Lehman Brothers Holdings Inc.

(Pink Sheets: LEHMQ, former NYSE ticker symbol LEH) (pronounced /ˈliːmən/) was a global financial-services firm which, until declaring bankruptcy in 2008, participated in business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. It was a primary dealer in the U.S. Treasury securities market. Its primary subsidiaries included Lehman Brothers Inc., Neuberger Berman Inc., Aurora Loan Services, Inc., SIB Mortgage Corporation, Lehman Brothers Bank, FSB, Eagle Energy Partners, and the Crossroads Group. The firm's worldwide headquarters were in New York City, with regional headquarters in London and Tokyo, as well as offices located throughout the world. There was an issue that an Indonesian investor, Dave Suwandra will bailout US$3.4 billion in order to wake this company up again.

On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. The filing marked the largest bankruptcy in U.S. history.[2] The following day, the British bank Barclays announced its agreement to purchase, subject to regulatory approval, Lehman's North American investment-banking and trading divisions along with its New York headquarters building.[3][4] On September 20, 2008, a revised version of that agreement was approved by Judge James Peck.[5]

During the week of September 22, 2008, Nomura Holdings announced that it would acquire Lehman Brothers' franchise in the Asia Pacific region, including Japan, Hong Kong and Australia.[6] as well as, Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. The deal became effective on Monday, 13 October.[7] In 2007, non-U.S. subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.[8]

Lehman Brothers' Investment Management business, including Neuberger Berman, was sold to its management 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.[9]

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Fate Chapter 11 bankruptcyFounded Montgomery, Alabama, United States (1850) Founder(s) Henry LehmanEmanuel LehmanMayer Lehman Defunct New York City, New York, United States (2008) Headquarters New York City, New York, United States Area served Worldwide Key people Richard S. Fuld, Jr.Former (Chairman) & (CEO)[1] Industry Investment services Products Financial ServicesInvestment BankingInvestment management Employees 26,200 (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".[39]

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.[40] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[40] 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.[40]

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.[41] 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."[42] 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.[43]

On September 17, 2008 Swiss Re estimates its overall net exposure to Lehman Brothers as approximately CHF 50 million.[44]

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.[45] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.[46]

The next day, 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.[47][48] The stock slid seven percent that day.[48][49] 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.[49

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."[50]

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."[50]

Bankruptcy

Main article: Bankruptcy of Lehman Brothers

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.[51] 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.[51][52]

The International Swaps and Derivatives Association (ISDA) offered an exceptional trading session on Sunday, September 14, 2008, to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day.[53]

[54] Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.[55]

Lehman Brothers headquarters in New York City on September 15, 2008

In New York, shortly before 1 a.m. the next morning, Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection[56] citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion.[57] It further announced that its subsidiaries would continue to operate as normal.[58] 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.[59]

The morning of Monday, September 15 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.

Lehman's bankruptcy is the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years prior.[59] Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant after clearing-houses terminated their contracts with the firm.[60]

Lehman shares tumbled over 90% on September 15, 2008.[61][62] 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.[63]

In the United Kingdom, the investment bank went into administration with PricewaterhouseCoopers appointed as administrators.[64] 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.[65]

On Tuesday, September 16, 2008, Barclays plc announced that they will acquire a "stripped clean" portion of Lehman for $1.75 billion, including most of Lehman's North America operations.[3][66] On September 20, this transaction was approved by U.S. Bankruptcy Judge James Peck.[67][68] On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.[69]

On September 17, 2008, Paul Brough, Edward Middleton, and Patrick Cowley of KPMG China became the provisional liquidators appointed over Lehman's two Hong Kong based units, Lehman Brothers Securities Asia Limited and Lehman Brothers Futures Asia Limited.[70] They are also appointed as the provisional liquidators for three further Hong Kong based Lehman Brothers companies, Lehman Brothers Asia Holdings Limited, Lehman Brothers Asia Limited and Lehman Brothers Commercial Corporation Asia Limited on 18 September 2008.[71]

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.[72][73] 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.[8]

Under the Lehman family (1850–1969)

Emanuel and Mayer Lehman

In 1844, 23-year-old Henry Lehman,[10] the son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria.[11] He settled in Montgomery, Alabama,[10] where he opened a dry-goods store, "H. Lehman".[12] In 1847, following the arrival of his brother Emanuel Lehman, the firm became "H. Lehman and Bro."[13] With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded.[12][14]

In the 1850s Southern United States, cotton was one of the most important crops. Capitalizing on cotton's high market value, the three brothers began to routinely accept raw cotton from customers as payment for merchandise, eventually beginning a second business trading in cotton. Within a few years this business grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855,[12][15]

the remaining brothers continued to focus on their commodities-trading/brokerage operations.

