Lehman Brothers files for bankruptcy; BoA acquires Merrill Lynch

James Ryan Jonas

It’s a sad — and scary — day for financial markets today.

Lehman Brothers, a global financial services firm operating for more than 158 years, filed for Chapter 11 bankruptcy after attempts to rescue it failed. The company went down with total debt amounting to $613 billion and losses amounting to $60 billion brought by subprime mortgage investments. More than 26,000 employees are expected to go unemployed.

And yet months ago, we thought the financial meltdown has already reached its peak when tens and thousands of employees in Citigroup, UBS, Morgan Stanley, and Siemens, among others, were laid off.

Apparently, the worst is not yet over. Troubled investment banking firm Merill Lynch is being sold to Bank of America in a $44 billion all-stock transaction aimed at preventing the company from suffering the same fate as Lehman Brothers.

The world’s largest insurance company, American International Group Inc. (AIG), is also planning major restructuring programs in an effort to survive the financial crisis. It is seeking a $40 billion loan from the Federal Reserve to raise liquidity while simultaneously planning to dispose major assets and business units.

What’s scary is that former Federal Reserve Chair Alan Greenspan himself said that these events only prove that the United States is in a “once in a century financial crisis that is more than likely to spark a recession.”

The sad part, however, is that this recession has started reaching Philippine shores. Earlier today, the collapse of Lehman Brothers ignited panic and uncertainty among investors, causing the Philippine stock market to shed off a hefty 110 points (a 4.15% one-day loss) and the dollar-peso exchange rate to depreciate to P47.095 (from P46.86 the previous week).

We’ve seen big banks in the US like Lehman Brothers and Bear Sterns collapse but the scarier part is that a few Philippine banks may follow. Not because they have huge investments in risky subprime mortgage assets, but because the economic downturn might lead clients to default on loans or pull out huge amount of funds, eventually causing a bank run.

Lately, rural banks seem to be the initial victims. A few weeks ago, the Bangko Sentral ng Pilipinas (BSP) ordered the closure of G7 Bank, Inc. (Rural Bank of Nabua, Inc.) after depositors complained they can no longer withdraw their deposits. See related thread: PDIC status of claims from the closed G7 Bank

A group of rural banks is also said to be in danger of being closed by the BSP after the banks were confirmed to have a capital deficiency of more than P2.5 billion.

These include banks under the Legacy Financial Group such as Rural Bank of Carmen (Cebu); Rural Bank of San Jose (Batangas); Philippine Countryside Rural Bank; Rural Bank of DARBCI; Pilipino Rural Bank; Rural Bank of Calatagan (Batangas) Inc. (now Dynamic Rural Bank); Rural Bank of Kananga (Leyte) Inc. (now First Interstate Rural Bank); Rural Bank of Bisayas Minglanilla (now Bank of East Asia); San Pablo City Development Bank; and Rural Bank of Parañaque.

However, clients and supporters claim the rumor is a mere demolition job aimed at bringing down the Legacy Financial Group.

Whatever the case is, closures of banks will surely create havoc in the local economy — the extent of the impact largely depends, though, on how big the closed bank is.

Here’s to hoping that the Philippine banking industry will not experience the same crisis currently plaguing the US banking sector. Otherwise, the aftermath might be unbearable for Juan de la Cruz.

Image Credit: Reuters

James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.