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how math killed Lehman Brothers

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how math killed Lehman Brothers [#permalink] New post 30 Jun 2009, 20:15
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found on digg

http://plus.maths.org/issue51/features/ ... index.html

Quote:
On a sunny morning in 2001, a piece of investment plan landed on the desk of Dick Fuld, the then Chief Executive of Lehman Brothers. The document, compiled by a team of maths and physics PhDs, included a calculation to show how the bank will always end up with a profit if they invest on the real estate markets. Fuld was impressed. The next five years saw the bank borrowing billions of dollars to invest in the housing market. It worked. The housing market boom had turned Lehman Brothers from a modest firm into the world's fourth largest investment bank.


But as the housing market started to shrink, the assumptions that the PhDs made began to break down one by one. The investment now became a mistake, resulting in a stunning loss of $613 billion. On September 15 2008 Lehman Brothers collapsed — "The largest bankruptcy in the US history," as described by Wikipedia.
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Re: how math killed Lehman Brothers [#permalink] New post 05 Jul 2009, 03:49
I agree that a lot of this financial engineering has created a lot of the market failures we've been experiencing.

Maybe some naked short-selling was also behind their demise:

Naked Short Sales Hint Fraud in Bringing Down Lehman

http://www.bloomberg.com/apps/news?pid= ... refer=home

Quote:
March 19 (Bloomberg) -- The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”

While the commission’s Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency’s inspector general.

The way the SEC processes complaints hinders its ability to respond, the report said.

Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.

After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.
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Re: how math killed Lehman Brothers [#permalink] New post 05 Jul 2009, 03:56
This one is also a nice read
http://www.scribd.com/doc/17017708/vf-article
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Re: how math killed Lehman Brothers [#permalink] New post 05 Jul 2009, 04:08
snipertrader wrote:


I just got done reading that as well. Lewis is the man!

Here's also a webcast interview with Lewis about this latest piece:

http://www.wallstreetandtech.com/blog/a ... 0CJUNN2JVN
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Re: how math killed Lehman Brothers [#permalink] New post 05 Jul 2009, 05:27
Nice one trader1. Just goes to show how complacent ppl have become and believe that the worst is over.
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Re: how math killed Lehman Brothers   [#permalink] 05 Jul 2009, 05:27
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