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Lehman Brothers

What Was Lehman Brothers?

Lehman Brothers was a global financial services firm. It provided investment banking, trading, investment management, private banking, research, brokerage, private equity, and associated services. The firm was one of the largest investment banks in the United States until Sept. 15, 2008, when it declared bankruptcy. Its failure was largely caused and accelerated by the subprime mortgage crisis. Its bankruptcy remains the largest ever. At the time of its Chapter 11 filing, Lehman Brothers was in operation for 164 years.

Key Takeaways

  • Lehman Brothers was a global financial firm that provided investment banking, trading, brokerage, and other services.
  • It was the fourth-largest investment bank in the United States.
  • The firm declared bankruptcy on Sept. 15, 2008, because of the subprime mortgage market.
  • Its collapse is regarded as deepening the 2008 financial crisis and is considered one of its defining moments.
  • Barclays Bank and Nomura Holdings acquired Lehman's assets following its bankruptcy.

Understanding Lehman Brothers

Lehman Brothers was considered one of the major players in the global banking and financial services industries. At the time of its bankruptcy filing, Lehman held some $600 billion in assets diversified globally and was the fourth-largest investment firm in the U.S. It invested heavily in mortgage origination in the U.S. from 1996 to 2006, in large part by utilizing leverage (at its peak at a ratio of about 30:1). As such, some say the firm became a de-facto real estate hedge fund. When real estate values peaked and began to falter between 2007 and 2008, Lehman Brothers became especially vulnerable. 

Over much of 2008, the firm fought off losses by issuing stock, selling assets, and reducing costs (issuing debt under such conditions became difficult to impossible). It had huge tranches of subprime and low-rated mortgage loans on its books that it either could not or chose not to sell.

When these loans became illiquid the firm went through a credit crunch, which meant it couldn't pay its creditors. Lehman could no longer raise cash cheaply by issuing debt, and issuing stock under such conditions led to share dilution and negative sentiment, which caused its share price to fall. Meanwhile, housing prices fell as buyers stayed on the sidelines because of market conditions and the inability to secure credit. As a result, the global financial system was under threat of collapse with the absence of any additional loans being made and the firm's significant threat of failure.

The Federal Reserve Bank of New York and several large investment U.S. banks met on Sept. 12, 2008, to discuss an emergency liquidation of Lehman in an attempt to stabilize the markets. The goal was to avoid a costly government bailout, such as the $25 billion loan the government made to Bear Stearns in March 2008. The discussions, which involved a potential sale to Bank of America and Barclays, failed (vetoed by the Bank of England and the U.K. Financial Services Authority). Efforts by potential acquirers to secure federal intervention were also unsuccessful.

Lehman Brothers' failure placed the subprime mortgage crisis prominently into the public eye and presaged the deepening of the Great Recession.

History of Lehman Brothers

Lehman Brothers was established by Henry Lehman, who emigrated from Germany. He opened a dry-goods store in Montgomery, Alabama, in 1844. The store became known as Lehman Brothers with the arrival of his brothers Emmanuel and Mayer. Their operation quickly expanded from dry goods into cotton and other commodities trading.

The firm's operations shifted to New York in 1858. At that time, the city became home to cotton and other commodities trading. Henry Lehman was responsible for the first incarnation of the grocery and general store business while his brothers laid the groundwork for what would become a financial industry powerhouse.

Over the next century and a half, the company underwent numerous changes and engaged in several alliances and partnerships. While the Lehman Brothers bankruptcy did not cause the Great Recession or even the subprime mortgage crisis, its downfall triggered a massive selloff in the global markets.

Lehman Brothers was allowed to fail. The repercussions were felt immediately and globally. For instance, the Dow Jones Industrial Average (DJIA) fell 500 points the same day that Lehman declared bankruptcy. Its failure is regarded as a contributor to the Great Recession that followed.

