Collapse Bankruptcy of Lehman Brothers

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Collapse Bankruptcy of Lehman Brothers - Causes
Malfeasance
A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used
cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than
they really were. This practice was a type of repurchase agreement that temporarily removed securities
from the company's balance sheet. However, unlike typical repurchase agreements, these deals were
described by Lehman as the outright sale of securities and created "a materially misleading picture of
the firm’s financial condition in late 2007 and 2008."
Subprime mortgage crisis
In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23
locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman
said that poor market conditions in the mortgage space "necessitated a substantial reduction in its
resources and capacity in the subprime space".
In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss
was a result of having held on to large positions in subprime and other lower-rated mortgage tranches
when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to
sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge
losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter,
Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets.[46] In the first half
of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[46] In
August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead
of its third-quarter-reporting deadline in September.
In September 2007, Joe Gregory appointed Erin Callan as CFO. On March 16, 2008, after rival Bear
Stearns was taken over by JP Morgan Chase in a fire sale, market analysts suggested that Lehman would
be the next major investment bank to fall. Callan fielded Lehman's first quarter conference call, where
the firm posted a profit of $489 million, compared to Citigroup's $5.1 billion and Merrill Lynch's $1.97
billion losses which was Lehman’s 55th consecutive profitable quarter. The firm's stock price leapt 46
percent after that announcement.
On June 9, 2008, Lehman Brothers announced US$2.8 billion second-quarter loss, its first since being
spun off from American Express, as market volatility rendered many of its hedges ineffective during that
time. Lehman also reported that it had raised a further $6 billion in capital. As a result, there was major
management shakeup, when Hugh "Skip" McGee III (head of investment banking) held a meeting with
senior staff to strip Fuld and his lieutenants of their authority. Consequently, Joe Gregory agreed to
resign as President and COO, and afterward he told Erin Callan that she had to resign as CFO. Callan was
appointed CFO of Lehman in 2008 but served only for six months, before departing after her mentor Joe
Gregory was demoted.[47][48][49] Bart McDade was named to succeed Gregory as President and COO,
when several senior executives threatened to leave if he was not promoted. McDade took charge and
brought back Michael Gelband and Alex Kirk, who had previously been pushed out of the firm by
Gregory for not taking risks. Although Fuld remained CEO, he soon became isolated from McDade's
team.
On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-
controlled Korea Development Bank was considering buying the bank.[51] Most of those gains were
quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing
regulators and attracting partners for the deal."[52] It culminated on September 9, when Lehman's
shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on
hold.
On September 17, 2008 Swiss Re estimated its overall net exposure to Lehman Brothers as
approximately CHF 50 million.
Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P
500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns
about the security of the bank.The U.S. government did not announce any plans to assist with any
possible financial crisis that emerged at Lehman.
The next day, Lehman announced a loss of $3.9 billion and its intent to sell off a majority stake in its
investment-management business, which includes Neuberger Berman. The stock slid seven percent that
day.[58][59] Lehman, after earlier rejecting questions on the sale of the company, was reportedly
searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.
Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos
suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar
bonuses to "send a strong message to both employees and investors that management is not shirking
accountability for recent performance."
Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal,
going so far as to actually apologize to other members of the Lehman Brothers executive committee for
the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the
water at Neuberger Berman. I'm embarrassed and I apologize."
Short-selling allegations
During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House
Committee on Oversight and Government Reform, former Lehman Brothers CEO Richard Fuld said a
host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors
contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman
Henry Waxman said the committee received thousands of pages of internal documents from Lehman
and these documents portray a company in which there was “no accountability for failure".
An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to
the demise of both Lehman and Bear Stearns. A study by finance researchers at the University of
Oklahoma Price College of Business studied trading in financial stocks, including Lehman Brothers and
Bear Stearns, and found "no evidence that stock price declines were caused by naked short selling".
Bankruptcy
On Saturday, September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of
New York, called a meeting on the future of Lehman, which included the possibility of an emergency
liquidation of its assets.Lehman reported that it had been in talks with Bank of America and Barclays for
the company's possible sale. However, both Barclays and Bank of America ultimately declined to
purchase the entire company.
