Lehman bankruptcy hits world markets

News that Lehman Brothers (Lehman), one of the largest Wall Street Investment banks, will file for Chapter 11 bankruptcy protection roiled international stock markets.

Lehman’s had been negotiating a sale of the firm to Barclays and Bank of America, but negotiations collapsed when the buyers were unable to obtain guarantees over the value of Lehman’s troubled assets.

Lehman, which has underwritten more than US$600 billion in debt acquired to finance housing for low income groups, known as subprime mortgages, was unable to find fresh capital as the value of these assets declined.

The US credit crisis, which started with the cooling of the US housing market in 2005, claimed its first victim in February of 2007 when more than 25 firms which lent to low income borrowers and a history of default filed for Chapter 11.

This had a domino effect on the firms that had underwritten many of these loans with big names such as Bear Stearns & Co, & Merrill Lynch and CitiGroup in the US and Northern Rock in the UK and UBS AG of Switzerland reporting losses on sub-prime loans.

Bear Stearns was acquired by Morgan Stanley as the US Federal Reserve undertook to guarantee its loans, while Northern Rock was nationalised.

Global Central bankers in an effort to quell the crisis increased money supply in an effort to shore up global capital markets. This in turn fuelled a commodities boom as loose money sought safe havens in tangible assets.

Standard & Poor’s Asia 50 Index lost 1%, while closer to home, the Bombay Sensex 30 lost almost 3% of its value. Most major European market indices were down by more than 3% in early morning trade while futures on the Dow Jones Industrial Average were down more than 4%.

Following these trends, the CSE declined, with large cap companies continuing to lose value. The ASPI lost 17 points (-0.7%) to close at 2,338, while the MPI lost 28 points (-1.0%) to close at 2,657.

Market turnover was at Rs 125 million with John Keells Holding accounting for Rs 30 million in turnover while Lanka IOC accounted for Rs 9 million in turnover. JKH closed at Rs 85.25 while Lank IOC closed at Rs 26.50.