security. Lehman’s counterparties are left in uncharted waters and are facing what could be “a big mess.” Lehman’s customers, while having some protection, are likely to face months of uncertainty as the whole situation gets unraveled.
The bankruptcy filing did not include Lehman subsidiaries. These subsidiaries will apparently continue to operate while attempts are made to dispose of them in an orderly fashion.
Lehman’s filing has a significant impact across various segments of the economy. Richard Bove, a banking analyst with Ladenburg Thalman & Co., stated “Forcing liquidation will set off problems in other companies and markets everywhere.” Meanwhile, Charles Palenbaum, a bankruptcy lawyer in Florida, stated “There’s likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown.”
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