Lehman (uk) was 'solvent after all

CLAPTON

It appears that the UK arm of Lehman simply suffered a cashflow problem due it the collapse of its US owners, but the underlying balance sheet was perfectly OK.

Report by PWC says that the unsecured creditors will receive all their money back.

Maybe bailing out banks isn't such a bad idea and a lot of pain may have been spared and lots of tax for UK government.

http://www.theguardian.com/business/2014/mar/05/lehman-brothers-administrators-surplus-creditors-paid


http://www.telegraph.co.uk/finance/financetopics/lehman-brothers/10676522/Lehman-creditors-to-recoup-their-money.html

purch

CLAPTON wrote: »

It appears that the UK arm of Lehman simply suffered a cashflow problem due it the collapse of its US owners, but the underlying balance sheet was perfectly OK.

Report by PWC says that the unsecured creditors will receive all their money back.

Maybe bailing out banks isn't such a bad idea and a lot of pain may have been spared and lots of tax for UK government.

When you have cashflow problems, in reality you run out of money you are insolvent.

Just because nearly 6 years later, after settling everything on the balance sheet you end up with a surplus, does not make you solvent in 2008.

The problems in 2007/2008 were of solvency, or the lack of it, that affected the whole Banking sector.

I'm sorry, but your headline that Lehman Brothers Europe was solvent in 2008 is entirely incorrect, and being solvent "after all" is not sufficient to save you, and never will be.

And also the fact that the administrators will end up with a surplus, does not prove that the underlying balance sheet was perfectly OK.

Your balance sheet includes both current and long term assets and liabilities. Your balance sheet is not OK if your current liabilities exceed your current liquid assets.

If that happens you are insolvent/bankrupt.

wotsthat

CLAPTON wrote: »

Maybe bailing out banks isn't such a bad idea and a lot of pain may have been spared and lots of tax for UK government.

The article suggests that there are lessons to be learnt for regulators. I hope they aren't learning that all banks must be bailed out under all circumstances.

CLAPTON

purch wrote: »

When you have cashflow problems, in reality you run out of money you are insolvent.

Just because nearly 6 years later, after settling everything on the balance sheet you end up with a surplus, does not make you solvent in 2008.

The problems in 2007/2008 were of solvency, or the lack of it, that affected the whole Banking sector.

I'm sorry, but your headline that Lehman Brothers Europe was solvent in 2008 is entirely incorrect, and being solvent "after all" is not sufficient to save you, and never will be.

And also the fact that the administrators will end up with a surplus, does not prove that the underlying balance sheet was perfectly OK.

Your balance sheet includes both current and long term assets and liabilities. Your balance sheet is not OK if your current liabilities exceed your current liquid assets.

If that happens you are insolvent/bankrupt.

I do agree that having no cash is a solvency issue and so they couldn't pay their bills. Maybe in another time they would have been able to borrow on the strength of their balance sheet if it was indeed merely a liquidity problem.

It is almost certainly true that each and every UK bank was in a similar situation but were supported by the BoE.

UK government choose to bail out our banks that were both cash flow insolvent and balance sheet insolvent (i.e. had lots of junk debts that have/will never be repaid).

Whilst I'm not seriously suggesting that government ought to have bailed them out, it does appear that it might have been a better investment that RBS.

CLAPTON

wotsthat wrote: »

The article suggests that there are lessons to be learnt for regulators. I hope they aren't learning that all banks must be bailed out under all circumstances.

Indeed so, I'm unconvinced that regulators have learnt anything since the crash.

Generali

CLAPTON wrote: »

I do agree that having no cash is a solvency issue and so they couldn't pay their bills. Maybe in another time they would have been able to borrow on the strength of their balance sheet if it was indeed merely a liquidity problem.

It is almost certainly true that each and every UK bank was in a similar situation but were supported by the BoE.

UK government choose to bail out our banks that were both cash flow insolvent and balance sheet insolvent (i.e. had lots of junk debts that have/will never be repaid).

Whilst I'm not seriously suggesting that government ought to have bailed them out, it does appear that it might have been a better investment that RBS.

It was more than having no cash, a simple repo (loan against the security of a bond) with the BoE as lender of last resort takes care of that. The problem is that if your liabilities exceed your assets, the lender of last resort can't help you as you don't have enough assets to borrow against.

NB A lender of last resort isn't the same thing as getting a bailout from the Government. It's a supply of liquidity to the market to fix short-term liquidity problems.

purch

CLAPTON wrote: »

Whilst I'm not seriously suggesting that government ought to have bailed them out, it does appear that it might have been a better investment that RBS.

I think that in the case of RBS, we might need a little longer than 6 years for the final "value" of the investment to be seen.

CLAPTON

Generali wrote: »

It was more than having no cash, a simple repo (loan against the security of a bond) with the BoE as lender of last resort takes care of that. The problem is that if your liabilities exceed your assets, the lender of last resort can't help you as you don't have enough assets to borrow against.

NB A lender of last resort isn't the same thing as getting a bailout from the Government. It's a supply of liquidity to the market to fix short-term liquidity problems.

The article on Lehmans isn't very comprehensive but I gained the impression that their balance sheet was OK: in any event would the BoE act as lender of last resort to Lehmans?

dryhat

PWC?

What a bunch of crooks.

purch

CLAPTON wrote: »

The article on Lehmans isn't very comprehensive but I gained the impression that their balance sheet was OK: in any event would the BoE act as lender of last resort to Lehmans?

They could also have used the Special Liquidity Scheme that the Bank introduced in April 2008 to give out Treasury Bills in return for "high quality" securities.

Also it was Lehman Brothers Holdings who filed the Chapter 11, and it was they who owned the LBIE operation. Whilst the European operation may have produced a surplus in administration, the company as a whole probably won't.

Generali

CLAPTON wrote: »

The article on Lehmans isn't very comprehensive but I gained the impression that their balance sheet was OK: in any event would the BoE act as lender of last resort to Lehmans?

I suspect that many posters don't really understand what a lender of last resort (lolr) is and is not.

A lolr is not someone who provides a bailout or some sort of cushy or subsidised borrowing facilities.

A lolr is someone who lends money at a discount in return for an asset held as security when the money markets won't or can't lend to that borrower. It does so at commercial rates (kinda that bit is complicated) and in such a way that it is unlikely to make a loss ever.

If Lehmans was facing a cash flow crisis it could simply take assets to the lolr to swap for cash. As the world was in the middle of a liquidity crisis, nil risk assets (e.g. UK and US Government Bonds) were expensive and thus lots of money could be borrowed against them. If there was ever a time that a bank facing a cash flow crisis could remain liquid it was 2008.