Lehman brothers & subprime crisis

2HH QUEEN TEAM , SHERATON 24 MAY 2024, 2:OO PM

 Agenda

Meet the presenters

Overview and history
Main characters
Challenges
CSR and governance
External Approaches to prevent the crisis
Internal Approaches to prevent the crisis
Questions

Lehman brothers & subprime crisis 2

 Meet Aya Omran

Ex Banker
Associate At multinational

Background of Human resources , Marketing , accounting ,

purchasing and Banking

Lehman brothers & subprime crisis 3

Meet Ayman Maher

Ve t

Background of vet medical

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 4
Meet Ahmed Eltahan

Ve t

Background of vet medical

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 5
 Meet Nurhan Waleed

Te a m l e a d e r i n P a n a s o n i c

Background of business and call center

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 6
Meet Mohamed Elsayyad

Military officer

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 7
 OVER VIEW
&HISTORY

It will be divided into :

 Founding and Early Years
 Growth and Expansion
 Demise and Collapse

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 Founding and Early Years

1844 1850S - 1860S

1870 20TH
Lehman Brothers was Lehman Brothers
The firm expanded Lehman Brothers
founded by Henry moved its
Lehman, a German
its operations into played a significant
headquarters to
immigrant, in cotton trading, role in financing
New York City and industries such as
Montgomery, taking advantage of shifted its focus to
Alabama. Initially, it the booming cotton railroads, oil, and
investment banking steel during
was a general store industry in the and financial
that dealt in dry America's
Southern United services.
goods. industrialization
States. period.

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 Growth and Expansion

1920s-1930s 1950s-1960s 1970s-1980s 1990s

Lehman Brothers Lehman Brothers

The firm continued The firm further
expanded its became a leading
investment banking
to grow, expanded its global
player in the bond
activities, particularly establishing a reach, particularly in
market and Europe and Asia,
in underwriting presence in expanded into areas
international and diversified its
securities and advising such as mortgage-
markets and revenue streams to
on mergers and backed securities include more trading
acquisitions. diversifying its and leveraged and proprietary
services to include buyouts. investing activities.
asset management
and trading.

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 Demise and Collapse

2000s 2007 2008

Lehman Brothers faced The onset of the subprime Despite efforts to raise capital
challenges related to its mortgage crisis led to and sell assets to shore up its
exposure to the subprime significant losses for balance sheet, Lehman
mortgage market and complex Brothers filed for Chapter 11
Lehman Brothers,
derivative products. The firm's bankruptcy protection on
risk-taking behavior and
particularly in its mortgage- September 15, 2008. It was the
leverage levels came under backed securities portfolio. largest bankruptcy filing in
scrutiny. U.S. history at the time, with
assets of over $600 billion

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Main characters

It will be divided into :

People
&
Organizations

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 Richard Fuld

Richard Fuld, CEO of Lehman Brothers, led the firm in

aggressively expanding into subprime mortgages, leveraging
heavily, and retaining risky securities, which significantly
contributed to its collapse in 2008. Under his leadership,
Lehman’s high leverage and inadequate risk management made
it highly vulnerable to the housing market downturn. Despite
efforts to stabilize the firm, including failed merger talks,
Lehman’s bankruptcy marked a pivotal event in the financial
crisis, drawing intense criticism and scrutiny towards Fuld for
his management practices.

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 Alan Greenspan

Alan Greenspan, Chairman of the Federal Reserve from 1987 to

2006, implemented prolonged low interest rates and opposed
regulation, which critics argue contributed significantly to the
housing bubble. His belief in the self-correcting nature of
markets and financial innovations like MBS and CDOs proved
overly optimistic, allowing risky financial practices to
proliferate. Greenspan's policies influenced his successors,
perpetuating an environment that led to the 2007-2008 financial
crisis.

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 Ben Bernanke

Ben Bernanke, Chairman of the Federal Reserve during the

financial crisis, initially underestimated the housing market's
impact but quickly implemented measures like aggressive rate
cuts, the Term Auction Facility, and quantitative easing to
stabilize the economy. His controversial decision not to rescue
Lehman Brothers contrasted with the $85 billion loan to AIG
and the $700 billion Troubled Asset Relief Program (TARP) to
stabilize the banking sector. Bernanke's actions, including
conducting bank stress tests and supporting financial reforms,
are credited with preventing a repeat of the Great Depression,
despite ongoing debates about the long-term effects of his
policies.

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 Henry Paulson

U.S. Treasury Secretary Henry Paulson played a pivotal role in the

government's financial crisis response, including the controversial
decision not to bail out Lehman Brothers, which exacerbated the crisis.
He orchestrated the $85 billion rescue of AIG and designed the $700
billion Troubled Asset Relief Program (TARP) to stabilize the banking
sector and restore market confidence. Despite criticism for not saving
Lehman and perceived favoritism towards Wall Street, his actions,
especially through TARP, are credited with stabilizing the financial
system and leading to significant regulatory reforms like the Dodd-Frank
Act.

