The PEOPLE
In the last few days, employees of Lehman Brothers have wrung their hands as the value of their stock evaporated before their eyes. Now, many fear losing their jobs, too.
In scenes eerily reminiscent of the final days of Bear Stearns, the megawatt energy within Lehman Brothers has dimmed to a hum as employees focus on the fate of the firm and what it might mean to them. To make matters worse, pink slips for previously announced layoffs were being handed out this week.
"Everyone is walking around like they have just been Tasered," said one Lehman employee, who, like many interviewed for this article, declined to be named because he was not authorized to talk publicly. "Everyone was always hoping we would pull through. Now, that is not really an option."
On Lehman's third- and fourth-floor trading floors overlooking Broadway's lights in Midtown Manhattan, traders continued working at their terminals, or at least were giving the appearance of doing so. At the same time, many polished their résumés and contacted recruiters.
If Lehman is sold — as now appears likely — the buyer will fire many of them. And they know that tens of thousands of other Wall Streeters laid off in the tsunami sweeping the financial industry — including many recently let go from Bear Stearns — are already chasing after too few jobs.
Wall Street is used to ups and downs, but this latest round of cuts brought about by the credit crisis is turning out to be one of the worst in recent memory — a fate compounded by a shrinking economy. As of June, many of the more than 83,000 employees dismissed from banks and brokerage firms worldwide have come from firms based in the New York area.
Everyone at Lehman knows what happened at Bear Stearns: Star employees did not have a hard time finding work when Bear was sold in a fire sale this year, but JPMorgan initially kept only about 6,500 of 13,500 employees. Many are still looking for work.
As at Bear, many at Lehman have taken a hit from a plummeting stock price. From an all-time high of $86.18 a share in early 2007, the stock has plunged, closing at $4.22 Thursday.
In an arrangement that is typical of Wall Street, Lehman employees have gotten much of their pay in stock and stock options in recent years. That figure could range from 10 percent to 60 percent in Lehman stock, according to a person close to the company.
"Over the past decade an increasing amount of the compensation had been given in stock and stock options," said Robert Willens, a tax expert who worked at Lehman from 1987 to this year. "Employees were paid in restricted stock that took several years to vest. Stock was granted at the current price."
As recently as last week, Lehman's stock was selling for $16 a share, and many Lehman employees were still betting that their chairman and chief executive, Richard Fuld Jr., would figure out a way to salvage the bank, and their future — a hope he reinforced Wednesday with assurances to Wall Street that the firm could remain standing alone.
On Thursday, those hopes ran dry as the share price plunged so low and so fast that potential suitors came out of the woodwork to see if they could snap up the 158-year-old institution for a bargain-basement price.
As employees left the firm's Seventh Avenue headquarters Thursday, a Lehman trader said people were trying to keep a stoic face. "They are not showing anything," he said.
As widely respected and liked as Fuld has been at the firm, now that the cold prospect of losing a life savings in Lehman stock has become more of a reality, many employees have grown resentful.
"We feel like we have been controlled by events and haven't controlled them," said one rank-and-file employee. "And it has just been the most punitive market. Is there frustration with the management team? Of course." Another employee who left Lehman earlier this year lamented that he had put enough faith in the firm to retain shares — a decision he is paying for. "My children's education fund is wiped out," said this person.
"I'm not a millionaire like a lot of these guys. Of course this is on Dick's hands," he said, referring to Fuld. "It all happened on his watch."
The investment bank said that Fuld was not available for comment.
A number of Lehman employees said the widespread support at the firm for Fuld was not as strong as it had been, largely because his strategy to save Lehman, including the partial sale of Neuberger Berman, its money management unit, would not be enough. These people said they had expected and hoped that Fuld would step aside Wednesday and let Herbert H. McDade III, the firm's president, ascend and start anew.
Fuld himself has seen much of his wealth disappear. At the stock's peak, his 11.4 million shares of various types of stock and 2.5 million stock options were worth about $835 million, according to James F. Reda Associates, a consulting firm. Now, they are worth only about $40 million. But employees know that Fuld has reaped rich rewards in his decade and a half at the helm.
Even if he loses his grip at Lehman, he stands to collect more. He does not have a severance agreement if he loses his job, but if he were terminated without cause, Fuld could expect to collect $63.3 million in various payouts based on the current share price, according to Reda Associates. That includes a $16 million pension and $5.6 million in deferred compensation.
LEHMAN BANKRUPTCY has wide reacing effects across the US Economy
U.S. stock index futures were down sharply early on Monday, pointing to a steep fall at the opening on Wall Street after Lehman Brothers (LEH.N: Quote, Profile, Research) filed for Chapter 11 bankruptcy protection, heightening fears over the embattled financial sector.
