It was September 16, 2008, a Tuesday, in Mumbai, India and I was walking around the airport in the evening, waiting to board a flight to Nairobi, Kenya en route to Lilongwe, Malawi for a professional assignment.
A little tired, I sat down in one of the sparsely populated row of seats in Mumbai’s international departure area. I noticed a man of my age or a little older with moist eyes. He eyes were blood red and it appeared he had been crying. Strangely, I felt compelled to talk to him so that I could help if required.
I briefly introduced myself and had begun to barely talk, when he broke down and wept. At first, I could hardly make out what he was saying but as I comforted him, I realized that he was talking about the collapse of Lehman and the fact that the Dow had gone down by almost 504 points on the ill-fated day, September 15, 2008.
He said he had invested all his savings in the stock market and suddenly he was a pauper, with no money what-so-ever, job that could not pay (as he worked in the back-end team of a financial services fund that also went down with Lehman) and just a green card and tickets to go back to New York, USA where his 2 daughters and wife lived. Suddenly, his life had turned topsy-turvy in the brief week that he had come visiting his parents when his father was diagnosed with leukaemia.
Most importantly, he felt helpless as he was hoping to get back and send money for his dad’s impending treatment but could not because of what happened on September 15, 2008. He sobbed repeatedly in public and I did not know how to comfort him. I was closely tracking Lehman and the U.S. subprime but this was the first of my many encounters with people impacted by such crisis and especially, financial crisis.
Interestingly, at close of play on September 12, 2008, Lehman’s stock price stood at $3.65 per share, a 94.16% drop from the $62.53 on January 29, 2008, which represented its heights as a stock.[ii] By September 14, 2008, it was crystal clear that Lehman did not have sufficient liquidity to fund its daily operations.[iii] And on September 14, in the evening, reportedly, “SEC Chairman Cox phoned the Lehman Board and conveyed the Government’s strong suggestion that Lehman act before the markets opened in Asia.[iv] On September 15, 2008, at 1:45 a.m., LBHI filed for Chapter 11 bankruptcy protection.[v]”[vi]
That the financial upheaval that resulted thereafter in 2008 was a consequence of LBHI filing for Chapter 11 bankruptcy protection needs no emphasis. The Dow Jones index plummeted by 504 points on September 15, 2008.[vii]
Rest is history…
Whenever a crisis (financial or otherwise) hits us on our face—the latest being Evergrande[viii] (from China)—there is so much of media buzz and commentary and associated activity. At the ground level, of course, there is a significant amount of uncertainty. And this uncertainty rather than anything else, pushes markets into a spin and much of this happens globally as we are increasingly living in what Prof. Mike Porter[ix] would call a truly global economy rather than a grouping of inter-linked multi-domestic economies.
Why are crisis situations, especially those that cause a financial crunch, best prevented? One, they make people poorer wherever they occur; two, they exclude large numbers of already (financially) included people from the ambit of the financial system; three, they cause depletion in wealth through their profound impact on the economies and markets in their own ways; and four, they set nations and their economies back by several years and undo the good hard work already done in terms of promoting growth and development and enhancing shared prosperity.
Looking back, starting with the great depression of the 1930s when much wealth was wiped out over a decade to the U.S. subprime of 2008 (initiated by the collapse of Lehman) and other crises over the years (The Satyam Computers saga of 2009, the Indian microfinance crisis in undivided Andhra Pradesh in 2010, the IL&FS and PNB crisis of 2018, the global four-in-one COVID-19 crisis of 2020/2021), a lot of people lost their hard earned wealth and were pushed back into hardship and poverty of some kind and most importantly, economies were devastated. That is why a crisis is never welcome and we must do everything in our power to stop the occurrence of crisis (especially, financial crisis) situations, come what may and that indeed is the avowed objective of this column and series of articles.
Having set the broad context, let us take the latest crisis that is doing the rounds. Evergrande[x], the real estate conglomerate which is at the heart of this crisis, has been unable to make interest and other payments to its stakeholders including lenders. Evergrande is what Prof. Richard Rumelt[xi] would call a conglomerate with significant diversification, some in related areas and some in unrelated fields. It has been reported that Evergrande, apart from its core business of real estate and construction, also has in its portfolio a bank (via its subsidiary), an electric vehicles company, a pharmaceutical company, an expressway, a football stadium and team and so on and so forth.
Interestingly, the first ever comment on Evergrande from The Peoples’ Bank of China (PBOC) came around October 16, 2021 where the official spokes person said that Evergrande grew irresponsibly (and away from its core business) and diversified too fast into areas that were not its expertise and hence faces the liquidity[xii] and other problems that is currently is encountering. PBOC has clearly stated that companies must reform and grow in relation to market realities and that neither the government nor the PBOC would intervene in any manner, more than required, implying that a full blown bailout of Evergrande is not on the cards.