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 Moody’s, S&P, Fitch

These agencies rated MBS and CDOs, often giving high ratings to
subprime-linked securities, thus underestimating their risk and
contributing to their widespread sale.
Assigned credit ratings to mortgage-backed securities (MBS) and
collateralized debt obligations (CDOs) based on their perceived risk of
default. These ratings influenced investors' decisions on purchasing
these securities.
Critics argue that the credit rating agencies underestimated the risks
associated with MBS and CDOs, particularly those backed by
subprime mortgages. They assigned high ratings to these securities,
leading investors to believe they were safer than they actually were.

Some critics allege that the credit rating agencies faced conflicts of
interest. They were paid by the issuers of the securities they rated,
creating an incentive to provide favorable ratings to attract business.

The agencies' ratings were often pro-cyclical, meaning they tended to

reinforce market trends rather than provide independent assessments
of risk. During the housing boom, they assigned high ratings to
securities that later experienced significant losses during the bust.

The financial crisis prompted scrutiny of the credit rating agencies

and led to regulatory changes aimed at improving their transparency,
accountability, and independence. Reforms included measures to
reduce conflicts of interest and increase oversight of their rating
processes.

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 17
 Goldman Sachs, Morgan Stanley,
Citigroup

Other major banks heavily involved in the creation and sale of

subprime MBS and CDOs. Some managed to weather the crisis
better than others.
Engaged heavily in investment banking activities, including
underwriting and trading mortgage-backed securities (MBS) and
collateralized debt obligations (CDOs), which were central to the
financial crisis.
Like other major banks, Goldman Sachs, Morgan Stanley, and
Citigroup had significant exposure to subprime mortgages
through their involvement in originating, securitizing, and
trading these loans.
Faced scrutiny for their risk management practices, which were
criticized for being inadequate in assessing and managing the
risks associated with complex financial instruments tied to
subprime mortgages.
During the crisis, all three banks faced pressure and uncertainty
about their stability. Goldman Sachs and Morgan Stanley
converted into bank holding companies to gain access to
emergency funding from the Federal Reserve, while Citigroup
received significant government assistance to prevent its collapse.
Faced legal and regulatory scrutiny in the aftermath of the crisis.
Goldman Sachs, for example, faced allegations of misleading
investors about the quality of mortgage-backed securities it sold.
Citigroup also settled claims related to the marketing and sale of
MBS. These legal issues highlighted concerns about the conduct
of major financial institutions during the crisis.

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 18
 Bear Stearns

Another investment bank that collapsed earlier in 2008 due to similar

issues with subprime mortgages and was sold to JPMorgan Chase in a
fire sale.
Bear Stearns was a major investment bank heavily involved in
mortgage-backed securities (MBS) and collateralized debt obligations
(CDOs), particularly those tied to subprime mortgages.
Like other financial institutions, Bear Stearns had significant
exposure to subprime mortgages through its origination,
securitization, and trading activities. As the housing market declined,
the value of its mortgage-related assets plummeted.
Bear Stearns faced a severe liquidity crisis in March 2008 when
rumors about its financial health led to a rapid loss of confidence
among investors and counterparties. The firm experienced a run on
its assets, threatening its viability.
To prevent Bear Stearns from collapsing and potentially causing a
broader financial meltdown, the Federal Reserve facilitated its
acquisition by JPMorgan Chase. The deal was backed by a significant
loan from the Fed.

The bailout of Bear Stearns raised questions about the stability of the
financial system and the government's role in supporting troubled
institutions. It underscored the fragility of investment banks and
prompted regulatory reforms aimed at reducing systemic risk in the
financial system.

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Countrywide Financial
• One of the largest mortgage lenders that aggressively sold subprime
mortgages, later acquired by Bank of America.

• Countrywide Financial was one of the largest mortgage lenders in the United
States and a pioneer in subprime lending. It aggressively marketed and
originated high-risk mortgages, including adjustable-rate mortgages (ARMs)
and no-documentation loans, to borrowers with poor credit histories.

• Countrywide originated a vast number of mortgages during the housing

boom, contributing to the expansion of subprime and non-traditional
mortgage products. Its lending practices fueled the housing bubble and
increased systemic risks in the financial system.

• As the housing market collapsed and borrowers defaulted on their mortgages,

Countrywide faced mounting losses and a deteriorating financial position. Its
extensive exposure to subprime mortgages and other risky assets made it
particularly vulnerable to the downturn.

