How Indias RBI, government staved off 2008 ICICI Bank meltdown

After 1990, taking a breather from the 1987 Wall Street crash, popularly known as Black Monday, Lehman Brothers acquired several mortgage lenders including BNC Mortgage and Aurora Loan Services. On September 15, Lehman Brothers filed for Chapter 11 bankruptcy, the record for the largest bankruptcy in the history of the United States even to date. At the time of filing bankruptcy, Lehman Brothers had assets worth $639 billion which were inter-dependable on other investment as well as commercial banks. Bandyopadhyay says the RBI had foreseen the crisis and regulated Indian banks from excessive disbursing of real estate loans. The capital requirements for banks were also modified and they were prepared to absorb the shock in case of increase in rates. The seeds of 2008 subprime mortgage crisis, or simply known as housing crisis, were sown way back in the 1980s.

Lehman’s real estate business enabled revenues in the capital markets unit to surge 56% from 2004 to 2006. The firm securitized $146 billion of mortgages in 2006—a 10% increase from 2005. In 2007, it announced $4.2 billion in net income on $19.3 billion in revenue. A new immigrant from Germany to the U.S., Henry Lehman opened a dry goods store in Montgomery, Alabama. With the subsequent arrival of his two brothers Emmanuel and Mayer, the store became known as Lehman Bros. The Lehman brothers decided to capitalize on this by provisioning raw cotton at the dry goods store and then engaging in cotton trading in New York.

A statement was issued, saying that ICICI had enough liquidity, and RBI was ready to make more cash available to the bank, should it run short. A bland statement like this might seem banal from this distance of time, but in real time, it proved remarkably effective in calming the anxiety around ICICI. But critics say that the government could and should have saved Lehman Brothers in order to prevent the systemic consequences of its collapse. Though it was not these firms’ main regulator, the New York Fed’s task was to monitor the health of each and assess whether any firm faced a similar risk of ruin that could reverberate throughout the financial markets. In 2007, Lehman’s high degree of leverage was 31, while its large mortgage securities portfolio made it highly susceptible to the deteriorating market conditions.

  1. The event rocked global stock markets and led to the biggest financial crash since the Great Depression.
  2. The two key crisis managers in those early days were finance minister P Chidambaram and planning commission deputy chairman Montek Singh Ahluwalia.
  3. Lehman Brothers was established by Henry Lehman, who emigrated from Germany.

The payment and settlement systems for financial transactions, the real-time gross settlement (RTGS) and national electronic funds transfer (NEFT), recommenced on Nov. 27, the day after the attack. The day Lehman collapsed, the RBI and the other Indian regulators ring-fenced its Indian subsidiaries. Restrictions were placed on their operations, and they were prohibited from remitting funds out of the country. Regulators have since argued that there was no authority to save Lehman, and that a calculation was made that Lehman’s investors had adequate time to prepare for the firm’s failure. And among the assets you’re looking for liquid assets so that you can start to pay the bills [that were due imminently]. We needed about $100m, and we couldn’t find liquid assets that would realise that in time.

Download the Financial Express App for the fastest and most reliable business news alerts, key investment strategies and latest movers and shakers from across financial market. Due to incessant lehman brothers india losses, Lehman’s stock plummeted to 73 per cent of its value in the first half of 2008. With investors losing confidence and falling ratings, Lehman filed for bankruptcy on September 15, 2008.

Lehman Brothers crash 2008: Explaining the crash that changed the world as you know it

The default spooked the markets and raised fears of a Lehman-like crisis, referring to the collapse of the US investment bank Lehman Brothers 10 years ago. The event rocked global stock markets and led to the biggest financial crash since the Great Depression. Expenditure heads, technically called automatic stabilisers, were left untouched. The government’s detractors, and eventually urban voters even, were critical of this focus on rural spending, in particular the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act).