By 1858, the center of cotton trading had shifted from the South to New York City, where factors and commission houses were based. Lehman opened its first branch office in New York City's Manhattan borough at 119 Liberty Street,[15] and 32-year-old Emanuel relocated there to run the office.[12] In 1862, facing difficulties as a result of the Civil War, the firm teamed up with a cotton merchant named John Durr to form Lehman, Durr & Co.[16][17] Following the war the company helped finance Alabama's reconstruction. The firm's headquarters were eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870;[15][18] Emanuel sat on the Board of Governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business.

Herbert H. LehmanOfficial U.S. Senate Photo

Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887.[15][18] In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company.

Despite the offering of International Steam, the firm's real shift from being a commodities house to a house of issue did not begin until 1906. In that year, under Philip Lehman, the firm partnered with Goldman, Sachs & Co.,[19][20] to bring the General Cigar Co. to market,[21] followed closely by Sears, Roebuck and Company.[21] During the following two decades, almost one hundred new issues were underwritten by Lehman, many times in conjunction with Goldman, Sachs. Among these were F.W. Woolworth Company,[21][22] May Department Stores Company, Gimbel Brothers, Inc.,[23] R.H. Macy & Company,[23] The Studebaker Corporation,[22] the B.F. Goodrich Co. and Endicott Johnson Corporation.

Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. During Bobbie's tenure, the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered.

Traditionally, a family-only partnership, in 1924 John M. Hancock became the first non-family member to join the firm,[19][24] followed by Monroe C. Gutman and Paul Mazur in 1927. By 1928, the firm moved to its now famous One William Street location.

Pete Peterson

In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation.

In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont, and helped fund the Radio Corporation of America (RCA).[25] It also helped finance the rapidly growing oil industry, including the companies Halliburton and Kerr-McGee. Later, it arranged the acquisition of Digital by Compaq.

Liquidation via bankruptcy court

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[80] 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."[81]

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.[82]

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.[83][84]

On September 29, 2008, Lehman agreed to sell Neuberger Berman to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15 billion.[85] The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy Court;[86] however, a competing bid was entered by the firm's management, who ultimately prevailed in a bankruptcy auction, held on December 3, which scuttled the deal with Bain and Hellman.[9]

The fall of Lehman has 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, elder 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 Credit Mutuel.

Financial fallout

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.

Board of directors

Richard S. Fuld, Jr., Chairman and Chief Executive Officer[87]

Michael L. Ainslie[87]

John F. Akers[87]

Roger S. Berlind[87]

Thomas Cruikshank[87]

Marsha Johnson Evans[87]

Sir Christopher Gent[87]

Roland A. Hernandez[87]

Dr. Henry Kaufman[87]

John D. Macomber[8

BackgroundMain article: Subprime mortgage crisis

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".[2]

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.[3] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[3] 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.[3]

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.[4] 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."[5] 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.[6]

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.[7] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.[8]

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.[9][10] The stock slid 7% that day.[10][11]

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.[12] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale.[12] 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.[13] It emerged subsequently that a deal had been vetoed by the Bank of England and the UK's Financial Services Authority.[14] Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure.[13] Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale.[13]

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 J.P. Morgan provided Lehman Brothers with a total of $138 billion dollars 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.[15]

Breakup process

On September 20, 2008, a revised proposal to sell the brokerage part of Lehman Brothers holdings of the deal, was put before the bankruptcy court, with a $1.35 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."[16]

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.[17] 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.[18][19]

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.[20]

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, 13 October.[21] In 2007, non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.[22]

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.[23] (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."[24]

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.[25] This move to cover $494 million of Lehman assets in the funds also raised fears about Wachovia's ability to raise capital.[26]

About 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. 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.[27]

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."[28] 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.[29]

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.[30]

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).[31][32][33]

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.[34]

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.[35][36][37] 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.[38] 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.[35][37][38] 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.[39] 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.

