What Was Lehman Brothers?
Let me explain Lehman Brothers to you directly: it was a global financial services firm that offered investment banking, trading, investment management, private banking, research, brokerage, private equity, and related services. As one of the largest investment banks in the United States, it operated for 164 years until September 15, 2008, when it filed for bankruptcy. This failure was driven and sped up by the subprime mortgage crisis, and it stands as the largest bankruptcy filing ever.
Key Takeaways
- Lehman Brothers provided investment banking, trading, brokerage, and other global financial services.
- It ranked as the fourth-largest investment bank in the U.S.
- The firm went bankrupt on September 15, 2008, due to the subprime mortgage market collapse.
- Its downfall deepened the 2008 financial crisis and became one of its key defining events.
- After bankruptcy, Barclays Bank and Nomura Holdings bought Lehman's assets.
Understanding Lehman Brothers
You should know that Lehman Brothers was a major force in global banking and financial services. At bankruptcy, it had about $600 billion in assets spread worldwide and was the fourth-largest U.S. investment firm. From 1996 to 2006, it dove heavily into U.S. mortgage origination, using high leverage—peaking at around 30:1—which essentially turned it into a real estate hedge fund, as some observers put it. When real estate values hit their peak and started dropping in 2007-2008, Lehman became highly exposed.
Throughout 2008, the firm tried to stem losses by issuing stock, selling assets, and cutting costs, but issuing debt grew nearly impossible. It held massive amounts of subprime and low-rated mortgage loans that it couldn't or wouldn't sell. As these became illiquid, Lehman faced a credit crunch and couldn't pay creditors. Raising cash via debt was no longer cheap, and stock issuance diluted shares, fueled negative sentiment, and drove the price down. Housing prices kept falling as buyers held off due to market woes and credit shortages, putting the global financial system at risk of collapse without new loans and amid Lehman's looming failure.
On September 12, 2008, the Federal Reserve Bank of New York and major U.S. banks met to discuss an emergency liquidation of Lehman to steady the markets. They aimed to dodge a government bailout like the $25 billion loan to Bear Stearns in March 2008. Talks for a sale to Bank of America or Barclays fell through, vetoed by the Bank of England and U.K. Financial Services Authority, and efforts to get federal help also failed.
Fast Fact
Here's a key point: Lehman Brothers' failure thrust the subprime mortgage crisis into the spotlight and signaled the deepening of the Great Recession.
History of Lehman Brothers
Let me take you through the history: Lehman Brothers started with Henry Lehman, a German immigrant who opened a dry-goods store in Montgomery, Alabama, in 1844. It became Lehman Brothers when his brothers Emmanuel and Mayer joined. They expanded from dry goods to trading cotton and other commodities.
By 1858, operations moved to New York, the hub for cotton and commodities trading. Henry handled the original store side, while his brothers built the foundation for a financial giant. Over the next 150 years, the company changed many times, forming alliances and partnerships. Though its bankruptcy didn't cause the Great Recession or subprime crisis, it sparked a huge global market selloff.
Important Note
Understand this: Lehman Brothers was permitted to fail, and the effects were immediate and worldwide. For example, the Dow Jones Industrial Average dropped 500 points on the day of the bankruptcy declaration. Its collapse contributed to the Great Recession that ensued.
Lehman Brothers Today
Today, Lehman's assets, real estate, and operations were liquidated in a fire sale to pay back investors. Within a month, Nomura from Japan acquired its Asia-Pacific operations (including Japan, Hong Kong, Australia), plus investment banking and equities trading in the Middle East and Europe. Barclays took its North American investment banking and trading, along with the New York headquarters.
In Popular Culture
Lehman Brothers and its leaders appear in various financial movies since 2008, like Margin Call, Too Big to Fail, and The Big Short. The 2019 Showtime series Black Monday is a dark comedy about a financial crisis, featuring fictional siblings Larry and Lenny Lehman inspired by the real brothers.
In 2016, former Lehman CFO Erin Montella, who resigned in 2008, wrote Full Circle: A Memoir of Leaning in Too Far and the Journey Back, detailing her finance experiences. Most prominently, The Lehman Trilogy is a three-act play by Stefano Massini, tracing the three immigrant brothers from arriving in America and starting their business to the 2008 collapse. It debuted on Broadway in March 2020, paused for COVID-19, resumed in fall 2021, and won five Tony Awards, including Best Play.
Why Did Lehman Brothers File Bankruptcy?
Lehman filed for bankruptcy because its subprime mortgage holdings were worth far less than believed. Clients fled as the stock price crashed, and creditors stopped lending. On September 15, 2008, it declared bankruptcy.
Why Was Lehman Brothers Not Bailed Out?
Regulators said they couldn't bail out Lehman due to insufficient collateral for a Federal Reserve emergency loan. The financial system was more fragile than during the Bear Stearns rescue, making a private buyer hard to find. Some speculate regulators aimed to set an example against Wall Street's risk-taking, but if so, it backfired as Lehman's failure spread contagion globally.
Who Were the Lehman Brothers?
Henry Lehman, a German immigrant, started a dry-goods store in Montgomery, Alabama. With brothers Emmanuel and Mayer, it became Lehman Bros. During the Civil War, cotton grew vital, so they supplied it and traded in New York. They left the South, headquartered in New York, focused on commodities trading and brokerage, and grew into a full financial firm over decades.
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