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The news on Lehman

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Director
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 10:13
Paradosso wrote:
Anyway, I can't see how banks might be not willing to loan to people who get an admit from such schools, I can't think of a more secure investment.


It's riskier with internationals. There's no guarantee they will stay in the USA to work and could just go back to their home country.
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 10:44
What is the interest rate on loans provided by schools?
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 10:53
Paradosso wrote:
Anyway, I can't see how banks might be not willing to loan to people who get an admit from such schools, I can't think of a more secure investment.


How about a loan that has actual tangible collateral as security, e.g. mortgage (homes), auto loan(cars), corporate bonds(company assets), etc. Student loans are notorious for having high default/low recovery rates. I think your point is a student loan to an M7 MBA student is less risky than most other student loans, I agree. Not trying to be pedantic, but student loans are among the most INsecure investments.
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 11:12
cougarblue wrote:
Not trying to be pedantic, but student loans are among the most INsecure investments.


The interest rates for private loans vary by school. A student going to a for-profit nursing school will have a much higher rate of interest than an MBA student at any of the M7, based on the schools' collective default histories.

Federal loans excepted, of course. Everyone (US citizens and residents) has equal access to Stafford loans.
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 12:45
Cougarblue,

your point of view is interesting, but still I believe that lending to a guy who is going to get a Stanford MBA (we're not talking about an undergrad majoring in Peruvian literature) is more secure than giving money with collaterals like houses (just look what happened with houses in the last 12 months) or cars (that decrease in value over time). Indeed I think that the very admit to one of the top schools is to a large extent proof that someone knows how to manage her/his life and will be good for the money s/he borrows.

In my opinion a top business education (the value of which increases over time) is at the very least as strong a collateral as a real guarantee like the ones you mentioned. I take Soni's point about going away from the US but I don't think this stops banks from getting their money back, and the interest rate is higher anyway.

Furthermore, if we think of how easy it is to get consumer credit in the US with little to no collateral whatsoever (students with tens of thousands in credit card debt from $5 frappuccinos, and the like) I really think that MBA students at top schools should have no problem securing funding for their education.
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Re: The news on Lehman [#permalink] New post 21 Sep 2008, 19:29
The Federal Reserve today granted GS and MS to designate themselves as bank holding institutions, which will allow them to take deposiits and build cash reserves. It will also allow them both to take emergency loans out from the Federal Reserve.

http://news.yahoo.com/s/ap/20080922/ap_ ... ank_change

Anybody have opinions on the state of M&A and other advisory services a couple of years down the line? I assume they will always be in demand -- companies will always buy others and merge with each other.
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 00:46
sonibubu wrote:
The Federal Reserve today granted GS and MS to designate themselves as bank holding institutions, which will allow them to take deposiits and build cash reserves. It will also allow them both to take emergency loans out from the Federal Reserve.

http://news.yahoo.com/s/ap/20080922/ap_ ... ank_change

Anybody have opinions on the state of M&A and other advisory services a couple of years down the line? I assume they will always be in demand -- companies will always buy others and merge with each other.


New demand for bank tellers now that GS and MS will start taking deposits ;)
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 11:45
sonibubu wrote:
The Federal Reserve today granted GS and MS to designate themselves as bank holding institutions, which will allow them to take deposiits and build cash reserves. It will also allow them both to take emergency loans out from the Federal Reserve.

http://news.yahoo.com/s/ap/20080922/ap_ ... ank_change

Anybody have opinions on the state of M&A and other advisory services a couple of years down the line? I assume they will always be in demand -- companies will always buy others and merge with each other.


Advisory business lines shouldn't really be affected, but i could see a lot of new boutique firms opening on Wall Street when people begin jumping ship. There are a lot of well paid IB MDs that won't like the new limits to compensation that come with the lower margins of commercial banking. I-Banking was one of the last industries of high profits and very little capital investment, which equals big pay days.
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 11:58
jb32 wrote:
sonibubu wrote:
The Federal Reserve today granted GS and MS to designate themselves as bank holding institutions, which will allow them to take deposiits and build cash reserves. It will also allow them both to take emergency loans out from the Federal Reserve.

http://news.yahoo.com/s/ap/20080922/ap_ ... ank_change

Anybody have opinions on the state of M&A and other advisory services a couple of years down the line? I assume they will always be in demand -- companies will always buy others and merge with each other.


