Lehman Brothers Declares Bankruptcy: What it Might Mean

by Deb Cupples |   Lehman Brothers is reportedly our nation's fourth largest investment bank and has been around since before the Civil War.  Yesterday, Leahman filed for Chapter 11 bankruptcy.  Some media call this a "collapse," as though Lehman will simply cease to exist. 

That might happen.  Then again, it might not.  Chapter 11 bankruptcy is not necessarily the burying of a coffin.  It's an opportunity to restructure a company -- and to shed a bunch of debt before re-emerging from bankruptcy. 

Yes, "shedding debt" means that a company doesn't have to pay all that it owes -- an indication that some creditors were born under a most-unlucky star.

Remember WorldCom: the telecom giant whose executives caused bigger shareholder losses than Enron?  Yes, the same WorldCom whose ex-CEO (Bernie Ebbers) ended up relocating to a federal prison in 2006 to serve a 25-year sentence.

WorldCom declared bankruptcy in 2002.  In 2004, the company re-emerged from bankruptcy after shedding $36 billion in debt (CNN).  That's about half of Florida's annual budget.

Apparently worried about public relations, WorldCom changed its name after bankruptcy. Now, it's known as MCI.

In 2005, Delta Airlines filed for Chapter 11 bankruptcy -- after managers wastefully spent money (some on themselves) and unwisely pushed the airline into massive debt.  In 2007, Delta re-emerged from Chapter 11 after shedding about $9 billion in debt (and 6,000 workers).

Delta did not change its name, likely because its executives weren't convicted of fraud-related crimes. 

My point: it is possible for a company to file for Chapter 11 bankruptcy, to reorganize, to shed tons of debt, and to re-emerge.  That's the point of Chapter 11 (see Chapter 11 basics).

One down side: most ordinary investors are at the bottom of the food chain when creditors duke it out during a Chapter 11 re-organization.  Generally, those investors simply lose their investments.

Executives tend to lose their jobs during after bankruptcy, too.  Don't feel too sympathetic: execs who'd been around long enough and had helped drive a company into Chapter 11 tend to be smart enough to funnel company money into their personal bank accounts far enough in advance of the bankruptcy filings that they get to keep it.

The families of such execs tend to survive in high style even if the execs remain unemployed.

The   New York Times reported that the Dow Jones Industrial Average was down more than 500 points, presumably in response partly to the Lehman bankruptcy.  This is the biggest drop since the one just after September 11, 2001.

House Minority Leader John Boehner (R-OH) is bizarrely trying to blame congressional Democrats  for our nation's current economic woes.  He said:

"'Going forward, we need to restore confidence in the financial markets and get our economy moving again — not by growing the size of the federal government, but by stopping the Democrats’ job-killing tax hike, cutting wasteful Washington spending, reforming oversight of the markets, and unshackling American energy resources to help lower gas prices and create new good-paying American jobs.'" (Politico)

Yes, that really is Rep. Boehner talking about the need to reform market oversight: the same Rep. Boehner who joined President Bush's staunch opposition to sensible regulation of our markets, the same Rep. Boehner who supported President Bush's tax cuts for companies that ship jobs overseas.

Yes, the credibility of Rep. Boehner -- and of all Republicans who goose-stepped behind President Bush over the last seven years -- is shot.

Memeorandum has commentary.

Comments

[Charles]

Meanwhile, Rep. Oxley is blaming Bush. From the FT:

"[T]he Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.

He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”"

[Deb Cupples (Buck Naked Politics)]

Interesting, Charles. How are you?

[rente tarieven hypotheken]

Lehman Brothers Declares Bankruptcy means nothing more than expected meltdown in view of present financial crisis.I think Lehman Brothers is no exception, however I still agree upon the quote that "we need to restore confidence in the financial markets and get our economy moving again".

[Student]

Can Lehman reorganize under Chap. 11? Doesn't this essentially mean a winding down for financial firms due to the limited availability of the Automatic Stay?