Lehman brothers, credit crunch and the recession

Lehman brothers, credit crunch and the recession Introduction This report will focus on the credit crunch and recession and how they have affected the business environment that firms that operate within it and how their resources were affected. A case study on Lehman Brothers Inc is also included and will analyse the strategies of the firm and how it coped. It is important to understand that the credit crunch and recession are to separate situations but can occur at the same time. A credit crunch happens when banks and other credit companies are less willing to lend money and charge high interest rates to compensate the increased risk of lending; where as the term for a recession is used when an economy experiences two consecutive quarters of negative growth. For example the total number of goods and services produced by a country (Gross Domestic Product) would have to decline on a quarter by quarter basis for six months to be deemed a recession. The Credit Crunch The term ‘credit crunch was once a term only understood and used by economists but over the past two years it has been widely used in the media and in day to day life to describe the money troubles people are experiencing. The credit crunch can be simplified as banks and other credit lending firms being more aware of the risk customers and each other pose when lending therefore placing higher interest rates on loans to cover risk or simply declining to offer loans to higher risk customers. This cautious behaviour leads to dearer credit cards and mortgages becoming very expensive, pensions and Isa rates will decline. Investors will also be less willing to part with their money as stock markets fluctuate rapidly and in some cases bankruptcy and repossession will occur. Current Credit Crunch The credit crunch we are currently experiencing started in 2007 but was caused by companies strategies that worked in the economic boom but as the boom ended and the economic climate changed companies failed to react. Before 2007 the world economies were experiencing a boom and with money flowing freely financial companies became reckless, lending money with cheap interest rates to high risk customers who invested into property. The US Recklessness In the US companies were even more reckless giving billions of dollars worth of mortgages to customers who were high risk; for example no job, income or assets to secure against. The companies justified these risky mortgages by insisting if the customers ran into trouble rising house prices would allow them to remortgage their properties. At the time this strategy worked as the central bank interest rates were low but as they rose companies still carried on with the same strategy not suited to accommodate the rise and as house prices began to fall borrowers started to default on payments sending everyone into panic. These factors alone were not the sole reason for the global credit crunch; it was the way in which the debt was sold on to investors that spread the problem global. US banks were packaging sub-prime loans (people with weak credit ratings) into mortgage backed securities (collateralised debt obligations) these were sold on to hedge funds and investment banks who decided they were a great way to generate high returns, resulting in higher bonuses and profit margins. When interest rates rose and house prices fell customers started to default on their loans, the value of these investments plummeted resulting in huge losses for banks globally. How it affected the UK UK banks and financial companies were watching how easy the US companies were making money so invested heavily to gain a piece of the high returns the US companies were reporting, the investment of choice was the sub-prime backed investments and as the US housing market crumpled and interest rates rose the returns decreased and resulted in companies writing off billions of pounds worth of debt. As the risk of these investments increased finding new investors became impossible and many UK banks were using a securitisation strategy by using the investment market to fund their mortgage business and as the investments could not be sold the banks were left with the debt, causing them to decrease lending to safe guard their finances or in some cases fall into administration or become nationalised as Northern Rock did. The result of the credit crunch meant borrowing rates increased rapidly meaning the good value mortgages people were enjoying were no longer available, financial businesses became paranoid as to whom to lend money, increasing interest rates and asking for higher deposits to secure against default on payments. Businesses in trouble The stock markets were in turmoil and dropped sharply as confidence plunged and as powerful financial companies fell to the credit crunch paranoia set in and companies tried to secure themselves against facing the same fate. This resulted in businesses being unable to run their day to day operations. In most product based companies there is a time gap between production and sales, and some credit is needed to pay for production before receiving cash from sales. Many companies relied on credit for these cash flow issues and in the economic boom overdraft facilities etc were easily accessed, but as the credit crunch set in financial companies cut down on lending