After Lehman, who's next?

…We have created a full-scale investment banking, securities trading and private equity business, a clear vote of confidence in the economic and social future of India—a future in which we at Lehman Brothers fully intend to play a large and growing part. Tarun Jotwani, Chairman & CEO, Lehman Brothers, India, in the foreword of the investment bank’s release of an India report titled India: Everything to Play For, last October.

Those were good times for Jotwani and his India team. The 158-year-old Lehman Brothers was preparing to celebrate its first anniversary since opening office in the upscale Ceejay House in central Mumbai. “Our fundamental vision is that India is at an early stage of a structural growth story… we want to be a part of this process. We do not want to create a cottage industry,” a full-of-beans Jotwani told Business Today in late-October. The India CEO had reason to be upbeat: Lehman, after all, was the bank that had just played advisor to the $98.2-billion mega-takeover of Dutch bank ABN AMRO by Royal Bank of Scotland.

Last fortnight, days after announcing a $3.9-billion net loss for the third quarter, ending August 30. Lehman itself was up for grabs. However, the bank, which had negative net revenues of $2.93 billion in the third quarter, was clearly not attractive enough to find a suitor, with Barclays and Bank of America walking away from the negotiating table. The sucker punch came when Lehman Brothers Holdings filed for bankruptcy protection. Even as it prepared to begin looking for ways to pay back creditors, bond holders and shareholders, Lehman said that it would explore the sale of its broking and investment management units, amongst other measures. As Jotwani’s India blueprint went up in smoke (an e-mail sent to Jotwani remained unanswered), Bank of America, in the meanwhile, saw more value in another Wall Street bank, Merrill Lynch. It bought Merrill for $50 billion, in the process throwing a lifeline to the John Thain-chaired bank’s investors and employees.

As BT went to press, another financial giant, American International Group (AIG), was pulling out all the stops to stay alive, with reports indicating that the sale of its aircraftleasing arm was just one last-ditch attempt to come back from the brink. AIG had reportedly sought a $40-billion bail-out from the US Fed. Reports indicate that there are other banks and mortgage houses in the US on the verge of going under. After Bear Stearns (which was snapped up at a fire-sale price by JPMorgan Chase) and mortgage-finance twins Freddie Mac and Fannie Mae (which were bailed out by the US Fed), Lehman becomes the latest—and the biggest—casualty of the oneyear-old subprime crisis, in what’s easily the worst period in the American financial system since the Great Depression.

The guessing game under way in the West is: “Who’s next?” Back home, however, the uncertainty is being felt not just amongst the investment banking community, but also on Dalal Street. Lehman and its associates were significant foreign institutional investors in India in stocks like Orbit Corp, Spice Mobiles and Emkay Global Financial Services; marketmen clearly fear that the downbeat mood on Wall Street will spread across global markets, including India. On the day the news of Lehman going bust and Merrill selling out hit the headlines, the benchmark Sensex fell by 3.35 per cent. On the same day, a canny domestic banker thought it opportune to announce that he had poached the cream of Merrill Lynch’s Indian institutional equities team.

{mosimage}Ashok Wadhwa’s Ambit Holdings succeeded in roping in Andrew Holland, Managing Director of Proprietary Trading at DSP Merrill Lynch, as CEO-Institutional Equities & Equity Proprietary Trading for its broking operations, Ambit Capital. Two other members of the proprietary team, Vaibhav Sanghvi and Piyush Shah, also jumped on board Ambit. “The current situation gives domestic firms like us an opportunity to scale up and diversify by recruiting high quality talent,” says Wadhwa, CEO& MD of Ambit Corporate Finance. His views are echoed by Lazard India Founder and Chairman Udayan Bose: “The situation is different from the late nineties when only US-based banks were present in India. Today, there are banks from other countries that are not affected by the crisis.” Around that time a number of banks, including Lehman, had upped and left the country. But Lehman, which left in 1999, returned in 2005.

A section of Indian marketmen believes that with Lehman going under and Merrill finding a buyer, some of the uncertainty in the market has been dealt with. “For Indian markets, a lot of anxiety is now over. For instance, markets were going down when crude oil prices were on an upswing. Now crude prices are going down. Now, we need to see how the global issue of demand destruction pans out,” says Vallabh Bhansali, Chairman, Enam Financial Consultants. “It’s a low point for the brokerage industry as two famous names are going out of business,” he adds. The fear, however, is that this may not quite be the lowest point, yet.

—K. R. Balasubramanyam