Lehman Brothers, Where Did It All Go So Wrong?

In 2008 Lehman Brothers made headlines by filing for the largest bankruptcy in history. At the time of this historic collapse Lehman brothers were the fourth largest US investment bank and had $639 billion in assets and $619 billion in debt. So how did it all go wrong? What caused these giants in the investment industry to collapse in such dramatic fashion? Earlier in the week I watched a very enlightening drama on the demise of Lehman Brothers and showed exactly where they went wrong!

Ever since the financial crisis hit in 2007 the share price of Lehman Brothers continued to fall at a consistent rate, however Lehman Brothers still reported that they had a net income of $4.2 billion from a $19.3 billion. So how can a company operating so successfully one year become the mess that Lehman Brothers did? Well to put it in “Lehman’s” terms, they made a lot of short term investments that increased the cash flow of the company temporarily, fooling the shareholders and investors. This contributed to their own detriment, as when shareholders caught wind of this they started selling shares at a very quick rate, resulting in the share price dropping radically.

Lehman Brothers also shot themselves in the foot, as they continued to buy mortgage securities when the housing market was a swiftly failing one. In 2007 they back more mortgage based securities than any other firm and their portfolio built up to a massive $85 billion! Due to market conditions continuing to deteriorate, Lehman Brothers were put in a very exposed position, as they had all of these mortgage securities and people were not paying their mortgages. This should have been a massive alert for Lehman Brothers and with the failing market they should have cut their losses and reduced the size of their massive, risky portfolio of securities. In retrospect, if they had done this rather than attempt to wait out the economic crisis and wait for a bailout at a later date then perhaps the collapse of Lehman Brothers could have been avoided.

 In March 2008 Bear Stearns very nearly collapsed and as a result of this Lehman Brothers share price fell by 48%, with investors worrying that this would be the next firm in Wall Street to Collapse. This was just a further demonstration of how untrusted Lehman Brothers were by their shareholders and the general public!

The drama on Lehman Brothers showed the days leading up to the inevitable collapse and how agonisingly close they were to being saved! The initial thought was that The Bank of America or Barclays would have to be the only organisations that could say Lehman Brothers, as the US government claimed to have no tax payer’s money to pay for a bailout. As The Bank of America pulled out of any arrangement, all faith for Lehman Brothers survival fell to Barclays. Lehman Brothers had valued their toxic assets at a value of $40 billion and after Barclays had been to look through the assets, they came up with the value of $25 billion. Obviously Lehman Brothers were not in a position where they could negotiate so accepted the offer of $25 billion. However, Lehman Brothers were unaware that this takeover from Barclays had to be passed by a shareholder vote and this was not going to be completed until the following Tuesday at the earliest.

Because Barclays could not complete the takeover in time Lehman Brothers ended up filing for bankruptcy. As a result of this the US government ended up paying out $700 billion for federal aid (Probably not the outcome that anyone was hoping for).

In my opinion the major reason for Lehman Brothers demise was due to the other confidence and arrogance of the company and the CEO (Dick Fuld) in thinking that they were too big an organisation to fail and that if things went wrong they could simply rely on the US government to bail them out. In fairness to Lehman Brothers they had good reason to think that the US government would bail them out, as in all previous cases similar to Lehman Brothers the company had been bailed out. In my opinion though it was inexcusable that they had the opportunity earlier to trim some of their massive portfolio of mortgage securities and they refused to do so!

Would love to hear some thoughts from my fellow bloggers on this matter, so feel free to comment if you have an opinion to add.

 

 

Insider Trading of the Fantasy Variety

In the same way that the stock market is, it is questioned whether or not you need skill or utter luck in order to be successful in fantasy sport leagues. As an unsuccessful member of the fantasy league community I can confidently say that this is down to luck, however there are many out there that disagree.

So that begs the question, would insider information for a fantasy league be beneficial for an individual or would it simply be random useless information? In the case of DraftKings and rival company FanDuel, it is evidently very beneficial as one of DraftKings employees played on the site of FanDuel and won $350,000 in one week (www.ft.com, 2015).

DraftKings have argued that the information that this employee had access to was not available in time for them to make an alterations to their roster. Major League baseball have expressed their shock that DraftKings allow their employees to participate in fantasy contests altogether, most likely because all employees will have more market knowledge than any normal member of the public and will surely lead to an unfair benefit.

Another article in The Financial Times has explored the ongoing investigation into whether or not daily and weekly contests in fantasy leagues are a form of online gambling or simply a game of skill. This is very interesting because if this is classed as online gambling then the overriding factor in winning would be luck. So any insider information would not benefit the individual participating in the fantasy game. However if it is seen as a game based on skill and knowledge, then to use any insider information is seen as not only immoral, but also illegal (Arnold, 2013).

Unless the employee had won this obscene amount of money from just pure luck it is quite apparent that the only other likelihood is that whatever knowledge they possessed has been used to their advantage. If this is the case then it seems farcical that there are no regulations or guidelines that have been put in place to prevent employees that work for daily or weekly fantasy leagues from participating, as they have a clear advantage over the general public.

After deliberating on this issue for some time I have come to a conclusion that the employee is not the main culprit for this situation, as they have simply made the most out of an opportunity that was available to them (even if it is frowned upon by many) and have taken advantage over a market that clearly does not run efficiently. The fault here lays with the authorities and the organisations for not having the necessary principles and regulations in order to make this market a fair one for all to compete in.

Please comment if you disagree or agree with any of my points, or even if you have anything additional that I have not discussed.

Over and Out

A Frozen Industry

A Frozen Industry

With all of the electronic goods that are being produced and manufactured in the Asian market it has made it increasingly difficult for British companies to compete, not only in foreign markets, but also in their own. The documentary Digby Jones: The New Trouble Shooter demonstrates these issues, as Ebac (a company that deals in dehumidifiers and water coolers) struggles to enter the market of selling freezers. Ebac had no issue with developing a high quality product, as they were essentially using technology that they already had possession of for their dehumidifiers and water coolers; however they suffered due the competitive nature of the market place due to foreign multinational companies.  

The big multinational companies from Asia specialise in producing cheap, basic goods and are able to do this due to the abundance of cheap labour and raw materials. As Ebac are a British company that operate in Britain it is not feasible that they are able to match the bigger companies on price. In the documentary it is clear that Ebac feel that they will only be able to compete in the market if they specialise in making a high quality chest freezer. What is not discussed in the documentary is whether or not consumers would be willing to pay more for a freezer, or whether they are simply happy paying less for a more basic model. The only way for a company to find this out would be to complete market research, however the employees at Ebac seem very reluctant to do so, as they believe that they already know the consumer market that they are aiming for.

During the documentary different types of production lines are discussed on how companies can be more efficient in their manufacturing processes. The managing director of Ebac is taken around the production line at Nissan and is introduced to the Kaizen system (practice of continuous improvement)  that they have in place there (www.kaizennissan.co.in, 2015), in the hope that they would be able to make adjustments to their own production line to make the manufacturing process more efficient.

Whilst watching the documentary it occurred to me that it is very easy for someone who is not attached to a company, such as Digby, to comment and judge on a company such as Ebac as they have no emotional or financial ties to the organisation. I felt that the real question that arose from the documentary was; should a company listen to an outsider with no strings attached, with no loyalty to the company and allow them to dictate the actions that the company makes? Or should they trust their own knowledge and expertise in a market that they have pre-existing knowledge of?