leaving many companies with higher costs than income leading to cuts in production and workforce to balance their finances. As the credit crunch caused banks to be nationalised and financial firms to go bust, the rate in which banks lend to each other (libor rate) rose to its highest since 1998 way above the Bank of Englands base rate this indicated that they were concerned as to who may go bust or simply didnt have any money to lend. This tense environment increased peoples worries and loss of confidence in each other indicated how hard the credit crunch had it the financial sectors once vast resources hard. Recession The term recession is used when an economy experiences two consecutive quarters of negative growth. For example the total number of goods and services produced by a country (Gross Domestic Product) would have to decline on a quarter by quarter basis for six months to be deemed a recession. The latest recession has been blamed on the fall of the financial markets but many causes have attributed to the severe downturn of the global markets. As the credit crunch hit the world economies slowed down, and the price of raw materials increased. Within a year the price of oil soared 40%, other materials such as steel and wheat etc saw similar rises. This resulted in higher production costs for companies that use these materials and transportation, energy and the service sector also saw costs increase due to the increased cost of gas and oil. When a business develops increased costs they tend to try and overcome them by raising the cost of their product or service so their consumers incur the cost which is called cost push inflation, this is where income becomes squeezed thus reducing disposable income. They can also cover these costs by cutting down on other costs such as workforce, some companies margins could not stretch to meet the higher material costs and subsequently went out of business. For example Silverjet, all these factors affect the economic downturn and contribute to the recession. The collapse of the housing market also contributed to the decline in the world economies. In boom years confidence was high and borrowing and saving was encouraged, this meant consumer spending was at a high and became a major factor behind economic growth. Consumers were able to remortgage their home easily as their homes grew in value, which enabled more spending and construction was easily affordable and profitable as people had money to buy or build new homes. As the boom came to an abrupt end the factors are reversed, borrowing is now harder and less attractive as higher interest rates are attached thus meaning less money to spend meaning less demand, leading to economic growth to contract. With borrowing limited and spending low, house prices continue to decrease reducing the effectiveness of the policies being used to combat the economic downturn such as the monetary and expansionary fiscal policy. The loss of confidence in the financial sector as the credit crunch hit has created a sense of paranoia amongst people who have lost their confidence in the wider economy. This has stopped people investing even if they have money to do so they are keen to keep hold of it as security as they are unsure what to expect. Spending has also decreased for the same reasons consumers are cutting back on shopping etc, this causes companies to enter into price wars or to cut down on production, costs are cut to enable the company to offer the lowest price or to simply survive. Cost cutting measures usually mean job losses, this increases unemployment which limits the amount people can spend therefore meaning companies need to make me cuts; it turns into a vicious cycle that government stimulus packages try to combat. Lehman Brothers Inc. Lehman Brothers Inc operated at a wholesale level, dealing with governments, companies and other financial institutions. Its core business included buying and selling shares and fixed income assets, trading and research, investment banking, investment management and private equity. In September 2008, Lehman Brothers filed for chapter 11 bankruptcy protection. The company became insolvent with finances totalling $639 billion in assets and debt worth $619 billion; it became the largest bankruptcy in history. The company employed 25,000 employees worldwide including 5,000 and was the fourth largest US financial bank at the time of the bankruptcy. It also became the biggest victim of the subprime mortgage disaster that had put the global financial sector into meltdown. History In 1844 23 year old Henry Lehman the son of a cattle merchant immigrated to the United States from Rimpar, Bavaria. He set up home in Montgomery, Alabama where he opened a dry-goods shop. In 1847, following the arrival of his brother Emanuel Lehman, the firm became H. Lehman and Bro. With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and Lehman Brothers was founded. The brothers expanded their dry goods store into a cotton business after noticing the potential the highly valued cotton had, even accepting cotton as a payment for products within their shop. Cotton trading became a key part of their business and they eventually relocated to New York, there Lehman became a member of the Coffee Exchange and then on to the New York Stock Exchange in 1887. In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company. The