Interesting Timeline of Lehman's Collapse (For Dummies)

[Blaupanzer]

Good stuff! At some point, it must have dawned on the people at JP Morgan that holding $59 trillion worth of CDS would be a bit hard to cash out if needed in a world with a collective GDP of $60 trillion. I mean, it's one thing to get giddy while bidding things up and another to discover you are on the hook for more money at one time than there is one-time money in the entire world. That is, multipliers help you on the way up, but you are so screwed if anyone ever calls your bluff.

[Asher]

As we now know.

[One_more_turn]

Notional value of all outstanding CDS has declined to $33 trillion as of October.

[Darius871]

Re the OP: as a dummy I can assure you that is NOT the "for dummies" version. Flagrant false advertising.

[Arrian]

One of the first (and the one that prompted the act) was the merger of Citibank and Travellers Group. Note that this merger has recently dissolved, with Citi splitting of parts of Travelers and selling the rest to Metlife.

One "l" in Travelers. Also, "recently" is stretching it a bit.

Good stuff, though. Thanks.

-Arrian

[Seeker]

I'm just shocked beyond words that they actually accounted for any variables, let alone 20!!

What, were people just not reading prospectusesesses or were these '20 variables' just 20 different shades of pig-lipstick?

[Asher]

Originally posted by Seeker
I'm just shocked beyond words that they actually accounted for any variables, let alone 20!!

What, were people just not reading prospectusesesses or were these '20 variables' just 20 different shades of pig-lipstick?

Pretty sure it's the latter. There was fundamental assumptions that all of the variables made that didn't hold out.

[Cort Haus]

I'm sure it's all excellent stuff, but I still think there should be an 'executive summary' for the TLDR brigade.

After all, if my CEO is allowed to run a publishing company without ever needing to understand any detail ....

[Asher]

As luck would have it, there is a "short version" which I didn't post.

The shortest version we’ve come up with is as follows:
• A combination of legislation, regulation and economic prosperity create the opportunity for investment banks to operate on “borrowed” capital.
• Lehman, gifted with a favorable ruling, engaged in trades which leveraged the borrowed capital as much as 25 times (or more in some cases).
• A small part of the most highly leveraged asset class (subprime loans) failed, triggering massive damages through the leverage mechanism.
• Lehman’s stock started to tank on news of Lehman’s upcoming 3rd quarter earnings report and plans to sell parts of the business.
• Lehman’s creditors froze Lehman’s accounts, the rating agencies lowered Lehman’s debt rating, and Lehman’s trading partners demanded large increases in margin.
• Lehman declared Chapter 11 (reorganization) bankruptcy because Lehman couldn’t scrape up enough cash to pay the increased margins and/or reduce the leverage on the bad assets.
• Lehman US was bought by Barclays. Other parts of Lehman were bought cheaply by Nomura (Japanese bank). Bain Capital Partners and Hellman & Friedman acquire Neuberger Berman and parts of Lehman’s Investment Management Division.

In short, Lehman wasn’t good enough to succeed (ala Goldman Sachs), but wasn’t “too big to fail” (ala Bear or AIG). Sometimes it sucks being just competent enough not to get caught in the safety net. It’s like being the one guy at college who had too much income for financial aid, but not enough income to just pay for school.

Each of these bullets could be treated to a 20 page essay. The ultimate questions of “why, how, who is to blame, and how do we fix it all” are even more complicated and involve a mix of history, regulation, legislation, speculation, greed, economics, luck, more greed and quite a few other things.

This document may not be 100% consistent, accurate, complete or coherent. The authors have tried to maintain some consistency and logical flow, but the topic is just too big to boil it all down nicely. Many of the topics are included simply as quick references for terms in the news. Take what you read here with your own grain of salt and an understanding that the authors had to dodge reporters and deal with thousands of employees suddenly wondering “what happened to my world?”.

[Cort Haus]