Advisory business lines shouldn't really be affected, but i could see a lot of new boutique firms opening on Wall Street when people begin jumping ship. There are a lot of well paid IB MDs that won't like the new limits to compensation that come with the lower margins of commercial banking. I-Banking was one of the last industries of high profits and very little capital investment, which equals big pay days.


How big of a hit will associates take in your opinion? I don't think CSFB, DB, JPMorgan, Citi were paying peanuts -- though not as much as the BB I'm sure.
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 13:17
sonibubu wrote:
How big of a hit will associates take in your opinion? I don't think CSFB, DB, JPMorgan, Citi were paying peanuts -- though not as much as the BB I'm sure.


CS, DB, JPM, Citi are in the BB. There is a bit of variation among the BB. GS/MS have always been at the top of the pay scale, with the other banks falling into the "2nd tier". Their order within the 2nd tier generally depends on how good of a year they have had.

In my opinion, fees from investment banking services will continue to be down as there is less activity to advise on in a recession. Once the market heats up again, the fee structures will end up being the same for advisory services (i.e. $50M of fees on a $1B transaction or $100M of fees on a $1.5B transaction or however they are structured). If the new bulge bracket banks decide to not compensate their MDs, VPs, and Associates/Analysts in line with the same fees that they have historically brought in - I think you will just see a lot of the top MDs join/start boutiques and take the junior people with them. This will be unlikely, therefore I think we will just see bonuses decline for a couple years in the down market (25-50%), and then they should pick back up in a couple of years.
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 14:07
I think associates will probably take a decent hit overall. Probably similar to what Terp says. Unfortunately, many of the employees at GS and MS will be looking at a pay cut as well. There is a reason JP Morgan, CSFB, and UBS pay less, and it's because they are in a less profitable, but more stable business lines, which GS and MS need to survive at this point. Most companies distribute some portion of division profits to the division that earned them, and at an IB almost every division can be obscenly profitable, so they all want money when they have a good year. However, at a commercial bank, the Main Street lending division will never be as profitable as the capital markets or Prop Trading desk. So what to do as the Wage & Salary Committee when it comes bonus time? You allocate a good portion of the IB division's profits to the people in that division, but a smaller percentage than was allocated at a pure investment bank. They give the bankers enough to be satisfied, but they will never pay what a HF or PE shop could pay and probably will not pay what they did before.
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 17:07
terp06 wrote:
sonibubu wrote:
How big of a hit will associates take in your opinion? I don't think CSFB, DB, JPMorgan, Citi were paying peanuts -- though not as much as the BB I'm sure.


CS, DB, JPM, Citi are in the BB. There is a bit of variation among the BB. GS/MS have always been at the top of the pay scale, with the other banks falling into the "2nd tier". Their order within the 2nd tier generally depends on how good of a year they have had.

In my opinion, fees from investment banking services will continue to be down as there is less activity to advise on in a recession. Once the market heats up again, the fee structures will end up being the same for advisory services (i.e. $50M of fees on a $1B transaction or $100M of fees on a $1.5B transaction or however they are structured). If the new bulge bracket banks decide to not compensate their MDs, VPs, and Associates/Analysts in line with the same fees that they have historically brought in - I think you will just see a lot of the top MDs join/start boutiques and take the junior people with them. This will be unlikely, therefore I think we will just see bonuses decline for a couple years in the down market (25-50%), and then they should pick back up in a couple of years.


5% remuneration on such a big deal? Sounds like it's an awful lot... 10 or 20 looks more reasonable to me (could be wrong though). I agree with you on the rest (or maybe it's just wishful thinking)
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Re: The news on Lehman [#permalink] New post 22 Sep 2008, 18:08
I particularly enjoyed these 2 articles related to the last recession and I thought I would share them.

http://query.nytimes.com/gst/fullpage.h ... A9649C8B63

http://nymag.com/nymetro/news/bizfinanc ... es/n_8453/

From the 1st one:

Some laid-off Wall Streeters have even adopted a name for themselves: the 405 Club, a reference to an evening last year when a group of unemployed investment bankers jestingly tried to pay an $800 dinner bill at Craft, in the Flatiron district, by signing over their $405 unemployment checks -- the maximum benefit offered by the Labor Department.