The next day, Sunday, September 14, the International Swaps and Derivatives Association (ISDA) offered
an exceptional trading session to allow market participants to offset positions in various derivatives on
the condition of a Lehman bankruptcy later that day.Although the bankruptcy filing missed the deadline,
many dealers honored the trades they made in the special session.
Shortly before 1 am Monday morning (New York time), Lehman Brothers Holdings announced it would
file for Chapter 11 bankruptcy protection citing bank debt of $613 billion, $155 billion in bond debt, and
assets worth $639 billion.It further announced that its subsidiaries would continue to operate as
normal.A group of Wall Street firms agreed to provide capital and financial assistance for the bank's
orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in
exchange for loans and other assistance from the government.The morning witnessed scenes of Lehman
employees removing files, items with the company logo, and other belongings from the world
headquarters at 745 Seventh Avenue. The spectacle continued throughout the day and into the
following day.
Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a
market participant after clearing-houses terminated contracts with the firm.Lehman shares tumbled
over 90% on September 15, 2008.The Dow Jones closed down just over 500 points on September 15,
2008, which was at the time the largest drop in a single day since the days following the attacks on
September 11, 2001.
In the United Kingdom, the investment bank went into administration with PricewaterhouseCoopers
appointed as administrators. In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding
company filed for civil reorganization on September 16, 2008, in Tokyo District Court. On September 17,
2008, the New York Stock Exchange delisted Lehman Brothers.
On March 16, 2011 some three years after filing for bankruptcy and following a filing in a Manhattan
U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek creditor approval of its
reorganization plan by October 14 followed by a confirmation hearing to follow on November 17.


Barclays acquisition
On Tuesday, September 16, 2008, Barclays plc announced that they would acquire a "stripped clean"
portion of Lehman for $1.75 billion, including most of Lehman's North America operations.[5][82] On
September 20, this transaction was approved by U.S. Bankruptcy Judge James Peck.[83][84]
On September 20, 2008, a revised version of the deal, a $1.35 billion (£700 million) plan for Barclays to
acquire the core business of Lehman (mainly its $960-million headquarters, a 38-story office building[85]
in Midtown Manhattan, with responsibility for 9,000 former employees), was approved. Manhattan
court bankruptcy Judge James Peck, after a 7-hour hearing, ruled: "I have to approve this transaction
because it is the only available transaction. Lehman Brothers became a victim, in effect the only true
icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy
hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to
imagine a similar emergency."
Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, the creditors committee counsel, said:
"The reason we're not objecting is really based on the lack of a viable alternative. We did not support
the transaction because there had not been enough time to properly review it."[citation needed] In the
amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in
trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & Manges, said "the purchase
price for the real estate components of the deal would be $1.29 billion, including $960 million for
Lehman's New York headquarters and $330 million for two New Jersey data centers. Lehman's original
estimate valued its headquarters at $1.02 billion but an appraisal from CB Richard Ellis this week valued
it at $900 million."[citation needed] Further, Barclays will not acquire Lehman's Eagle Energy unit, but
will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman
Brothers Uruguay and its Private Investment Management business for high net-worth individuals.
Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being
transferred to Barclays. Barclays acquired a potential liability of $2.5 billion to be paid as severance, if it
chooses not to retain some Lehman employees beyond the guaranteed 90 days.
Nomura acquisition
Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for
$225 million and parts of the European division for a nominal fee of $2.It would not take on any trading
assets or liabilities in the European units. Nomura negotiated such a low price because it acquired only
Lehman's employees in the regions, and not its stocks, bonds or other assets. The last Lehman Brothers
Annual Report identified that these non-US subsidiaries of Lehman Brothers were responsible for over
50% of global revenue produced.
Sale of Asset Management Businesses
On September 29, 2008, Lehman agreed to sell Neuberger Berman, part of its investment management
business, to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15
billion. The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy
Court,[94] but a competing bid was entered by the firm's management, who ultimately prevailed in a
bankruptcy auction on December 3, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49%
common equity interest in the firm, now known as Neuberger Berman Group LLC.[95] In Europe, the
Quantitative Asset Management Business has been acquired back by its employees on November 13,
2008 and has been renamed back to TOBAM.
