One year after Lehman’s collapse, the tears still flow
Big and small, investors reeled from US giant’s 2008 crash
Mark Pittman and Bob Ivry 13 September 2009
Yu Lia-chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers before she got a call last September from her banker. “He said: ‘Did you hear the news? Something has happened to Lehman,’” Yu, 66, recalled. “I didn’t get it.”
Yu, who has a Primary Six education, said she thought her money was in a savings account. She did not know she had lent it to a bankrupt US securities firm.
Eventually, she found out that her HK$1.2 million nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.
“There is no way a person like me could understand any of this,” Yu said tearfully. “Sometimes I feel like jumping off a building.”
What hit Yu and her family was a tidal wave triggered halfway around the world by the biggest bankruptcy in US history.
The September 15 collapse last year of Lehman, with US$613 billion in liabilities, had unforeseen and far-flung consequences that devastated those, like Yu, who did not know their fates were tied to the New York-based investment bank.
The chief operating officer of a private-equity firm in London jumped in front of a commuter train, blaming himself for leaving the company’s money in a Lehman account. The Israeli managers of a hotel construction project on the island of West Caicos, northeast of Cuba, were taken hostage by Chinese workers when an anticipated Lehman loan did not materialise and wages were not paid. In Hong Kong, Yu and thousands of others who had invested in Lehman products camped out in the rain, thumping drums and chanting: “Give us our money back.”
The realisation that a US securities firm so woven into the financial system could not pay its debts radiated out from New York, panicking investors around the world.
What differentiated Lehman from previous financial crises was how fast the panic spread, said Professor Richard Sylla, an economic and financial historian at New York University’s Leonard N. Stern School of Business. “Communications made things happen faster,” Sylla said, describing how it took six months for the 1931 failure of Austria’s Creditanstalt bank to put stress on the British financial system.
The responses to the Lehman crisis succeeded in stemming the panic. But what they did not do was save Yu and thousands of other investors in Hong Kong, Singapore, Taiwan and elsewhere who had bought equity-linked notes or the so-called minibonds connected to Lehman.
Yu, a mother of six who immigrated from the mainland in 1962, did not have a chance, Nobel Prize winner Professor Joseph Stiglitz said.
“As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased,” the Columbia University economics professor said. “Complexity opened up new venues for information asymmetry, which banks exploited.”
Asia became Lehman’s highest growth region in 2007, taking in more than US$3.1 billion in revenue, or 16 per cent of the firm’s business. Revenue was up more than 41 per cent from 2005 in Asia, while it climbed 3 per cent in the US in that span.
Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi-chung, a salesman for ABN Amro. He offered her a better return on her savings if she switched banks, she said.
Two-thirds of Yu’s money, about HK$780,000, came from a settlement with her employer after a lift fell half a floor, injuring her pelvis, says Yu, who still drags her right leg when she walks.
A month after their meeting, Yu said Chow told her he had a new product that could return 20 per cent a year because it was linked to the stock performance of three large companies - China Communications Construction, China Merchants Bank and Ping An Insurance. Yu said she did not read the fine print, trusting Chow when he told her she could not lose her principal.
ABN Amro also recruited Yu to sell the same product to her family, giving her a cash bonus of HK$1,200 for each person who signed up, she said.
There are 873 issues of Lehman equity-linked structured notes outstanding with a combined face value of about US$8.7 billion, all now in default.
Banks also sold US$1.8 billion of Lehman minibonds to 43,000 investors in Hong Kong, where the notes were first marketed in 2003.
The notes were financial dumplings - derivatives contracts tied to the creditworthiness of major companies wrapped inside Lehman corporate bonds. Series 19 notes, for instance, were linked to securities dealers including Citigroup and Goldman Sachs. If any of those businesses or Lehman defaulted, the investor would not get paid.
Sun Kwan, a 58-year-old retired parks worker, was among those who bought Lehman minibonds. He said he thought he was putting his money into a certificate of deposit. Instead, as the prospectus explained, the notes were a bet against the default of the Chinese government and five companies, including Hutchison Whampoa, CNOOC and Lehman.
As an incentive, he was given HK$200 in supermarket coupons.
Sun also purchased HK$310,000 worth of Octave Series 10 notes, a similarly structured product created by Morgan Stanley, in which the investor would lose all of his money if Lehman or any of six other companies defaulted. He said he had never heard of Lehman and thought the notes were backed by the People’s Republic of China because most of the businesses were state-owned.
“It’s all gone,” Sun said. “I’ve been crying for months.”
The vulnerability of the global financial system revealed by Lehman’s bankruptcy - from ordinary investors like Sun and Yu to London hedge funds and German lenders - makes it all the harder to regulate.
But Lehman’s bankruptcy also poses a challenge to America’s financial leadership. What was broken now was the trust the rest of the world had in US banks, said Phillip Yin, managing director of Asia Investors Partners, a Hong Kong-based research firm. “All that has happened since - the job losses, the slump, everything - is tied to one thing and one event. And that’s Lehman.”
