Lehman files for Bankruptcy, Market Reacts

 

"Lehman Brothers Holdings Inc said it plans to file for bankruptcy protection, but the Chapter 11 filing will not include its broker-dealer operations and other units, including Neuberger Berman.

Lehman is looking at selling its broker-dealer operations, and is still in advanced discussions with a number of potential buyers of its investment management division.

Bankruptcy represents the end of a 158-year old company that survived world wars and the collapse of Long-Term Capital Management but could not survive the global credit crunch.

Investors in recent weeks had grown increasingly jittery about Lehman's $46 billion of mortgages and asset-backed securities, as well as its credit rating and its ability to raise capital.  Source : Reuters"

The news has broken hell on the global as well as Indian stock markets. As a public company Lehman had never reported a Qaurterly loss until June'08. The bank had actually reported a record net profit of $4.2 billion in year 2007. The ruptured U.S. financial system faces an unprecedented shakeup with Lehman Brothers set to file for bankruptcy, Bank of America buying Merrill Lynch, and the Federal Reserve saying for the first time it will accept stocks in exchange for cash loans.

I had mentioned in my Recent presentation on stock markets that the credit crisis in US is yet to unfold and may unsettle the dynamics of the financial regulations globally. There are other financial institution in pipeline to declare themselves on the verge of bankruptcy. It is high time that Indian banks take stock of their credit regulations and control in place for determining quality of credit. It's a wake-up call for the RBI to do a check on potency of its banking regulations.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a form of corporate financial reorganization in which a company's assets gets sold off to remunerate past due creditors. In some cases, Chapter 11 bankruptcy allows companies to continue to function. The theory here is that businesses which are allowed to move forward will generate revenue, protect jobs, and otherwise heal creditor wounds. Scraping and selling businesses for their parts, on the other hand, may lead to less than optimal utilization of company resources. Chapter 11 bankruptcy filings may be “strategic”. In other words, management may wish to reorganize for political reasons, not simply for the sake of balancing books.

Much of Chapter 11 bankruptcy case law is devoted to the finding what constitutes asset exemptions under the law. In cases in which parent companies and/or partnerships are involved, assets may be shielded by selling them off or otherwise hiding them within the financial infrastructures of sympathetic firms. It's even legally possible, under certain situations, to offshore assets to shield them from creditors. Despite the abundance of case law designed to establish precedent for Chapter 11 bankruptcy situations, the emergence of "globalized business" has added a new wrinkle to the ongoing debate over how failing businesses should repay creditors. (Source : Super Pages)

For Detailed study of Chapter 11 US Courts website provide a comprehensive reading material. Go to US Court Website to read more.

5 comments:

Kiran said...

Hi Rajesh
What will be impact of this event on Indian companies?

Subramanian said...

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Ruchi said...

with so many applications, dda is earning good interest over a 3 month period. Wonder why does it take so much time.

QUALITY STOCKS UNDER 5 DOLLARS said...

A ruff year for investment bankers.

Top Performing Mutual Funds said...

Interesting one!! Very well explained about the mutual funds!!