Financial fallout
Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert
collapsed amid fraud allegations 18 years prior. Immediately following the bankruptcy filing, an already
distressed financial market began a period of extreme volatility, during which the Dow experienced its
largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain.
What followed was what many have called the “perfect storm” of economic distress factors and
eventually a $700bn bailout package (Troubled Asset Relief Program) prepared by Henry Paulson,
Secretary of the Treasury, and approved by Congress. The Dow eventually closed at a new six-year low
of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year. Durvexity
spiked, due to funding issues at the major investment banks.
The fall of Lehman also had a strong effect on small private investors such as bond holders and holders
of so-called Minibonds. In Germany structured products, often based on an index, were sold mostly to
private investors, elderly, retired persons, students and families. Most of those now worthless
derivatives were sold by the German arm of Citigroup, the German Citibank now owned by Crédit
Mutuel.
Ongoing litigation
On March 11, 2010, Anton R. Valukas, a court-appointed examiner, published the results of its year-long
investigation into the finances of Lehman Brothers. This report revealed that Lehman Brothers used an
accounting procedure termed repo 105 to temporarily exchange $50 billion of assets into cash just
before publishing its financial statements. The action could be seen to implicate both Ernst & Young, the
bank's accountancy firm and Richard S. Fuld, Jr, the former CEO. This could potentially lead to Ernst &
Young being found guilty of financial malpractice and Fuld facing time in prison.
According to the Wall Street Journal, in March 2011, the SEC announced that they weren't confident
that they could prove that Lehman Brothers violated US laws in its accounting practices.
In October 2011 the administrators of Lehman Brothers Holding Inc. lost their appeal to overturn a court
order forcing them to pay 148 million pounds into their underfunded pensions plan.



Exposure to the mortgage market
Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in
2008, a process known as leveraging or gearing. A significant portion of this investing was in housing-
related assets, making it vulnerable to a downturn in that market. One measure of this risk-taking was
its leverage ratio, a measure of the ratio of assets to owners equity, which increased from approximately
24:1 in 2003 to 31:1 by 2007.[2] While generating tremendous profits during the boom, this vulnerable
position meant that just a 3–4% decline in the value of its assets would entirely eliminate its book value
or equity.[3] Investment banks such as Lehman were not subject to the same regulations applied to
depository banks to restrict their risk-taking.
In August 2007, Lehman closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23
locations, and took a $25-million after-tax charge and a $27-million reduction in goodwill. The firm said
that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources
and capacity in the subprime space".
Lehman's final months
In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. Lehman's
loss was apparently a result of having held on to large positions in subprime and other lower-rated
mortgage tranches when securitizing the underlying mortgages. Whether Lehman did this because it
was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear.
In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the
second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in
assets.[6] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market
continued to tighten.[6] In August 2008, Lehman reported that it intended to release 6% of its work
force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.
On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-
controlled Korea Development Bank was considering buying Lehman. Most of those gains were quickly
eroded as news emerged that Korea Development Bank was "facing difficulties pleasing regulators and
attracting partners for the deal." It culminated on September 9, 2008, when Lehman's shares plunged
45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.[9]
Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P
500 down 3.4% on September 9, 2008. The Dow Jones lost nearly 300 points the same day on investors'
concerns about the security of the bank. The U.S. government did not announce any plans to assist with
any possible financial crisis that emerged at Lehman.

On September 10, 2008, Lehman announced a loss of $3.9 billion and their intent to sell off a majority
stake in their investment-management business, which includes Neuberger Berman. The stock slid 7%
that day.