* By 0822 GMT, S&P 500 futures SPc2, Dow Jones futures DJc2 and Nasdaq 100 futures NDc2 were down between 2.8 percent and 3.4 percent.
* Lehman filed for bankruptcy protection on Monday, making it the largest and highest-profile casualty of the global credit crisis.
The Chapter 11 filing did not include its broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them. It said it is in advanced talks on selling its investment management division.
* Lehman shares traded in Frankfurt (LHMH.F: Quote, Profile, Research) were down 80 percent, while shares in Morgan Stanley (MS.N: Quote, Profile, Research) (MWD.F: Quote, Profile, Research), Goldman Sachs (GS.N: Quote, Profile, Research) (GS.F: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research) (TRV.F: Quote, Profile, Research) traded in Frankfurt were down between 7.4 and 15.2 percent.
* The U.S. dollar tumbled in Asian trade on the news that triggered talk of a possible Federal Reserve rate cut.
* The Federal Reserve launched a series of emergency measures on Sunday to calm financial markets and ease any trading disruptions that could arise from a collapse of Lehman.
One of the biggest changes the Fed made was to accept equities as collateral for cash loans at one of its special credit facilities, the first time that the Fed has done so in its nearly 95-year history.
* Adding to the gloom, the New York Times said insurer American International Group Inc (AIG.N: Quote, Profile, Research), working to stave off rating downgrades and shore up the capital of its holding company, has made an unprecedented approach to the Federal Reserve seeking $40 billion in short-term financing. AIG officials did not immediately respond to requests for comment. AIG shares traded in Frankfurt (AIG.F: Quote, Profile, Research) were down 33 percent.
* Also in the financial sector, Bank of America Corp (BAC.N: Quote, Profile, Research) agreed to buy Merrill Lynch (MER.N: Quote, Profile, Research) in an all-stock transaction worth $50 billion. Bank of America (BAC.F: Quote, Profile, Research) was down 12.5 percent in Frankfurt, while Merrill (MER.F: Quote, Profile, Research) was up nearly 40 percent.
* The news on Lehman knocked equity markets around the world, with the UK's FTSE 100 index .FTSE down 3.6 percent, Germany's DAX index .GDAXI down 3.4 percent, and France's CAC 40 .FCHI down 4.2 percent. A number of Asian markets, including Japan, Hong Kong, South Korea and China, were closed on Monday for a holiday.
* Companies releasing earnings on Monday include The Kroger Co (KR.N: Quote, Profile, Research) and Pall Corp (PLL.N: Quote, Profile, Research), while economic indicators include the New York Fed's manufacturing index for September, and the Fed's industrial output and capacity utilization data for August.
Lehman Brothers Holdings Inc.'s bankruptcy filing today is as much as 15 times larger than any other Chapter 11 case in history and may leave creditors with tens of billions in losses, lawyers said.
Lehman, the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis and sought bankruptcy protection in New York owing creditors more than $613 billion. WorldCom Inc., the telecommunications company that filed for court protection in 2002 after an accounting scandal, listed $41 billion in debt in what's now the second-largest Chapter 11 case.
Among Lehman's obligations are at least $155 billion in unsecured bond debt, compared with about $24 billion owed WorldCom bondholders, court papers show. Lehman's bond and stock holders, along with employees, are likely to be among the hardest hit from the investment firm's collapse, said Charles Tatelbaum, a lawyer at Adorno & Yoss.
``The only winners here are any of Lehman's trading partners who were able to unwind their deals last night,'' said Tatelbaum, the former editor of the American Bankruptcy Institute Journal. ``Everyone else is going to be a loser to one degree or another.''
New York-based Lehman shareholders may get nothing back because U.S. bankruptcy law mandates such claims be paid after almost all other creditors.
Some Lehman bondholders may get as much as 60 cents on the dollar if the investment bank is forced into liquidation, analysts at CreditSights Inc. said today. That would compare favorably with investors' recoveries in bankruptcy cases involving other financial firms, according to Bloomberg data.
Refco, WorldCom
Refco Inc. creditors generally recovered about 24 percent of the $16.8 billion they were owed in the futures trader's 2005 bankruptcy. Once the biggest independent U.S. futures trader, New York-based Refco collapsed after disclosing a firm controlled by its chief executive owed the company hundreds of millions of dollars.
WorldCom won court approval of a bankruptcy reorganization plan in October 2003 that erased $36 billion of debt and paid most unsecured creditors about 36 cents on the dollar, according to court filings.
Some lenders and other secured creditors, those with collateral backing their claims, and professionals, such as lawyers and accountants hired to work on Lehman's case, are likely to be paid in full.