company then went from strength to strength underwriting many companies and becoming a powerhouse in the financial industry, prospering through world wars, civil wars and the great depression but the US house market crash proved to be its undoing as greed and the need for higher profits led them to take the decision to invest heavily into the subprime mortgage market which led to its demise. Subprime Mortgages Subprime Mortgages are loans offered to customers who would not usually be accepted for credit due to a poor credit score. The loans often have higher interest rates due to the higher risk a company takes by lending to a subprime borrower. There are many types of subprime mortgage plans on offer, the most common is the adjustable rate mortgage (ARM) which at first charges a fixed interest rate and then switches to a floating rate plus a margin. ARMs can be misleading to subprime borrowers who jump at the chance to take out a mortgage they were previously denied. By charging lower rates at first the mortgages reined in borrowers but as their rates were reset to variable rate which were considerably higher than the rates the borrowers were previously paying and many could not offered the new payment requirements resulting in loan defaults. During the boom Lehman were trading tremendously well and decided to invest in mortgage lending by acquiring five mortgage lenders, which included subprime mortgage lenders BNC Mortgage and Aurora Loan services which specialised in Alt-A Loans. Alt-A Loans are categorised between prime and subprime loans, Alt-A borrowers have clean credit histories but have limited documentation therefore occurring a higher risk, these borrowers proved very attractive to lenders as they could charge them higher interest rates than normal prime loans but were less risky than subprime borrowers. Lehman Brothers Success Lehman Brothers acquisitions proved a success at first; record revenues from Lehmans real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitised $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion. Lehman Brothers were still continuing to grow and in February 2007 stock reached a record $86.18, meaning Lehman had a market capitalisation of close to $60 billion. This masked the real problem as by the first quarter of 2007 defaults on subprime mortgages rose to a seven-year high. Investors started to have concerns that rising defaults would affect Lehmans profitability, but the firm reported record revenues and profit for its fiscal first quarter. These concerns led to Lehmans chief financial officer (CFO) insisting that the risks posed by rising home delinquencies were well contained and would have little impact on the firms earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S. economy. This statement showed the company had become reckless and the prospect of higher profits and keeping investors happy became their main concern and as long as profits were good the strategy stayed the same Credit Crunch hits Five months after Lehmans Brothers chief financial officers assurances that the company would be unaffected and safe from the housing problems the companys risks seemed to be catching up with it. Lehmans stocks fell sharply as two of Bear Stearns hedge funds failed, it caused them to shut down the BNC unit and cut 2500 jobs and also shut down some of its Aurora offices but as this may have been a sign of them cutting down their mortgage portfolio they continued to pursue the mortgage market becoming the major player gaining a portfolio of mortgage backed securities four times that of shareholder equity. The risk seemed to have paid off as their stocks increased and calm returned to the market, this was the opportunity to trim down their massive portfolio and release funds to secure against any losses the mortgage market may encounter by investing in other areas, however they seemed to choose to keep hold of the bulging portfolio. Lehman Brothers leverage was a high 31 in 2007 which in tandem with its massive mortgage portfolio made it increasingly vulnerable to any change in the market. In March 2008 Bear Stearns struggles continued and confidence in Lehman was fading resulting in a drop in shares of over 40% and although they managed to increase confidence by raising $4billion dollars people were becoming increasingly worried about the size of the companys high risk portfolio. In June Lehman recorded a second quarter loss of $3billion but managed to keep confidence high by raising $6billion through investors and noticing the ticking time bomb they were sitting on boosted its liquidity pool to an estimated $45 billion, decreased gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about 25. However, these measures were perceived as being too little, too late. On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank. Most of those gains were quickly eroded as news came in that Korea Development Bank was facing difficulties pleasing regulators and attracting partners for the deal. On September 9 Lehmans shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold. This caused the companys hedge fund clients to pull out, while its short-term creditors cut credit lines. On September 10, Lehman announced shocking fiscal third-quarter results early that highlighted the feebleness of its financial position. The firm reported a loss of $3.9 billion, including a write-down of $5.6 billion as well as these shocking results Moodys Investor Service dealt the company another blow as it announced that it was reviewing Lehmans credit ratings, and also said that Lehman would have to sell a majority stake to a strategic partner in order to avoid a rating downgrade. These developments led to a 42% plunge in the stock on September 11. With $1 billion left in liquidised assets, Lehman was quickly running out of time. Last-ditch efforts over the weekend of September 13 between Lehman, Barclays PLC and Bank of America, aimed at working out a takeover of Lehman, were unsuccessful. On Monday September 15, Lehman declared bankruptcy, resulting in the stock plunging 93% from its previous close on September 12