A point of comparison between Evergrande and Lehman is necessary at this juncture as much of the media discourses have put forth the idea that Evergrande is indeed China’s Lehman moment. Here, a key point to be noted is that Evergrande is a diversified real estate and construction conglomerate that owes between U.S. Dollar[xiii] ($)300 – 325 billion to several lenders. Lehman, on the other hand was one among several giant global investments banks that together were facing a major crisis (the 2008 U.S. Subprime). A cursory look at the numbers suggests Evergrande crisis pales in comparison to the U.S. Subprime, which Lehman was a part of but a closer comparative analysis between Evergrande and Lehman reveals a very different story and we look at this in part II of this series.
[i] Ramesh Srivatsava Arunachalam wears many hats. He is the author of 14 critically claimed bestselling books. 58 years of age, Ramesh is an international economic development, financial sector and investment banking professional with special focus on strategic governance, competitive and corporate strategies, investment banking, inclusive finance and regulation and supervision. Ramesh has authored numerous reports/studies/papers as part of his assignments, several of which have been published internationally and received global recognition. Ramesh has also been a columnist with the Hindu Business Line (1995-97), Moneylife (2011-2013 and 2020) and The Business and Financial Times (2021), one of Africa’s leading business dailies. During the last 32 years, Ramesh has completed 314 professional assignments. He has worked in 680 districts of India and has also travelled and worked extensively in about 31 countries in North America, Asia, Africa, Europe and the Caribbean across diverse projects (in senior positions). He is passionate about his work and brings strong inter-disciplinary insight to his assignments. Ramesh can be contacted at [email protected]
[ii] Morningstar Document Research Co., LBHI Historic Stock Prices (Jan. 1, 2008 through Sept. 15, 2008) [LBEX‐EXM 000001‐14] (printed from www.10kwizard.com) (last visited on Feb. 3, 2010).
[iii] Lehman, Liquidity of Lehman Brothers [Draft] (Oct. 7, 2008), at p. 9 [LBHI_SEC07940_844701] (LBIE faced a cash shortage of $4.5 billion on September 15, 2008).
[iv] Examiner’s Interview of Christopher Cox, Jan. 8, 2010, at pp. 16‐17 (Cox called Lehman’s Board to urge that Lehman take whatever action it decided upon as soon as possible, before the markets opened. During the call, Cox related, FRBNY General Counsel Thomas C. Baxter, Jr., added that it had been made clear in the meetings earlier that day that the “action” should be that Lehman declare bankruptcy. Cox told the Examiner that the SEC was not “offering guidance or trying to influence the fiduciary responsibilities of [Lehman’s] directors.”).
[v] Voluntary Petition (Chapter 11), Docket No. 1, Lehman Brothers Holdings Inc., Case No. 08‐13555 (Bankr. S.D.N.Y. Sept. 15, 2008); Docket Activity Report, Lehman Brothers Holdings Inc., Case No. 08‐13555 (Bankr. S.D.N.Y. Sept. 15, 2008).
[vi] See examiner’s report referred above
[vii] Alexandra Twin, Stocks Get Pummeled, CNNMoney.com, Sept. 21, 2008, at p. 1 (stating “Wall Street sees worst day in 7 years with Dow down 504 points . . . “), available at http://money.cnn.com/2008/09/15/markets/markets_newyork2/index.htm (last visited Jan. 28, 2010).
[viii] Evergrande is cash strapped and has reportedly missed three rounds of interest payment on international bonds. See https://realty.economictimes.indiatimes.com/news/industry/hong-kong-audit-watchdog-investigating-china-evergrande-group-pwc/87055790 and https://www.aljazeera.com/economy/2021/10/15/chinas-central-bank-says-evergrade-risks-are-controllable
[ix] See ‘Michael E. Porter, Bishop William Lawrence University Professor, https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6532
[x] See ‘Chinese property firms suffer fresh downgrades amid Evergrande crisis’, Reuters, October 13, 2021, Andrew Galbraith and Marc Jones, https://www.reuters.com/world/china/china-developers-bonds-shares-hit-again-by-evergrande-contagion-worries-2021-10-13/
[xi] See ‘Richard P. Rumelt’, https://www.anderson.ucla.edu/faculty-and-research/strategy/faculty/rumelt
[xii] See https://realty.economictimes.indiatimes.com/news/industry/hong-kong-audit-watchdog-investigating-china-evergrande-group-pwc/87055790
[xiii] All amounts in United States Dollars, unless otherwise specified.