Presentation Slides Outline:
1. Normal Cover Slide
2. Table of Contents
3. Economic and Financial Situation (Mortgage crisis; Lehman ratios)
The U.S. Subprime Mortgage Crisis breaks out in the first half of 2007. It was triggered by a large decline in home prices and as one of the biggest mortgage backed securities underwriter, Lehman Brothers’ profitability and liquidity ratios started to getting worse. Lehman’s MBS and ABS assets started to lose in value according to mark to market prices. The Subprime Mortgage Crisis also hit Lehman from its dependency on short-term borrowing. Lenders witnessed to failure of Bear & Stearns another investment bank famous with mortgage underwritings, and started to squeeze their credit lines.
Despite the fact that Lehman’s risk arising from its mortgage backed assets and its reliance on short-term financing soared, Lehman did not change its strategy and sustained to raise leverage it uses.
Liquid Assets / Dep. & ST Funding (%)
107.81
92.48
91.47
86.85
88.77
Liquid Assets / Tot. Dep. & Bor. (%)
52.93
51.21
50.27
45.49
46.12
Current ratio
1.08
0.92
0.91
0.87
0.89
Solvency Ratio (%)
3.49
3.30
3.25
3.16
4.11
(Osiris, 2014)
Lehman reported $2.8 billion loss at 2nd quarter of 2008, its first quarterly loss since going public in 1994. The loss was equal to 15.55% of total shareholders’ funds.
At the second quarter of 2008, Lehman’s total assets fallen radically from $786 billion to $639 billion (21%).
Market-based Asset prices dropped.
Mortgage loans dropped dramatically ($32 billion to $2.0 billion)
Gross Leverage began to climb from 23 to 33.
(Osiris, 2014)
Falling solvency ratio illustrates though the total liabilities have been growing, net income of Lehman haven’t been growing in the same degree.
(Osiris, 2014)
In order to lessen its reported leverage and to reduce its reported short term borrowings, Lehman decided to implement an accounting policy which is called “Repo 105” interior of the company. Repo, also known as Repurchase Agreement, is a common form of short-term borrowing by selling the government securities and other debt instruments, and agreeing to repurchase in the future.
A typical Repo 105 maneuver would begin with Lehman’s European unit transferring $105 million or $108