Rock and Roll: How it Relate to Jazz, Current Hip-hop, Rap, Latin Music, Blues, etc

The origin of rock and roll comes from many roots that date back in the nineteenth century. African-American slaves brought by the early American Celtics during the 17th and 18th century in America brought along with them their native African music which was later influenced by the music of their masters. With the passing of decades, gospel music, blues and country music began to evolve from the mixture of African and American music and later were adapted to become the musical genre of the African-Americans.Before the onset of the Second World War, gospel music transformed into rhythm and blues and eventually into Jazz. The war broke up the popularity of Jazz and so in 1942 and 1943, Jazz bands migrated from south to the north to stage their performance and resurrect the popularity of jazz. Unfortunately, Jazz has never regained its reputation because of the lack of support by recording companies. The groups of African-American Jazz Bands staged a massive strike against these recordi ng companies and ask for support for the already dwindling music industry of Jazz. But conditions were not met.In the long run the recording companies without any other alternative music in place of jazz tried to experiment with solo performers, vocal backings and small groups of singers. Since gospel songs were still sung by black’s religious group, the word â€Å"rock† has been in constant use with most of the songs they created. Examples of these songs are the Rock My Soul, Rock Me Lord, Rock Daniel and so on. Although the word rock has occasionally been misconstrued during the 1920s describing it as a connotation for sex in slang word, it was in 1947 when Roy Brown changed that meaning.Brown did a blues called Good Rockin’ Tonight and then it was followed by Wynonie Harries’ song that was derived from Brown’s blues. The word rock became fad among the rhythm and blues (r&b) songs and recordings. From there on, musicians have begun to experiment on vocals and guitar away from jazz By the late 1940s, groups like the Orioles were already performing rock music with the style of African-American dance music of boogie-woogie. Louis Jordan who was known then to be the most popular r&b performer had embarked on playing rock music and made 18 records that remained bestseller for years.His dance music of lively dance called â€Å"jump blues† or â€Å"jumpin’ jive† had inspired the spirit of early rock’n’roll. Jimmy Preston, Bill Haley and Chuck Berry were only few of the early rock and rollers who were also inspired by the music of Jordan. But prior to the introduction of rock and roll into the music industry, this musical genre have already been created by other bands unknown in the industry. The Muddy Waters in 1943 made their own style of combining amplified vocals, guitar, drums, harmonica and piano to create music much the same as rock and roll.The music was only to become a hit when Jordan ma de his music backed-up by recording companies. Although it seems now that rock and roll was also introduced by the revolutionary evolution of African-American music, its arrival also influenced county and Western music. The Western music absorbed the tempo of rock and roll particularly the boogie-woogie dance and style of songs. It was understood that the first rock’n’roll recording was Rocket 88 by Ike Turner and His Rhythm Kings in Memphis under Sam Phillips studio. Phillips is soon to discover Elvis Presley, B.B. King, Jerry Lewis, Roy Orbison and Johnny Cash in the world of rock and roll. There are also other claims on the origin of rock and roll. Chuck Berry who was once a blues singer claimed that he was writing a country song when he â€Å"accidentally invented rock’n’roll† by playing lively tunes while Little Richard who had his first rock and roll record for Tutti Frutti said he was the architect and the â€Å"real king† of rock and roll (Thorogood, 2004). Observing the evolution of rock and roll to the rock music of today in its 50 years of development was unexpected.The late 1940s have popularized the doo-woop and boogie woogie as the progression of rock and roll in its early stage. During the 1950s, however, music of different genre with mixture of early rock and roll, country, blues and jazz has made the world of music livelier. This became the era for Presley, Haley, Holly and Little Richard. In the 1960s, America has begun to merge their music with the British. The Beatles has arrived and invaded not only America but also the world with their most popular rock band.Later, they overtook what