Chapter 2 : The impacts of the credit crisis on worldwide organizations.
Introduction to this chapter : This chapter discusses multiple significant negative impacts in the aftermath of the housing bubble burst, additionally explained examples of multiple companies that has been majorly effected in the crisis will be mentioned with a detailed analysis.
1. Northern Rock :-
Brief information : A publicly owned british bank was founded in 1965, head quartered in Newcastle U.K, their main services includes banking and mortgages, with total profit estimation of ? 443 million and a total employees of 4,500 as of 2008, Northern Rock was one of the first banks who were majorly effected by the turmoil.
Northern Banks business plan and the tragic outcomes :
Northern Bank had a business plan which involved borrowing heavily in the U.K and in the money market, a process known as securitization which involved extending mortgages to consumers and reselling them in the international capital markets.
When the global demand from investors for securitized mortgages dropped in 2007 the bank was unable to pay their loans from the money market with funds that should have been raised from the securitization process. The problem was anticipated by the financial markets which made it more public, in September 2007 the bank received a liquidity support facility i.e. a loan to be able to repay the money markets loans due to the failure of raising funds from the securitization process, which caused a panic among individual depositors who feared that their savings wont be available for them in case of receivership.
The panic gradually caused a Bank run which has never occurred in 150 years in the U.K, depositors were queuing behind the doors of Northern Bank waiting for their turn to draw their deposits from the bank particularly since everyone was doing the same.
On Feb 2008 the bank was taken into a state ownership its fully controlled by the government through the U.K financial investments limited.
Their main plans against the catastrophic failure of their business plan is to pay off their debts with the governments by encourage their borrowers to shift their mortgages to other lenders, costs were also reduced by decreasing the numbers of the employees, the results that the bank were paying their debts way ahead of the targeted date, people started to gain more confidence in the bank since it is now nationalized and national banks cannot fail .
2. American Insurance Group (AIG) :
Brief information : an American insurance company headquartered in New York city with several branches in the world including : Hong Kong, Paris, London, AIG was one of the largest publicly held companies in the world with more than 116,000 employees around the world.
AIG and the liquidity crisis on 2008:
In September 2008 AIG suffered a liquidity crisis due to the downgrading of its credit rating, industry practice allows all companies with high credit ratings to enter SWAPS, when its credit ratings was downgraded AIG was forced to post more collateral with its trading counter parties which led AIG to an liquidity crisis.
The major factor of this downgrading in its credit ratings was due to AIG selling credit protection against credit default risk in the form of credit default swaps on collateralized debt obligations (CDO) which lost its value during the housing bubble burst.
AIG share price fell over 95% by September 2008 from $70.13 to $1.25 the company reported over $13.2 Billion in losses in the first six months of the year. AIGs financial products has entered credit default swaps to insure $441 Billion worth of securities of those $57.8 were debt securities backed by subprime loans.
AIG and the Federal reserve bailout :-
On September 2008 the Federal reserve bank of New York has been granted the authorization to create an $85 billion credit facility of which AIG can draw up from on a 24-months basis, this credit facility was collateralized by the assets of AIG including its non-regulated subsidiaries and the stock of its (substantially all) regulated subsidiaries with an interest rate of 8.5% , in exchange of this credit facility the government required warrants of 80% of AIG stake equity and the right to suspend dividends payment to common and preferred, the board of directors announced the approval of the loan transaction bailout to the press in the same day, AIG drew $24 Billion of the loan bailout on 17 September 2008, an additional $37.8 Billion liquidity bailout has been issued in October, by 24 October AIG drawings from the facility reached $122.8 Billion.
AIGs sales of assets:-
Since September 2008 AIG has marketed its assets in order for it to successfully pay off its government debt, a global decline in the insurance business and its devaluation has challenged their efforts, the U.S government in its continuous bailout plans for AIG have included the taking of these assets in exchange for their continuous direct financial support, AIG assets sales included $500 million to pacific century , AIG agreed to sell its American life insurance company (ALICO) to melt life co for $ 15.5 billion on March 2010.
3. Lehman Brothers :-
Brief information : Was a global financing company until declaring bankruptcy 2008, participated in businesses including : investment banking, equity and fixed-income sales, private equity and private banking, a primary dealer in the U.S treasury securities market, headquartered in New York with regional headquarters in London, Tokyo and other offices around the world.
Causes of the collapse of lehman brothers :
Subprime mortgage crisis : in 2007 Lehman brother closed down its subprime lender, eliminating 1,200 positions in 23 locations, Lehman brother took an after tax charge of $ 25 million and $ 27 million in reduction of goodwill due to the poor market conditions in the mortgage space.