The firm eventually abandoned the South entirely, relocating its headquarters to New York where it focused almost entirely on commodities trading and brokerage. In the following decades, the operations expanded into a full-service financial firm. Over the next century and a half, the company underwent numerous changes and engaged in several alliances and partnerships. While the Lehman Brothers bankruptcy did not cause the Great Recession or even the subprime mortgage crisis, its downfall triggered a massive selloff in the global markets.

Huge losses were reported, and Lehman Brothers stock lost three-quarters of its value—and then plunged again when rumours of a takeover came to nothing. A mass exodus of clients took place, the firm’s assets were drastically downgraded by credit agencies, and the U.S. federal government refused to take action to help prevent the firm’s collapse. Its failure had lasting negative effects on global markets and became a symbol of the chaos of the financial crisis of 2007–08.

What caused the 2008 financial crisis

With 76 parallel affiliate proceedings involving hundreds of affiliates in 16 jurisdictions around the world, as well as settlements with Lehman affiliates, the recoveries achieved by the Trustee and his team exceeded $100 billion. The liquidation proceeding also involved the administration of more than 15,000 general creditor claims asserted against LBI, many of which required contested litigation and appeals. Goldman Sachs executive Susan McCabe wrote an email to William Dudley, Vice President of the Markets Group at New York Fed, on Sept. 11, 2008 that the market had become nervous about a Lehman bankruptcy. According to Bethany McLean and Joe Nocera’s book on the crisis, Paulson began in March 2008 to push Lehman’s CEO Dick Fuld to raise additional liquidity or find a buyer for the firm, but Fuld had seemed reluctant. On the Monday morning the main legal entity in the UK needed to repay something in the order of $3bn to its trading counterparties, and of course it was dependent upon that cash coming overnight on the Sunday – and it didn’t come.

Response to September 11, 2001 attacks

But to arrest the dampening effects of the global financial crisis, an immediate pickup in consumption was needed, without which, projections showed, a drastic fall in GDP would be near certain. Among the choices available, MGNREGA was the fastest and easiest way of putting money in people’s pockets. The group’s venture into buying real estate in India’s slowing market also backfired. As the money drained out, IL&FS defaulted on a series of its loan repayment commitments. This has shaken investor confidence in the non-banking financial institutions. Lehman’s collapse roiled global financial markets for weeks, given its size and status in the U.S. and globally.

When these loans became illiquid the firm went through a credit crunch, which meant it couldn’t pay its creditors. Lehman could no longer raise cash cheaply by issuing debt, and issuing stock under such conditions led to share dilution and negative sentiment, which caused its share price to fall. Meanwhile, housing prices fell as buyers stayed on the sidelines because of market conditions and the inability to secure credit. As a result, the global financial system was under threat of collapse with the absence of any additional loans being made and the firm’s significant threat of failure. After Bear’s collapse, the New York Fed wanted to know how the remaining banks would react if they experienced a run similar to Bear. A major source of trouble had been the firm’s reliance on the repo market—the market used by banks to take out short-term loans that are used to finance their operations.

Who bought Lehman Brothers?

Our free, fast, and fun briefing on the global economy, delivered every weekday morning. An economic collapse naturally reduces tax collections, but expenditures adjust slowly. It was decided to maintain the expenditures, which implied that the fiscal deficit could be expected to automatically expand. Ahluwalia and the team of economists entrusted with the job of crafting a rescue plan for the economy settled on a two-part fiscal response, supplementing the monetary measures being taken by the RBI.

Natalia Rogoff, worked in international client sales at Lehman Brothers

Many questioned the decision to allow Lehman to fail, compared with the government’s tacit support for Bear Stearns, which was acquired by JPMorgan Chase (JPM) in March 2008. Bank of America had been in talks to buy Lehman, but backed away after the government refused to help with Lehman’s most troubled assets. Instead, Bank of America announced it would buy Merrill Lynch on the same day Lehman filed for bankruptcy.

Leave a Comment

Your email address will not be published. Required fields are marked *

Open chat
Have a question?