Lehman Brothers

1. Q. Why has Lehman Brothers collapsed . It was one of the most exposed banks to the US sub-prime mortgage market. It did not give out mortgages to ordinary American citizens. Rather, it bought up billions of dollars worth of These loans from US banks, re-packaged them, and sold them on to global.
2. Q. Why has Lehman Brothers collapsed . It also invested heavily in property, both commercial and residential. With the US housing market in free-fall these re-packaged loans and its property portfolio have plummeted in value. In June to August last year, the bank said it would write off $700 million (£390 million), from its balance sheet as a result. In the same three months this year, this figure soared to $7.8 billion (£4.34 billion). The bank tried to sell itself but no one – including the UK's Barclays – was willing to take on these "toxic" assets
3. Q. Could others follow Lehman Brothers? A. Yes. Merrill Lynch, one of the most venerable Wall Street firms, has been bought out by the Bank of America to save it going under. AIG, the world's largest insurance company is also running short of funds, it is understood. It is almost certain another major financial institution will collapse
4. Why does it matter that Lehman has collapsed and others are in trouble? A. Lehman does not have any High Street branches, ordinary savers or mortgage customers. However, its collapse will have profound implications for people around the world – and not just for its 25,000 staff, 5,000 of them in the UK who are almost certainly out of a job. Crucially, the US's central bank, the Federal Reserve has refused to step in to rescue the firm, even though it bailed out Bear Stearns, Fannie Mae and Freddie Mac earlier this year. This has rattled Wall Street and the City as investors realise that others could be allowed to go to the wall. As a result, share prices have fallen heavily on stock markets around the world
5. CHRONOLOGY OF EVENTS(NEWYORK LOCAL TIME) FRIDAY 16:00: U.S. market closes after a see saw session dominated by the fate of Lehman Brothers. After initially opening 140 points down in the wake of disappointment that Lehman had not secured a rescue by early Friday, the Dow Jones Industrials index recovered and closed down just 10 points. 16:25: Sources say Lehman Brothers has received bids for its asset management division from private equity firms Clayton Dubilier & Rice and Bain Capital. 20:00: U.K. newspapers say Barclays is considering a bid for Lehman Brothers
6. CHRONOLOGY OF EVENTS(NEWYORK LOCAL TIME) SUNDAY 12:00 The rest of Wall Street's banks and brokers are called into work to start addressing Lehman Brothers outstanding trades in the over-the-counter derivatives markets. 12:57: Barclays says it is pulling out of its bid for Lehman Brothers 15:11: Newspaper reports say AIG is seeking to raise between $10bn and $20 billion from buyout investors including Kohlberg Kravis & Roberts and J.C Flowers & Co to bolster its balance sheet. 15:45: Bank of America says it is pulling out of talks to acquire Lehman Brothers 16:18 : The Wall Street Journal reports that Bank of America and Lehman Brothers are in merger talks 22:00: A global consortium of 10 banks announces it is provide a total of $ 70bn for a U.S. borrowing facility aimed at providing liquidity.

Bankruptcy

Bankruptcy legislation was originally intended to be primarily a “businessman’s” statute. Its original purpose was often stated to be twofold:

1. To permit an honest debtor, who has been unfortunate in business, to obtain relief from his/her creditors; and 2. To provide a regime whereby the creditors of a bankrupt can pursue their claims by collective action through a Trustee so that the assets of the bankrupt can be realized and distributed on an equitable basis subject to the rights of secured creditors and the priorities of preferred creditors.

In 1992 the Bankruptcy Act was radically reformed (and renamed the Bankruptcy and Insolvency Act) in a number of ways. One such reform was arguably inconsistent with the original purpose of the Act, and it ironically has had the most significant impact on how the Act is used today. I am talking of course about the addition of provisions to the Act to make it more easily accessible to consumer debtors. The statistics are mind boggling. Consumer debtors have and continue to seek relief from their debts under the Act in record numbers. The theory and reality behind what happens when a consumer debtor declares bankruptcy is as follows:

1. All unsecured claims against the bankrupt as at the date of bankruptcy are stayed. This is the immediate relief a consumer debtor obtains, and the main reason for the bankruptcy; 2. The trade off is supposed to be that all of the bankrupt’s property in existence as at the date of bankruptcy, or acquired thereafter up to the date of the bankrupt’s discharge, vests in his or her Trustee for distribution among the bankrupt’s unsecured creditors. However, in the case of property with a registered lien or mortgage, the Trustee’s interest only attaches to any equity available in the property, and the Trustee is not entitled to any property held in trust by the bankrupt for third parties, or any property exempt from seizure or execution by statute (like the $5,000.00 exemption for an automobile). In a typical consumer bankruptcy situation, there aren’t any significant assets for the Trustee to seize and sell and thus there is usually little or no return available for the unsecured creditors; 3. The Trustee has the power to review the affairs and conduct of the bankrupt with a view to setting aside any payments made or assets transferred by the bankrupt to third parties prior to bankruptcy if these payments or transfers constitute a preference, settlement, or reviewable transaction. However, Trustees are running a business themselves, and unless there are assets that can be converted to cash to fund litigation they generally will not spend their own money to litigate these matters. Under the Act there are procedures to allow a creditor to take over a Trustee’s right to pursue such transactions and thus the onus shifts to the individual creditors to take (and pay for) action; 4. Individual bankrupts are required to make monthly “surplus income” payments to their Trustee in accordance with published guidelines. In a typical consumer bankruptcy situation, the bankrupt is not a high income earner and has dependents. The reality is that these surplus payments are usually just enough to cover the Trustee’s fees and disbursements (with nothing left for the unsecured creditors); 5. First time individual bankrupts are entitled to an absolute discharge from bankruptcy after nine months unless an objection is filed by a creditor, the Trustee, or the Official Receiver. First time consumer bankrupts cross their fingers and hope no one files an objection thereby allowing them to get in and out of the bankruptcy system after nine months, and with relative ease (except for those bankrupts who still attach a stigma with going bankrupt); 6. If a bankrupt is required to proceed to a discharge hearing, the Registrar will consider the circumstances and either grant an absolute discharge, or refuse or suspend the discharge, or order that the bankrupt has to pay a sum of money to his or her Trustee as a condition of being discharged. An absolute discharge will be granted if the bankrupt can show the objections are not valid and that he or she “can not justly be held responsible” for going bankrupt. Refusals are only ordered in the rarest of cases where the bankrupt has engaged in really offensive conduct. The most common disposition at a discharge hearing is for an order to be made that the bankrupt’s discharge is to take effect after the bankrupt pays a certain sum of money to his or her Trustee, usually in monthly instalments of between one to three years. However, the amount of the monthly payments will depend on the bankrupt’s monthly household income and expense situation and much reliance is usually placed on the guidelines referred to above for determining “surplus income”. Again, unless the bankrupt is a high income earner these monthly payments may be a lot for the bankrupt but provide little or no return to the unsecured creditors; 7. Upon being discharged from bankruptcy, all claims against the bankrupt in existence as at the date of bankruptcy, which were stayed, are released and discharged. There are some exceptions. Most notably these are for family law support obligations, debts incurred by fraudulent misrepresentation, and criminal fines or penalties. These claims continue to survive and can be pursued against the bankrupt.