On September 13, 2008, Timothy F. Geithner, then president of the Federal Reserve Bank of New York
called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of
its assets.Lehman reported that it had been in talks with Bank of America and Barclays for the
company's possible sale. The New York Times reported on September 14, 2008, that Barclays had ended
its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed.It
emerged subsequently that a deal had been vetoed by the Bank of England and the UK's Financial
Services Authority. Leaders of major Wall Street banks continued to meet late that day to prevent the
bank's rapid failure. Bank of America's rumored involvement also appeared to end as federal regulators
resisted its request for government involvement in Lehman's sale.
Bankruptcy filing
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. According to
Bloomberg, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on
September 16 indicated that JPMorgan Chase & Co. provided Lehman Brothers with a total of $138
billion in "Federal Reserve-backed advances." The cash-advances by JPMorgan Chase were repaid by the
Federal Reserve Bank of New York for $87 billion on September 15 and $51 billion on September 16.
Breakup process
On September 22, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of
the deal, was put before the bankruptcy court, with a $1.3666 billion (£700 million) plan for Barclays to
acquire the core business of Lehman Brothers (mainly Lehman's $960 million Midtown Manhattan office
skyscraper), was approved. Manhattan court bankruptcy Judge James Peck, after a 7 hour hearing,
ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers
became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This
is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for
future cases. It's hard for me to imagine a similar emergency."[19]
Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on
the lack of a viable alternative. We did not support the transaction because there had not been enough
time to properly review it."[citation needed] In the amended agreement, Barclays would absorb $47.4
billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of
Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be
$1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New
Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion but an appraisal
from CB Richard Ellis this week valued it at $900 million."[citation needed] Further, Barclays will not
acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc,
Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management
business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in
Lehman Brothers Inc that are not being transferred to Barclays.[20] Barclays had a potential liability of
$2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the
guaranteed 90 days.
On September 22, 2008, Nomura Holdings, Inc. announced it agreed to acquire Lehman Brothers'
franchise in the Asia Pacific region including Japan, Hong Kong and Australia.[23] The following day,
Nomura announced its intentions to acquire Lehman Brothers' investment banking and equities
businesses in Europe and the Middle East. A few weeks later it was announced that conditions to the
deal had been met, and the deal became legally effective on Monday, October 13.[24] In 2007, non-US
subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.
Impact of bankruptcy filing
The Dow Jones closed down just over 500 points (−4.4%) on September 15, 2008, at the time the largest
drop by points in a single day since the days following the attacks on September 11, 2001. (This drop
was subsequently exceeded by an even larger −7.0% plunge on September 29, 2008.)
Lehman's bankruptcy is expected to cause some depreciation in the price of commercial real estate. The
prospect for Lehman's $4.3 billion in mortgage securities getting liquidated sparked a selloff in the
commercial mortgage-backed securities (CMBS) market. Additional pressure to sell securities in
commercial real estate is feared as Lehman gets closer to liquidating its assets. Apartment-building
investors are also expected to feel pressure to sell as Lehman unloads its debt and equity pieces of the
$22 billion purchase of Archstone, the third-largest United States Real Estate Investment Trust (REIT).
Archstone's core business is the ownership and management of residential apartment buildings in major
metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at UBS said that in markets
with apartment buildings that compete with Archstone, "there is no question that if you need to sell
assets, you will try to get ahead" of the Lehman selloff, adding "Every day that goes by there will be
more pressure on pricing."
Several money funds and institutional cash funds had significant exposure to Lehman with the
institutional cash fund run by The Bank of New York Mellon and the Primary Reserve Fund, a money-
market fund, both falling below $1 per share, called "breaking the buck", following losses on their
holdings of Lehman assets. In a statement The Bank of New York Mellon said its fund had isolated the
Lehman assets in a separate structure. It said the assets accounted for 1.13% of its fund. The drop in the
Primary Reserve Fund was the first time since 1994 that a money-market fund had dropped below the
$1-per-share level.
Putnam Investments, a unit of Canada's Great-West Lifeco, shut a $12.3 billion money-market fund as it
faced "significant redemption pressure" on September 17, 2008. Evergreen Investments said its parent
Wachovia Corporation would "support" three Evergreen money-market funds to prevent their shares
from falling.[28] This move to cover $494 million of Lehman assets in the funds also raised fears about
Wachovia's ability to raise capital.