Elvis and the other great rock and roll performers have ruled in the past decade. The Beatles have triggered a new age of rock and more astonishing genre of rock was about to come in the following decades. This will explain the relation of the early rock and roll to the music we have today. After years of Beatlemania we have created more colorful, livelier and intriguing bands in the world of rock. Pink Floyd, The Who, The Rolling Stones, Grateful Dead and Jimi Hendrix were only few of those who also conquered the world with their own style of rock.Folk rock was one of the metamorphoses of rock and roll that has the traditional acoustic rock and blues undertone. Bob Dylan and Janis Joplin were few of the most popular musicians who are best in this genre. Heavy metal rock also emanates from the early rock and roll and it is emphasized with the use of a thick, heavy and highly amplified electric musical instruments to produce not only rhythm but with the accent of the real â€Å"rocking of instruments†. The Black Sabbath popularized heavy metal in our modern society. The 70s became a war of the heavy metal bands.Led Zeppelin who was already known in the 60s became more popular as the dawning of heavy metal music continued. They created a perfect blend of hard rock and blues to create their original music. Other rock bands are mellower, however, with the emergence of bands like David Bowie, the Eagles, Queen and Yes. These bands does not follow the genre of hard rock but leveled more on soft rock, pop, soul and country music with the influence of rock. Before the closing of the 70s, a new wave of music that cast the shadow of rock and roll came into the scene.The â€Å"punk rock† was a combination of anarchism and teenage rage with the musical bases of rock and roll. Originally introduced by The Ramones, other bands followed their style with the arrival of The Sex Pistols and The Clash. The coming of punk music influenced the new generation of music in the following years. As the 1980s became most popular with the reintroduction of different bands of different style, heavy metal bands dominate the music industry during this decade. Heavy metal rock bands are most notorious with their tight leather pants, electrifying guitar solos and colorful hair.Guns and Roses , Van Halen, AC/DC, Aerosmith, Motley Cue and Bon Jovi are good examples of these bands. These bands occupy the music airwave with their powerful ballads and guitar solos. Then during the mid 80s, another wave of music genre was suddenly introduced by the generation of young but jolly musicians. From punk into funk, the disco music has arrived. In the last years of the decade, alternative rock or better known as Indie music emerged. This is where the bands of U2, The Cure and Sonic Youth became most popular.As the 1990s came, new bands of rock alternative musicians came packing a different form of music. It was known as â€Å"grunge music† and the most popular band in this genre was the Nirvana. Grunge music is emphasized by the playing of dirty guitar and strong guitar riffs that is distorted to produce feedback with other instruments. It originates from Seattle, Washington and expresses dark lyrics and torments which the generation adored. Peal Jam, Alice in Chains and Jane ’s Addiction specialize in this type of music.The coming of year 2000 up to the present became a mixture of genre of music that was broadest in its form. The passing of generations, however, have seen the transformation of music to the very simple gospel music to the lively rock and roll and to more daring musical adaptations of different musical genre. At present, Emo music is most popular among the young generations of today. It is an alternative rock sub genre that contains intense emotional lyrics mixed with the root of hardcore punk.Bands like Taking Back Sunday, Senses Fail, From First to Last, Brand New and mellower bands like the Dashboard Confessional, and Bright Eyes are only few of the Indie bands that scattered their influence in our music industry (MeGsTeRl3, 2007). Technology has played a major role in the development of rock when Adolph Rickenbacker invented the electric guitar in 1931. Transistor technology was also improved as well as the microphones to captu re the distinction of voice.Guitars became louder and vocals with the shuffle beat of blues drumming revolutionize the making of drum kit assembly best fit for the tones. Country, folk and all-American music originates from diversified forms of music but they all fall under the influence of rock music. The decades of influence by different artists have saturated the consciousness of the public that focused on rock music. Developing it into an artform exploded into many genre of artist, style, media and tools that have alternately altered, distorted or even improved the level music preferred by the public.What is more amazing is that from time to time there were bands that would shock us, amaze us or even bring us to high level of consciousness with their presentation of music. However, with all the music, song, tunes and composition we had and still have every bit of it have roots of rock and roll into it. Rock ‘n’ roll inspired us to become daring and experimental with our music and so we learn to realize our freedom to make music according to the preference of the existing generation (Productions, 2004).