Politically the bankruptcy proved of influence on the 2008 United States Presidential Election, for the day after Barack Obama moved ahead of John McCain in the presidential gallup poll, never again to fall behind.[dubious – discuss]

Lehman Brothers headquarters in New York CitySee also: Lehman Brothers

Lehman Brothers Fallout Threatens Deeper, Wider RecessionBy Emily Kaiser - AnalysisReuters15th September 2008

WASHINGTON (Reuters) - The fall of Lehman Brothers raises the risk of a deeper U.S. recession that engulfs a broader swath of the global economy as skittish banks around the world lock their vaults.

Countries that had so far escaped the yearlong credit crisis largely unscathed scrambled on Monday to quantify the potential losses after Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) filed for bankruptcy.

Banks' borrowing costs soared because of the uncertainty over how far and wide the Lehman impact might extend. If that translates into a crackdown on lending terms for companies and consumers, the economic fallout will be severe.

U.S. growth prospects already looked gloomy even before this weekend's drama, which also included Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) agreeing to

be bought by Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz) looking for financial help.

"At this point, the U.S. will be lucky to escape with a mild recession," said Ken Rogoff, a Harvard University professor and former International Monetary Fund chief economist.

The pain quickly spread to Asia and Europe.

In Taiwan, which had reported little in the way of losses from the subprime mortgage mess, the top financial regulator said Lehman-related exposure for its companies and retail investors totaled $2.5 billion. Two Japanese banks appeared on the list of major Lehman creditors.

In Europe, Germany's Finance Minister Peer Steinbrueck said the initial impact on Germany was limited, but Economy Minister Michael Glos said Lehman's collapse could seriously harm Europe's biggest economy.

"We hope that we don't see a crisis which pushes the global economy to the brink of ruin," Glos said.

Across Europe, banks' funding demands far outstripped the supply offered by central banks, indicating that firms were keeping a tight grip on cash as they assessed the damage.

U.S. interbank interest rates spiked to three times the Federal Reserve's target of 2 percent, and calls grew for additional interest rate cuts.

"This weekend's events raise the probability of one or several major central banks cutting interest rates, possibly as early as this week, and perhaps in a concerted action," Morgan Stanley economist Joachim Fels wrote in a note to clients.

The U.S. central bank's interest rate-setting committee meets on Tuesday, and trading in rate futures markets showed that investors think another reduction is possible then.

DUST SETTLES

Although the financial pain was acute on Monday, Harvard's Rogoff said the Federal Reserve and Treasury Department were right to deny taxpayer money to salvage Lehman Brothers.

"The government's actions may lead to a deeper recession but much shorter because they're letting the private sector work this out," Rogoff said. "It takes a lot of guts a few months before an election to let this happen, but it is absolutely the right thing to do."

The depth of the downturn depends largely on how banks behave in the coming weeks. Douglas Elmendorf, an economist with the Brookings Institution, said it will be several days before markets settle down enough to give a clear signal on the status of lending conditions.

If banks manage to unwind their transactions with Lehman this week, the effect on corporate and consumer lending may be manageable. If they cannot, and losses mount, that will clearly restrict lending and lead to higher borrowing costs.

"If you could stop the world for a week and let everybody figure out exactly what their exposures are and try to find other counterparties, that would help," he said.

Because of that uncertainty, Elmendorf said he expected the Federal Reserve to hold off on lowering interest rates at its Tuesday meeting but make it clear that it stood ready to act swiftly should credit conditions remain tight.

'RECESSION WOLVES'

Brian Bethune, chief U.S. financial economist with Global Insight, said the Fed did not have the luxury of waiting to see if credit markets worsen and called for an emergency rate cut now to cope with the fallout.

"We should not delude ourselves into thinking that without a significant move from the Fed there will not be further tightening of credit conditions as a result of the events over the weekend," he said. "That will threaten the economy and the financial system even further."

He pointed out that even before this weekend's drama, data showed that lending conditions tightened over the summer and the pace of credit growth was at recessionary levels. Consumer spending has already weakened, and unemployment is rising.

"The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation, and an aggressive response from the Fed is needed," he said.

(Additional reporting by Anna Holzer in Munich; Editing by Jonathan Oatis)

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