Close to 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing.
In an attempt to meet their own credit needs, Lehman Brothers International routinely re-
hypothecated[30] the assets of their hedge funds clients that utilized their prime brokerage services.
Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter
11 Bankruptcy. Of this, 22 billion had been re-hypothecated.[31] As administrators took charge of the
London business and the U.S. holding company filed for bankruptcy, positions held by those hedge funds
at Lehman were frozen. As a result, the hedge funds are being forced to de-lever and sit on large cash
balances inhibiting chances at further growth.[32] This in turn created further market dislocation and
overall systemic risk, resulting in a 737 billion dollar decline in collateral outstanding in the securities
lending market.
In Japan, banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied
to the collapse of Lehman. Mizuho Trust & Banking Co. cut its profit forecast by more than half, citing
11.8 billion yen in losses on bonds and loans linked to Lehman. The Bank of Japan Governor Masaaki
Shirakawa said "Most lending to Lehman Brothers was made by major Japanese banks, and their
possible losses seem to be within the levels that can be covered by their profits," adding "There is no
concern that the latest events will threaten the stability of Japan's financial system."[34] During
bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is facing
between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured
guarantee from Lehman and connected to trading losses with Lehman subsidiaries, Martin Bienenstock.
Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that
matured on September 15, 2008. Freddie said it had not received principal payments of $1.2 billion plus
accrued interest. Freddie said it had further potential exposure to Lehman of about $400 million related
to the servicing of single-family home loans, including repurchasing obligations. Freddie also said it
"does not know whether and to what extent it will sustain a loss relating to the transactions" and
warned that "actual losses could materially exceed current estimates." Freddie was still in the process of
evaluating its exposure to Lehman and its affiliates under other business relationships.[36]
After Constellation Energy was reported to have exposure to Lehman, its stock went down 56% in the
first day of trading having started at $67.87. The massive drop in stocks led to the New York Stock
Exchange halting trade of Constellation. The next day, as the stock plummeted as low as $13 per share,
Constellation announced it was hiring Morgan Stanley and UBS to advise it on "strategic alternatives"
suggesting a buyout. While rumors suggested French power company Électricité de France would buy
the company or increase its stake, Constellation ultimately agreed to a buyout by MidAmerican Energy,
part of Berkshire Hathaway (headed by billionaire Warren Buffett).
The Federal Agricultural Mortgage Corporation or Farmer Mac said it would have to write off $48 million
in Lehman debt it owned as a result of the bankruptcy. Farmer Mac said it may not be in compliance
with its minimum capital requirements at the end of September.
In Hong Kong more than 43,700 individuals in the city have invested in HK$15.7 billion of "guaranteed
mini-bonds" (迷你債券) from Lehman.[41][42][43] Many claim that banks and brokers mis-sold them as
low-risk. Conversely, bankers note that minibonds are indeed low-risk instruments since they were
backed by Lehman Brothers, which until just months before its collapse was a venerable member of
Wall Street with high credit and investment ratings. The default of Lehman Brothers was a low
probability event, which was totally unexpected. Indeed, many banks accepted minibonds as collateral
for loans and credit facilities. Another HK$3 billion has been invested in similar like derivatives. The Hong
Kong government proposed a plan to buy back the investments at their current estimated value, which
will allow investors to partially recover some of their loss by the end of the year.[44] HK chief executive
Donald Tsang insisted the local banks respond swiftly to the government buy-back proposal as the
Monetary Authority received more than 16,000 complaints.[41][43][44] On October 17 He Guangbe,
chairman of the Hong Kong Association of Banks, agreed to buy back the bonds, which will be priced
using an agreed upon methodology based on its estimated current value.[45] This episode has deep
repercussions on the banking industry, where misguided investor sentiments have become hostile to
both wealth management products as well as the banking industry as a whole. Under intense pressure
from the public, all political parties have come out in support of the investors, further fanning distrust
towards the banking industry.
