Posted on: Sep 20, '08
LEHMAN BRO. BANKRUPTCY &ITS EFFECT IN INDIA-made easy
On Sept. 14, 2008, the investment bank Lehman Brothers announced that it would file for liquidation after huge losses in the mortgage market and a loss of investor confidence crippled it and it was unable to find
a buyer.Denoted as"The biggest financial pandemic since the Great Depression "Lehman Brothers bankruptcy is going to hit world economy big time. Lehman, the 158-year-old investment bank, has filed for bankruptcy.It would be the largest collapse of an investment firm in 18 years.
Lehman attempted to find a buyer over the weekend but it met with no success. The last remaining bidder, Barclays PLC bank pulled out Sunday afternoon. Barclays, a United Kingdom-based bank, had become the sole bidder after a consortium led by Bank of America pulled out early Sunday morning citing that it would need government support before considering a bid. The support would consist of backing bad debts owed by Lehman. Barclays cited a similar reason for withdrawing its bid.As of Monday morning, no buyer has come through to take control of the firm. As a result, the firm filed for bankruptcy protection.
Now what is bankruptcy?
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Bankruptcy is a legal proceeding in which people who cannot pay their bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal
court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
what causes this?
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It was said that The firm(Lehman Brothers), which has over 25,000 staffers, has suffered bad results due to the subprime mortgage crisis.
What is the subprime mortgage crisis?
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The subprime mortgage crisis is an ongoing economic problem characterized by contracted liquidity in the global credit markets and banking system. An undervaluation of real risk in the subprime market is
cascading, rippling and ultimately adversely affecting the world economy.
What is subprime mortgage?
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A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.
There are several different kinds of subprime mortgage structures available. The most common is the adjustable rate mortgage (ARM), which initially charges a fixed interest rate, and then convert to a
floating rate.The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage".Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage.ARMs are somewhat
misleading to subprime borrowers in that the borrowers initially pay a lower interest rate. When their mortgages reset to the higher, variable rate, mortgage payments increase significantly. This is one of the factors that lead to the sharp increase in the number of subprime mortgage foreclosures in August of 2006, and the subprime mortgage meltdown that ensued.
Many lenders were more liberal in granting these loans from 2004 to 2006 as a result of lower interest rates and high capital liquidity. Lenders sought additional profits through these higher risk loans, and they charged interest rates above prime in order to compensate for the additional risk they assumed. Consequently, once the rate of subprime mortgage foreclosures skyrocketed, many lenders experienced extreme financial difficulties, and even bankruptcy.
Does it gonna effect India?
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While the collapse of the US-based Lehman Brothers may not have a direct impact on Indian banks, some of them may face marginal losses due to their exposures to the US investment bank. ICICI Bank, the biggest private player in the country, arguably has the largest exposure.The government is closely monitoring the balance sheets of the Indian arms of the troubled US entities-Lehman Brothers and Merrill Lynch-to avert direct impact on the country's economy.The govt said that there will not be any possible hike in the interest rates in short-term, despite the temporary drop in inflation .The expected GDP growth is between 7.5 to 8 per cent.
however Lehman currently employs about 2,500 people in India. The mood in their office at Ceejay House and back office at Hiranandani Gardens in Powai is very grim. employees have been asked to wait for 72 hours before a decision from the headquarters is communicated.But most have already made up their minds. Most of them qualify for firms such as PricewaterhouseCoopers, JP Morgan and Deloitte.The development has already lead to a loss of nearly Rs 2,000 crore for Indian companies in which Lehman had made equity investments. Even some reality developers feels the heat. ICICI Bank will lose around Rs.375 Crore as ICICI Bank UK Plc holds 57 million euro of senior bonds of Lehman Brothers Inc.
The Indian markets experienced the ripple effects of the Lehman collapse, the mood is so bad that there are simply no genuine buyers in the markets. On 15th Sept The Bombay Stock Exchange (BSE)
benchmark Sensex fell by 772.62 points and the Nifty of the National Stock Exchange also dipped below 4,000-mark by falling 242.40 points.The ray of hope:As of 18th September 2008 there is news that
Barclays has agreed to acquire Lehman Brothers' North American investment banking, and fixed income and equities sales, trading and research operations, including approximately 10,000 employees.
Tags: bankruptcy, economy, india, business, lehmanbrother
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