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One year after Lehman’s collapse, the tears still flow
Big and small, investors reeled from US giant’s 2008 crash
Mark Pittman and Bob Ivry
13 September 2009
Yu Lia-chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers before she got a call last September from her banker. “He said: ‘Did you hear the news? Something has happened to Lehman,’” Yu, 66, recalled. “I didn’t get it.”
Yu, who has a Primary Six education, said she thought her money was in a savings account. She did not know she had lent it to a bankrupt US securities firm.
Eventually, she found out that her HK$1.2 million nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.
“There is no way a person like me could understand any of this,” Yu said tearfully. “Sometimes I feel like jumping off a building.”
What hit Yu and her family was a tidal wave triggered halfway around the world by the biggest bankruptcy in US history.
The September 15 collapse last year of Lehman, with US$613 billion in liabilities, had unforeseen and far-flung consequences that devastated those, like Yu, who did not know their fates were tied to the New York-based investment bank.
The chief operating officer of a private-equity firm in London jumped in front of a commuter train, blaming himself for leaving the company’s money in a Lehman account. The Israeli managers of a hotel construction project on the island of West Caicos, northeast of Cuba, were taken hostage by Chinese workers when an anticipated Lehman loan did not materialise and wages were not paid. In Hong Kong, Yu and thousands of others who had invested in Lehman products camped out in the rain, thumping drums and chanting: “Give us our money back.”
The realisation that a US securities firm so woven into the financial system could not pay its debts radiated out from New York, panicking investors around the world.
What differentiated Lehman from previous financial crises was how fast the panic spread, said Professor Richard Sylla, an economic and financial historian at New York University’s Leonard N. Stern School of Business. “Communications made things happen faster,” Sylla said, describing how it took six months for the 1931 failure of Austria’s Creditanstalt bank to put stress on the British financial system.
The responses to the Lehman crisis succeeded in stemming the panic. But what they did not do was save Yu and thousands of other investors in Hong Kong, Singapore, Taiwan and elsewhere who had bought equity-linked notes or the so-called minibonds connected to Lehman.
Yu, a mother of six who immigrated from the mainland in 1962, did not have a chance, Nobel Prize winner Professor Joseph Stiglitz said.
“As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased,” the Columbia University economics professor said. “Complexity opened up new venues for information asymmetry, which banks exploited.”
Asia became Lehman’s highest growth region in 2007, taking in more than US$3.1 billion in revenue, or 16 per cent of the firm’s business. Revenue was up more than 41 per cent from 2005 in Asia, while it climbed 3 per cent in the US in that span.
Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi-chung, a salesman for ABN Amro. He offered her a better return on her savings if she switched banks, she said.
So she did.
Two-thirds of Yu’s money, about HK$780,000, came from a settlement with her employer after a lift fell half a floor, injuring her pelvis, says Yu, who still drags her right leg when she walks.
A month after their meeting, Yu said Chow told her he had a new product that could return 20 per cent a year because it was linked to the stock performance of three large companies - China Communications Construction, China Merchants Bank and Ping An Insurance. Yu said she did not read the fine print, trusting Chow when he told her she could not lose her principal.
ABN Amro also recruited Yu to sell the same product to her family, giving her a cash bonus of HK$1,200 for each person who signed up, she said.
There are 873 issues of Lehman equity-linked structured notes outstanding with a combined face value of about US$8.7 billion, all now in default.
Banks also sold US$1.8 billion of Lehman minibonds to 43,000 investors in Hong Kong, where the notes were first marketed in 2003.
The notes were financial dumplings - derivatives contracts tied to the creditworthiness of major companies wrapped inside Lehman corporate bonds. Series 19 notes, for instance, were linked to securities dealers including Citigroup and Goldman Sachs. If any of those businesses or Lehman defaulted, the investor would not get paid.
Sun Kwan, a 58-year-old retired parks worker, was among those who bought Lehman minibonds. He said he thought he was putting his money into a certificate of deposit. Instead, as the prospectus explained, the notes were a bet against the default of the Chinese government and five companies, including Hutchison Whampoa, CNOOC and Lehman.
As an incentive, he was given HK$200 in supermarket coupons.
Sun also purchased HK$310,000 worth of Octave Series 10 notes, a similarly structured product created by Morgan Stanley, in which the investor would lose all of his money if Lehman or any of six other companies defaulted. He said he had never heard of Lehman and thought the notes were backed by the People’s Republic of China because most of the businesses were state-owned.
“It’s all gone,” Sun said. “I’ve been crying for months.”
The vulnerability of the global financial system revealed by Lehman’s bankruptcy - from ordinary investors like Sun and Yu to London hedge funds and German lenders - makes it all the harder to regulate.
But Lehman’s bankruptcy also poses a challenge to America’s financial leadership. What was broken now was the trust the rest of the world had in US banks, said Phillip Yin, managing director of Asia Investors Partners, a Hong Kong-based research firm. “All that has happened since - the job losses, the slump, everything - is tied to one thing and one event. And that’s Lehman.”
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