Neuberger Berman
Neuberger Berman Inc., through its subsidiaries, primarily Neuberger Berman, LLC, is an investment-
advisory firm founded in 1939 by Roy R. Neuberger and Robert Berman, to manage money for high-net-
worth individuals. In the decades that followed, the firm's growth mirrored that of the asset-
management industry as a whole. In 1950, it introduced one of the first no-load mutual funds in the
United States, the Guardian Fund, and also began to manage the assets of pension plans and other
institutions. Historically known for its value-investing style, in the 1990s the firm began to diversify its
competencies to include additional value and growth investing, across the entire capitalization
spectrum, as well as new investment categories, such as international, real-estate investment trusts and
high-yield investments. In addition, with the creation of a nationally and several state-chartered trust
companies, the firm became able to offer trust and fiduciary services. Today the firm has approximately
$130 billion in assets under management.
In October 1999, the firm conducted an initial public offering of its shares and commenced trading on
the New York Stock Exchange, under the ticker symbol "NEU". In July 2003, shortly after the retired Mr.
Neuberger's 100th birthday, the company announced that it was in merger discussions with Lehman
Brothers Holdings Inc. These discussions ultimately resulted in the firm's acquisition by Lehman on
October 31, 2003, for approximately $2.63 billion in cash and securities.
On November 20, 2006, Lehman announced its Neuberger Berman subsidiary would acquire H. A.
Schupf & Co., a money-management firm targeted at wealthy individuals. Its $2.5 billion of assets would
join Neuberger's $50 billion in high-net-worth client assets under management.[46]
An article in The Wall Street Journal on September 15, 2008, announcing that Lehman Brothers Holdings
filed for Chapter 11 bankruptcy protection, quoted Lehman officials regarding Neuberger Berman:
"Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as
usual and will not be subject to the bankruptcy case of the parent company, and its portfolio
management, research and operating functions remain intact. In addition, fully paid securities of
customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject
to the claims of Lehman Brothers Holdings' creditors, Lehman said."[47]
Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos
suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar
bonuses to "send a strong message to both employees and investors that management is not shirking
accountability for recent performance."
Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal,
going so far as to actually apologize to other members of the Lehman Brothers executive committee for
the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the
water at Neuberger Berman. I'm embarrassed and I apologize."[48]
Controversies
Controversy of executive pay during crisis
Richard Fuld, head of Lehman Brothers, faced questioning from the U.S. House of Representatives'
Committee on Oversight and Government Reform. Rep. Henry Waxman (D-CA) asked: "Your company is
now bankrupt, our economy is in crisis, but you get to keep $480 million (£276 million). I have a very
basic question for you, is this fair?"[49] Fuld said that he had in fact taken about $300 million (£173
million) in pay and bonuses over the past eight years.[49] Despite Fuld's defense on his high pay,
Lehman Brothers executive pay was reported to have increased significantly before filing for
bankruptcy.[50] On October 17, 2008, CNBC reported that several Lehman executives, including Richard
Fuld, have been subpoenaed in a case relating to securities fraud.[51]
Accounting manipulation
In March 2010, the report of Anton R. Valukas, the Bankruptcy Examiner, drew attention to the use of
Repo 105 transactions to boost the bank's apparent financial position around the date of the year-end
balance sheet. The attorney general Andrew Cuomo later filed charges against the bank's auditors Ernst
& Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud"
by approving the accounting treatment.[52]
On April 12, 2010, a New York Times story revealed that Lehman had used a small company, Hudson
Castle, to move a number of transactions and assets off Lehman's books as a means of manipulating
accounting numbers of Lehman's finances and risks. One Lehman executive described Hudson Castle as
an "alter ego" of Lehman. According to the story, Lehman owned one quarter of Hudson; Hudson's
board was controlled by Lehman, most Hudson staff members were former Lehman employees.[53]
Section 363 Sale
On February 22, 2011, Judge James M. Peck of the U.S. Bankruptcy Court in the Southern District of New
York rejected claims by lawyers for the Lehman estate that Barclays had improperly reaped a windfall
from the section 363 sale. "The sale process may have been imperfect, but it was still adequate under
the exceptional circumstances of Lehman Week.

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