Lehman Brothers Today

Lehman Brothers' assets, real estate holdings, and operations were sold off in a fire sale liquidation to repay investors. Within a month, Japanese bank Nomura bought the firm's operations in the Asia-Pacific region (Japan, Hong Kong, Australia), and also its investment banking and equities trading businesses in the Middle East and Europe. Barclays purchased its North American investment banking and trading operations, as well as its New York headquarters.

In Popular Culture

Not only was Lehman Brothers mentioned, but the firm's leadership at the time of its bankruptcy was portrayed in several financial-themed movies since 2008, such as in Margin Call, Too Big to Fail, and The Big Short.

The 2019 Showtime series Black Monday is a dark comedy about a financial crisis. The show features Larry and Lenny Lehman, two fictional siblings who were inspired by the real Lehman brothers.

In 2016, Erin Montella, former Lehman chief financial officer (CFO) who resigned in 2008, published an autobiography, Full Circle: A Memoir of Leaning in Too Far and the Journey Back. The book was about her experiences in the financial world.

Why Did Lehman Brothers File Bankruptcy?

Lehman Brothers was forced to file for bankruptcy after its subprime mortgage portfolio was exposed to be worth far less than people had thought. Clients began to abandon Lehman as its stock price plummeted, and soon creditors would not lend the bank money. On Sept. 15, 2008, Lehman declared bankruptcy.

Why Was Lehman Brothers Not Bailed Out?

Regulators claimed they could not have rescued Lehman because it did not have adequate collateral to support a bailout loan under the Federal Reserve's emergency lending powers. Furthermore, the financial system was by then more fragile compared to when the Fed saved Bear Stearns. This was one reason why the government was not able to find a private-sector buyer for Lehman.

Some have alternatively speculated that regulators wanted to make an example out of Lehman to show the cost of fiscal irresponsibility and excessive risk-taking on Wall St.; however, if true, this proved disastrous as contagion from Lehman's failure rippled throughout the global economy.

Who Were the Lehman Brothers?

A new immigrant from Germany to the U.S., Henry Lehman opened a dry goods store in Montgomery, Alabama. With the subsequent arrival of his two brothers Emmanuel and Mayer, the store became known as Lehman Bros. During the U.S. Civil War, cotton became an increasingly important domestic commodity. The Lehman brothers decided to capitalize on this by provisioning raw cotton at the dry goods store and then engaging in cotton trading in New York. The firm eventually abandoned the South entirely, relocating its headquarters to New York where it focused almost entirely on commodities trading and brokerage. In the following decades, the operations expanded into a full-service financial firm.

Article Sources
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  1. Yale School of Management. "The Lehman Brothers Bankruptcy A: Overview," Pages 39,43-48.

  2. Federal Reserve History. "Subprime Mortgage Crisis."

  3. Federal Reserve Bank of New York. "Liberty Street Economics: Customer and Employee Losses in Lehman’s Bankruptcy."

  4. Yale School of Management. "The Lehman Brothers Bankruptcy A: Overview," Page 45.

  5. Yale School of Management. "The Lehman Brothers Bankruptcy A: Overview," Page 40-45.

  6. Yale School of Management. "The Lehman Brothers Bankruptcy A: Overview," Page 45-48.

  7. EveryCRSReports. "Bear Stearns: Crisis and “Rescue” for a Major

    Provider of Mortgage-Related Products," Page 4.

  8. Federal Reserve Bank of New York. "The Failure Resolution of Lehman Brothers."

  9. Yale School of Management. "The Lehman Brothers Bankruptcy A: Overview," Page 41.

  10. Wharton Business School. "Not Too Big To Fail: Why Lehman Had to Go Bankrupt."

  11. Nomura Holdings. "Nomura to Acquire Lehman Brothers' Asia Pacific Franchise."

  12. Federal Reserve Bank of New York. "The Failure Resolution of Lehman Brothers," Pages 178-180.

  13. Erin Callan Montella. "Full Circle: A Memoir of Leaning in Too Far and the Journey Back." Triple M Press, 2016.

  14. Brookings Institute. "History Credits Lehman Brothers' Collapse."

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