Starbucks Going Global Fast - 3760 Words

The Starbucks coffee shop on Sixth Avenue and Pine Street in downtown Seattle sits serene and orderly, as unremarkable as any other in the chain bought 15 years ago by entrepreneur Howard Schultz. A little less than three years ago, however, the quiet store-front made front pages around the world. During the World Trade Organization talks in November, 1999, protesters flooded Seattle’s streets, and among their targets was Starbucks, a symbol, to them, of free-market capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters and riot police were black-masked anarchists who trashed the store, leaving its windows smashed and its tasteful green-and-white decor smelling of tear gas instead of†¦show more content†¦Amazingly, with 4247 stores scattered across the United States and Canada, there are still eight states in the United States with no Starbucks stores. Frappuccino-free cities include Butte, Mont., and Fargo, ND. But big cities, affluent suburbs and shopping malls are full to the brim. In coffee-crazed Seattle, there is a Starbucks outlet for every 9400 people, and the company considers that the upper limit of coffee-shop saturation. In Manhattan’s 24 square miles, Starbucks has 124 cafes, with four more on the way this year. That’s one for every 12000 people – meaning that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of 10 per cent or more if the company is going to match its historic overall sales growth. That, as they might say at Starbucks, is a tall order to fill. Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication: ‘A New Starbucks Opens in Restroom of Existing Starbucks.’ And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets. ‘We probably self-cannibalise our stores at a rate of 30 per cent a year,’ Schultz says. Adds Lehman Brothers, Inc. analyst Mitchell Speiser: ‘Starbucks is at a defining point in its growth. It’s reaching a levelShow MoreRelatedStarbucks-Going Global Fast1353 Words   |  6 PagesCASE: Starbucks- Going Global Fast Summery Starbucks is one of the largest chains of coffee shops in the world. They started their business in the early 80s as a tiny chain of Seattle coffee shops, grew rapidly in the 90s and now own 5,689 coffee shops in 28 countries. 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Isaac Newton Principia Mathematica en 1686 - 1352 Words

La Ilustracià ³n fue un movimiento cultural, polà ­tico y filosà ³fico que se produjo entre 1680 y 1780 en la mayorà ­a de Europa, el cual se caracterizaba por la importancia dada a la razà ³n. Los pensadores de este movimiento afirmaban que sà ³lo a travà ©s de la razà ³n serà ­a posible entender perfectamente los fenà ³menos naturales y sociales. La Ilustracià ³n se inicià ³ en Inglaterra en la dà ©cada de 1680, con la obra de Isaac Newton, quien publicà ³ Principia Mathematica en 1686, y con John Locke, quien publicà ³ Ensayo sobre el Entendimiento Humano en 1689. Estas publicaciones pusieron las bases matemà ¡ticas, cientà ­ficas y filosà ³ficas para los grandes avances de este movimiento: las teorà ­as de cà ¡lculo de Newton permitieron medir con precisià ³n el conocimiento, mientras que Locke sostenà ­a que la naturaleza humana era mutable y que el conocimiento era adquirido a travà ©s de la experiencia acumulada. La Ilustracià ³n alcanzà ³ su mayor des arrollo entre 1730 y 1780 en Francia, donde vivà ­an los grandes pensadores de la Ilustracià ³n, como Voltaire, Rousseau, Montesquieu y Diderot. Los dià ¡logos y las publicaciones de estos filà ³sofos franceses propusieron que todo en el universo podà ­a ser racionalmente desmitificado y catalogado. Voltaire publicà ³ en 1733 Cartas Inglesas, en la que se exalta la libertad de pensamiento y religià ³n y a las instituciones de Inglaterra, criticando indirectamente al sistema de gobierno de Francia. Montesquieu publica El Espà ­ritu de las Leyes en 1748, en el que presentà ³ su