Too big to fail. A personal story of the Lehman Bros collapse
On 15 September 2008, Lehman Brothers, a bank considered ‘too big to fail’ filed for protection under Chapter 11 of the Bankruptcy Code, the single largest bankruptcy filing in the history of the US. Lehman Bros had been operational for 158 years before it collapsed as a consequence of “excessive risk taking”, and large losses sustained through the positions it held in the US subprime mortgage market.
Barclays and Nomura Holdings acquired the ‘clean’ assets and staff in North America and the rest-of-the-world respectively; with Barclay’s paying $1.35 billion and Nomura paying $225 million plus $2 (for the European division of Lehman Brothers). The fact that Lehman Brothers was allowed to enter bankruptcy by the US Government meant the idea that banks were ‘too big to fail’ was now proved to be untrue.
Ten years ago I was working in Hong Kong as a newly made partner when KPMG was appointed as the provisional liquidator for Lehman Brothers Asia. For the next three years I worked full time on managing, restructuring and selling Lehman’s principal real estate investment positions in China, Hong Kong, Thailand, Malaysia and Vietnam.
It was a period of immense pressure and concern, where asset valuations were plunging, multi-jurisdictional litigation was burning like wildfire and a wide cross-section of Asian society (not just investors or employees) were wondering if a global depression was to follow.
Fortunately China took the regional lead in Quarter 1 2009 with an unheralded fiscal and monetary stimulus package to pump prime their economy. Suddenly the confidence came back into the real estate market, enabling our team to sell the Lehman positions for close to full value. Most of the new investors were Chinese insurance companies, real estate developers or banks and they understood the long term value to invest and grow while other western banks and hedge funds thought it was an opportunity for deep discount bargains. They were wrong.
In 2012, as the Lehman assets largely resolved for the benefit of their creditors, my attention turned to a new global phenomenon – Chinese outbound direct investment (ODI). It was time to move home to Australia.
From 2008, Australia was for a time the largest single country recipient for Chinese ODI – mostly from SOEs and into our mining and gas industry projects in WA and QLD. This investment, the exports and the jobs it created in many ways underwrote Australia’s survival from the GFC, something we should always remember and be appreciative of. However we aren’t, perhaps because we weren’t aware of the scale and impact of this investment.
According to KPMG and University of Sydney data and research, between 2008 and 2017, Chinese companies have invested roughly USD 100 billion in capital to Australia. In 2008, the year of the GFC, Chinese ODI peaked at USD16.2 billion into mega mining projects and while there has been some volatility in years since, Australia still recorded USD 10.3 billion of new investment in 2017.
These days, it’s the private Chinese companies and funds that are investing into Australian real estates, healthcare, food, education and tourism sectors which sell products both domestically and export Australian branded goods to China.
This investment and the flow on effects creates new opportunities for Australian companies, employees and end consumers.