Finance



Finance

Finance Assignment

During the summer of 2008, the share price of Lehman experienced a lot of turbulence. Where it gained an impressive 40% on a single day, it would post a dismal performance on the corresponding day and shed its gained value considerably. Looking at the way things were progressing, Lehman determined to acquire some additional capital. The bank's CEO, Henry Paulson, and the Federal Reserve discussed in detail effective strategies that could be adopted in order to evade a looming crisis.

Among the options that Lehman was weighing were strategies like raising additional capital of nearly US$4 billion, signing contracts with Morgan Stanley, or signing an agreement with Bank of America. However, none of these strategies proved to be effective for Lehman and thing eventually came to culmination in 2008 (Johnson, 2009, p.52). The US government did not reveal any intentions of lending a helping hand, mainly because it wanted to avoid any dealings following the ignominious controversy that surrounded the Bear Stearns Aid program.

Tough economic conditions affected nearly all of the major banks operating in the global arena. Therefore, there were many other banks that suffered almost as much as or even more than Lehman. For example, Merrill Lynch was one of the banks that were on the verge of bankruptcy at one point. In order to reinforce the trust of investors in these banks, the media mainly remained silent over the situations and did not report how rapidly banks were losing their money. Fears were also rife in the market that Merrill may not survive the devastating shockwave that would be created in the wake of the collapse of Lehman.

In the September of 2008, the US Department of Treasury set up a series of negotiations between the US Federal Reserve and the Chief Executive Officers of major banks. The agenda of these meetings was to devise an effective strategy to rescue Lehman brothers from the looming crisis that threatened the survival of other banks (Johnson, 2009, p.52). However, the government maintained its stance and was adamant on refusing to offer any assistance. Instead, it showed a greater deal of interest in adopting a solution like that introduced in the 1990's when Long Term Capital Management was seen as one of the most effective solutions to rescue businesses facing a crisis (Ivashina & Scharfstein, 2010, p.338).

A number of big banks were showing keen interest in Lehman at the time. Among them, Bank of America and Barclays were the major players. However, since it was blocked by the UK Government, Barclays was not a preferred bank even if its interest was just in buying the bank. This is mainly because the UK government and Regulators were of the point of view that it would de-stabilize the UK banking sector. This paved the way for Bank of America which was the only bank that enjoyed less stringent and strict government regulations (Ivashina & Scharfstein, 2010, p.338). John Thain of Merrill Lynch stepped into the limelight and, just like that, Merrill Lynch was ...