• In January 2008, facing a liquidity crisis and declining investor confidence,

Countrywide Financial agreed to be acquired by Bank of America in a deal
valued at around $4 billion. The acquisition was aimed at stabilizing
Countrywide and preventing its collapse, but it also exposed Bank of America
to significant risks and legal liabilities related to Countrywide's mortgage
practices.
L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 20
 New Century Financial

A major subprime lender that filed for bankruptcy in April 2007, marking the beginning of the crisis.

New Century Financial was one of the largest subprime mortgage lenders in the United States. It specializes in
providing mortgages to borrowers with poor credit histories or limited documentation, often offering adjustable-
rate mortgages (ARMs) with low initial teaser rates.

New Century Financial engaged in aggressive lending practices during the housing boom, originating a large
volume of high-risk mortgages. These included subprime loans with little to no down payment requirements and
lax underwriting standards, contributing to the expansion of the subprime mortgage market.

New Century Financial filed for bankruptcy in April 2007, marking one of the earliest signs of distress in the
subprime mortgage industry. Its collapse highlighted the fragility of subprime lenders and foreshadowed the
broader financial crisis that would unfold in the following years.
L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 21
 Challenges that Lehman
brothers faced

6 main challenges

New rules came up

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The solvency ratios of the bank

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Balance sheet 2008

L e h m a n b r o t h e r s & s u b p r i m e c r i s i s 24
 Too much leverage

aggressive growth strategy

risk-taking business model supported by limited

equity

financial standards had become laxer.

In 2007 it has 111 $ billion from assets (loans) it is

almost double the year previous which was 52$billion
It is more than 4 times bigger than its equity,
So it went to 30% leverage which double the limit at
15%

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 Liquidity pressures

Non-performing subprime
sell assets – and loss
mortgages

Can’t meet short term relied on short-term

obligations wholesale funding

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Dubious management
practices

Some of fraud cases of buying and

selling assts (fake)

Which made the responsible hide the real

ratios that affected the bank reputation
then the stock price

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 Complex capital structure

from a local bank to a global

investment bank, offering complex
financial products across over 3,000
legal entities worldwide.

The collapse of Lehman highlighted failures in supervision

and regulatory shortcomings in financial markets.

Complex financial products and procedures

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 INternal Approaches to
prevent the crisis

5 main Approaches

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Risk Management
and Oversight

SEstablish robust risk

management practices to
identify, assess, and mitigate
risks effectively. Regularly
review and update risk
management

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 Corporate
Capital Adequacy
Governance

Ensure strong corporate Maintain sufficient capital

governance structures with reserves to withstand market
effective oversight fluctuations and unforeseen
mechanisms, including events. Regular stress testing
independent board members can help assess capital
and committees focused on adequacy under various
risk and compliance. scenarios.

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 Liquidity Transparency and
Management Disclosure

Monitor and manage Foster a culture of transparency

liquidity risk by maintaining and open communication both
sufficient liquid assets and internally and externally.
diversifying funding sources. Provide clear and
comprehensive disclosures to
Implement liquidity stress
stakeholders regarding financial
testing to identify health and risk exposures.
vulnerabilities.

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 External Approaches to
prevent the crisis

5 main Approaches

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 Regulatory
Compliance

Adhere to regulatory
requirements and standards
imposed by financial
authorities. Stay informed
about changes in regulations
and adapt policies and
practices accordingly.

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 Market Stakeholder
Surveillance Engagement

Monitor market conditions Maintain open channels of

and trends to anticipate communication with
potential risks and stakeholders, including
vulnerabilities. Stay vigilant investors, regulators, and
for signs of systemic issues counterparties. Address
or market distortions. concerns promptly and
transparently.

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 Crisis
Industry
Preparedness
Collaboration

Collaborate with industry : Develop comprehensive crisis

peers, regulatory bodies, and management plans and conduct
policymakers to develop best regular drills to test responses to
practices, share information, various scenarios. Establish
clear protocols for decision-
and coordinate responses to
making and communication
systemic risks. during crises.

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 End Result of
raising up with
governance and
CSR

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 Breakout questions

No.
1 How do you define communication?

Do you think technology has helped

No.
2 or hindered our ability to
communicate with each other?

No.
3 Share your answers with each other.

Lehman brothers & subprime crisis 38

 History

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HIRE DESIGNERS OPEN OFFICES START DEVELOPMENT

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Lehman brothers & subprime crisis 39

 Tips for businesses

1
Take risks to lead in product
No. innovation

No.
2
Listen to customers and learn what
they need

No.
3
Test with customers until you get the
product right

Lehman brothers & subprime crisis 40

 Call to action

Contoso is the best technology platform

on the market

Download Contoso to try it out and

provide feedback

Lehman brothers & subprime crisis 41

 Thank you
Questions

Lehman brothers & subprime crisis 42