Employee salaries are considered a ``priority claim'' and are typically paid in full with a judge's approval on the first day of the case. Workers in some bankruptcies organize committees that are recognized by the court to represent their interests in pensions, investments and their jobs.
Lawyer Winners in Lehman Bankruptcy
Lawyers, accountants, bankers and other bankruptcy professionals may be among the few winners in the Lehman bankruptcy filing.
Enron Corp. in December 2004, three years into its bankruptcy case, asked a judge to approve more than $780 million in fees for advisers, led by New York law firm Weil Gotshal & Manges LLP, which also represents Lehman. The Houston-based company at the time estimated its bills for professional fees might top $1 billion. Most Enron creditors got paid about 25 cents on the dollar.
Lehman's lead bankruptcy lawyer is Harvey Miller of Weil Gotshal. Miller has worked on some of the largest bankruptcies in history, including Texaco Inc. He left the firm in 2002 to join investment bank Greenhill & Co. and returned last year.
Interest Rates Climb as Money Markets Spike in response to Lehman Bankruptcy
The cost of borrowing in dollars overnight jumped the most since June after Lehman Brothers Holdings Inc. filed for bankruptcy, deepening the freeze in lending between banks.
The London interbank offered rate, or Libor, climbed 96 basis points to 3.11 percent, the British Bankers' Association said today. The cost of borrowing in euros overnight increased 19 basis points to 4.49 percent, the BBA said.
``Lehman is now basically considered out of business so I can't imagine that the money markets today or tomorrow are going to be lovely or fine,'' said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``Spreads are going to be ugly and screen prices are probably going to be fiction.''
The difference between the three-month London interbank offered rate for dollars and what traders bet the U.S. central bank's daily effective federal funds rate will average over the next three months, the so-called OIS spread, widened to 108 basis points today, the most in at least six years, from 87 basis points at the end of last week.
The spread widened on concern Lehman's collapse may herald more losses at financial institutions. The U.S. bank succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.
Credit Losses
Banks and insurers are among financial companies that have booked almost $513 billion in writedowns and credit-market losses since last year as the U.S. mortgage crisis deepened. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. today for about $50 billion as the credit crisis claimed another of America's oldest financial companies.
In an effort to help Wall Street weather Lehman's bankruptcy, the Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks and also boosted its program for lending Treasuries to bond dealers by $25 billion, bringing it to $200 billion. At the same time, a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity.
``The market is simply so thin that there's not a lot you can do,'' said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's still absolute uncertainty about what is going to happen.''
Central Banks Act
The European Central Bank and the Bank of England offered financial institutions additional money after Lehman's application for bankruptcy threatened to derail global markets.
The ECB said it injected 30 billion euros ($43 billion) at a marginal rate of 4.30 percent to soothe credit markets while the Bank of England loaned financial institutions an additional 5 billion pounds ($9 billion) for three days in its exceptional fine-tuning operation. The Swiss central bank offered additional liquidity through its overnight facility for the first time since Feb. 22.
``While central banks will be doing everything in their power to keep the market functioning correctly, it will probably take a couple days to bring overnight rates down,'' said Barry Moran, a money-market trader in Dublin at the Bank of Ireland, the country's second-biggest bank. ``The three-month Libor is being impacted by rate-cut expectations so the possibility of a Fed cut is negating liquidity concerns farther out.''
The three-month Libor rate for dollars was little changed at 2.82 percent, the BBA said.
Euribor Rate
The cost of borrowing in euros for three months stayed within a basis point of the highest level since December 2000, according to the European Banking Federation.
The euro interbank offered rate, or Euribor, was little changed at 4.96 percent, EBF data showed today. The one-week rate increased 2 basis points to 4.42 percent.
The so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months and a sign of lender confidence, was at 131 basis points today, down 4 basis points from Sept. 12 and the second-highest level since July 21. It averaged 39 basis points in the first half of last year.
``The market is underestimating the awfulness of this news so I would look for a gradual rise in money-market rates,'' said Ciaran O'Hagan, a fixed-income strategist for Societe Generale SA in Paris. ``I still hear a lot of talk that this is rock-bottom and it can't get any worse. That kind of bravado will only ensure things will worsen.''
Treasuries Climb
Treasuries surged, sending two-year notes up by the most since the September 2001 terrorist attacks, as Lehman's bankruptcy filing stoked speculation the Fed may cut interest rates. The gains pushed the yield below 2 percent for the first time since April after Barclays Plc and Bank of America withdrew from talks to buy Lehman.
Interest-rate futures on the Chicago Board of Trade showed a 92 percent chance the Fed will lower its key rate by a quarter- point to 1.75 percent tomorrow, compared with no chance a week ago.
Bank of America will pay $29 a share in stock for New York- based Merrill, 70 percent more than the Sept. 12 closing price, the company said today in a statement.