Severance packages for investment bankers, the values of which are influenced by seniority and education, usually consist of about three to six months' paid salary, plus a portion of the bonus the employee would have gotten at the year's end, experts say. In the case of a junior-level banker who missed out on the truly golden year, from 1999 to 2000, the package could still approach $50,000. For others -- especially if they signed employment contracts during the boom, which guaranteed their salaries for years -- a mid-level banker could leave with a $600,000 exit package.
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 07:14
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 07:22
From the news I'm seeing here in Hong Kong, the outcry seems to be that the Profits are privatised and the debts are socialised. There 'appears' to be a movement who want to see the bankers who got the financial system into this mess for taking high risks be punished. They see it as unfair that bankers are rewarded for taking such high risks and get helped out by governments when the risks go wrong... i.e. it appears unfair to the guy on the street.

I think we may see a change in the way bonuses are paid and regulated in the financial industry because it looks like its being demanded by the voter.
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 07:38
togafoot wrote:
I think we may see a change in the way bonuses are paid and regulated in the financial industry because it looks like its being demanded by the voter.


I can promise you if this passes in the US, then the talent will flee from public banks as fast as they can to set up a HF, PE shop, or Boutique bank.

I can certainly see how the voter would think its unfair to bail out Wall Street, but lets be realistic here, there are MANY, MANY people who are as guilty or moreso than Wall Street. Without Fannie and Freddie guaranteeing the credit on these "conforming" loans, then there never would have been a securitized market for Alt-A and subprime loans. Without mark-to-market acounting, the I-banks would never have had to write down their susecptible loans, and probably could have riden out the storm. Notice one of the main reasons GS and MS are becoming bank holding companies is to avoid mark-to-market.

Now I'm certainly not saying anyone is innocent, because they are not, but everyone from gov't to home lenders to Wall Street can pass the hat on this one. Unfortunately, its the politicians who get the microphone to yell the loudest on who to blame.
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 07:51
Completely agree. In fact, I was trying to make the same argument 6 months ago. You reap what you sow.

http://gmatclub.com/forum/126-t59138

jb32 wrote:
there are MANY, MANY people who are as guilty or moreso than Wall Street
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 10:16
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I think most people understand that we are all to blame here. I think the problem that most people have is that even though we are all to blame people like Richard Fuld raked in $22.1 million in 2007 and even more on the way out the door in 2008. So you make huge amounts of money when you're up and huge amounts of money when you fail. So now your telling me that we the tax payers need to bail you out to save our economy. Maybe so, but if that the case then when you took your huge bonuses over the last couple years that wasn't money you earned. You essentially took out massive amounts of debt to pay yourself and then when the company goes bankrupt you look to the taxpayers to pay the bill.

So let's agree that you didn't create enough wealth in 2007 to warrant $22.1 million. How about you return that money and use it help all the people that will get laid off.

So I was to blame for taking out a mortgage I couldn't afford and you're to blame for running this racket. Yet I lose my house and you get richer. I can see it now. When the government needs to look to consultants in the future to figure out the best way to recoup their money who are they going to look to. Bingo, the same guys who screwed it up in the first place. So you make money screwing it up, more money when it fails, and yet more money to sort it out.
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 11:08
gixxer1000,

I think you got the gist of it. The money didn't just disappear into thin air. And the gov't infusion isn't coming from thin air either.
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Re: The news on Lehman [#permalink] New post 23 Sep 2008, 11:40
He earned $22.1 million on the way out and he deserved every penny of it. He earned that money in the good times (since people are paid on past performance), but you can take solace in the fact that the majority of his pay was in stock options and restricted shares that are now completely worthless. While he might have failed and cost many people their jobs, people fail all the time and I don't blame Richard Fuld for everything that happened at Lehman. There were plenty of tremendously smart people working for him that also failed to do their job. And it's not like Richard Fuld was an incompetent CEO for 14 years. Please tell me which of you has ever run anything successfully this large and complex? Can you even imagine how hard that job would be if you were suddenly put in the top spot? Would you 'screw it up' to?

If you want to know why I believe he deserves his money, you just need to look at the tens of thousands of employees and countless numbers of investors he made very rich over his 14 years as CEO and during his 30 years on Wall Street. While it may have all come crashing down at the end, the man did a lot of good before the firm went bankrupt. He had 14 good years and one bad summer. Anything similar happen to any one else, or have the last 14 years of your life been absolutely perfect?

So let's not play pile on the Wall Street CEO, his failure will still be greater than most everyone on this planets successes'. He held one of the 100 hardest jobs on this planet for 14 years and did pretty dang well at it.
Re: The news on Lehman   [#permalink] 23 Sep 2008, 11:40
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