In 2008 Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis, their loss was due to having held on to a large positions in subprime and other lower-rated mortgages when securitizing the underlying mortgages , in another event a huge losses occurred in the lower-rated mortgaged back securities throughout 2008, Lehman brother reported losses of $2.6 billion and was forced to sell of $6 billion of their assets, in the first half of 2008 Lehman brother lost 73% of its stock value as the credit market continued to tighten, in August 2008 Lehman brother intended to release 6% of its workforce, 1,600 people, just ahead of the third quarter reporting deadline in September.
Naked Short-selling allegations :
Former Lehman brother CEO Richard fuld said a host of factors including a confidence crisis and naked short-selling attacks contributed in the collapse and the demise of Lehman brother, naked short-selling is illegal in the united states as well as other jurisdictions.
A journalist named Matt Taibbi contended in his article that naked short selling contributed in the demise of Lehman brother, later a study by finance researchers at the university of Oklahoma including Lehman brother have found that there is no evidence that stock prices declines was due to naked short-selling.
Bankruptcy of Lehman brother :
On September 2008 the president of the federal reserve bank of New York called a meeting on the future of Lehman, which included the possibility of liquidation of its assets, Lehman reported that there were talk with the Bank of America and Barclays bank regarding the sale of Lehman, both of them ultimately declined the purchase of the entire company.
On September 15th 2008 Lehman brother announced that it would file for Chapter 11 of Bankruptcy protection with bank debt of $613 billion and bond debt of $155 billion and net asset worth of $639 billion and it further announced that it subsidiaries will continue to operate as normal, the morning witnessed scenes of employees removing their files from the world headquarters and it continued throughout the day and the next day.
Liquidation of Lehman brother :
Barclays acquisition :
On September 2008 Barclays plc announced that it would acquire a portion of Lehman of $1.75 billion including most of Lehmans north America operation and the responsibility of 9,000 employees, this transaction was approved by the United States judge of bankruptcy a few days later.
On the same month a revised version of the deal including $1.35 billion a plan to acquire the core business of Lehman brother was approved by the Manhattan judge of bankruptcy .
Nomuras acquisition :
Nomura holdings, one of Japans top brokerage firms, agreed to acquire the Asian division of Lehman brothers for $225 million .
4. Washington Mutual inc. :
Brief information : Washington Mutual inc. was a saving bank holding association and the former owner of Washington mutual bank the largest saving and loan association in the United states until it became the largest bank failure in the history of America , abbreviated as WaMu, was founded in 1889 and defunct in 2008, headquartered in Seattle Washington, United states, major products includes consumer banking and financial services, with 49,400 employees .
Business operations prior to the banks receivership :
Despite the name, the bank ceased being a mutual company when it was demutualized in 1983 and became a public company.
As of June 2008 WaMu had total assets of $307 billion and total retail branches of 2,239 operating in 15 states and 4,933 ATMs, it held liabilities in the form of deposits of $188.3 billion and owned $82.9 billion to the federal home loan bank, and had subordinated debt of $7.8 billion, it held as assets $118.9 billion of single family loans of which $52.9 were adjustable rate mortgages, with $16 billion in subprime mortgage loans and $53.4 billion in home equity line of credit and credit card receivables of $10.6 billion, it was servicing other banks loans of
$689.7 billion.
Subprime losses:
In December 2007 WaMu reorganized it Home-loan division where it closed down 160 out of 336 home loan offices and removing 2,600 positions in its home loan staff ( a 22% reduction).
In April 2008 the company announced responding to the sustained losses as a result of 2007-2008 that 3,000 people would lose their jobs, and the company disclosed its intent to close down its 186 stand alone offices of home loans, it stopped buying loans from outside mortgage-brokerage firms known in the trade as whole sale lending, WaMu also announced a new infusion of capital from investors led TPG capital, other investors agreed to buy an additions $5 billion in newly issued stocks.
Seizures by OTS and FDIC :
In September 2008 WaMu share price has closed as low as $2.00 it had been worth over $30 in September 2007 and traded as high as $45 in the previous year, at the same time the banks suffered a massive run ( mostly via the internet banking or wire transfer) the customers pulled out $16.7 billion in 10 days span.
This led the federal reserve to pressure the bank to find a buyer and they secretly held an auction and finally regulators informed JPMorgan chase that it was the winner.
On Thursday night the office of thrift supervision seized Washington mutual bank into receivership of the FDIC, as receivers FDIC sold most of Mutual banks assets including its branches networks and all of its deposit liabilities and its secured debts to JPMorgan chase for $1.9 billion .
Bankruptcy :
On September 2008, Washington Mutual inc and its remaining subsidiaries filed for chapter 11 bankruptcy protection, they were delisted from trading on the New York stock exchange, the bankruptcy was the second largest (by asset size) in the U.S history .