What Is Lehman Brothers?
Lehman Brothers was a global financial services firm whose bankruptcy in 2008 was largely caused by — and accelerated — the subprime mortgage crisis. The firm was at the time the fourth-largest investment bank in the United States; its bankruptcy remains the largest ever. At the time of its Sept. 15, 2008 Chapter 11 bankruptcy filing, Lehman Brothers had been in operation for 158 years. It provided investment banking, trading, investment management, private banking, research, brokerage, private equity, and associated services. Lehman Brothers' failure placed the subprime mortgage crisis of 2007-2009 prominently into the public eye and presaged the deepening of the Great Recession.
Understanding Lehman Brothers
Lehman Brothers were once considered one of the major players in the global banking and financial services industries. It saw its start in Montgomery Ala., in 1850 as a dry-goods store and quickly grew into cotton and other commodities trading. Its operations shifted to New York in 1858 when the city became home to cotton and other commodity trading. Over the next century and a half, the company underwent numerous changes and engaged in several alliances and partnerships. While the bankruptcy of Lehman Brothers did not cause the Great Recession or even the subprime mortgage crisis, its downfall triggered a massive selloff in the global markets.
Lehman Brothers Bankruptcy
At the time of its bankruptcy filing, Lehman Brothers held some $600 billion in assets diversified globally. It had invested heavily in mortgage origination in the U.S. form 1996-2006, in large part by utilizing leverage (at its peak at a ratio of about 30:1). As such, some say the firm had become a de-facto real estate hedge fund. When real estate values peaked and then began to falter in 2007-2008, Lehman Brothers became especially vulnerable.
Over much of 2008, the firm fought off losses by issuing stock, selling assets and reducing cost (issuing debt under such conditions became difficult to impossible). It had on its books huge tranches of subprime and low-rated mortgage loans that it either could not sell or chose not to sell. When these loans became illiquid, and the firm had no ability to pay back its creditors, Lehman Brothers experienced a credit crunch; it could no longer cheaply raise cash via debt issuance, and issuing stock under such conditions led to both dilution of shares and negative sentiment, which caused its share price to fall. Meanwhile, housing prices fell as buyers stayed on the sidelines due both to market conditions and the inability to secure credit. With no loans being made and the world's largest financial institutions under significant threat of failure, the global financial system was under threat of collapse.
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 Brothers 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 American and Barclays, failed (vetoed by the Bank of England and the U.K. Financial Services Authority), and efforts by potential acquirers to secure federal intervention were unsuccessful. Lehman Brothers were allowed to fail. The repercussions were felt globally; the Dow Jones Industrial Average fell 500 points on the day Lehman Brothers declared bankruptcy.
Lehman Brothers Today
Lehman Brothers' assets, real estate holdings, and operations were quickly sold off 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. Lehman Brothers have been mentioned, and its leadership at the time of its bankruptcy has been portrayed, in numerous movies since 2008, such as in Margin Call and Too Big to Fail.