The ASR Introspect │Lehman Brothers (1)

In what appeared to be a global financial services firm founded in 1847, the history of Lehman Brothers which grew to be the fourth largest investment bank in the United States with 25, 000 employees worldwide twisted fate when it filed for bankruptcy in 2008.

By Alexander Solomon

According to Wikipedia, The bankruptcy of Lehman Brothers on September 15, 2008 was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate financing for its reorganization.

These discussions failed, and Lehman filed a Chapter 11 petition that remains the largest bankruptcy filing in U.S. history, involving more than US$600 billion in assets.

The bankruptcy triggered a 4.5% one-day drop in the Dow Jones Industrial Average, then the largest decline since the September 11, 2001 attacks. It signaled a limit to the government’s ability to manage the crisis and prompted a general financial panic. 

Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure. The government and the Federal Reserve system responded with several emergency measures to contain the panic.

Updated January 30, 2021 on Investopedia, The Collapse of Lehman Brothers: A Case Study.

Lehman stock plunged 93% between the close of trading on September 12, 2008, and the day it declared bankruptcy. (Investopedia)

Hundreds of employees, mostly dressed in business suits, left the bank’s offices one by one with boxes in their hands. It was a somber reminder that nothing is forever—even in the richness of the financial and investment world.

At the time of its collapse, Lehman was the fourth-largest investment bank in the United States with 25,000 employees worldwide. It had $639 billion in assets and $613 billion in liabilities. The bank became a symbol of the excesses of the 2007-08 Financial Crisis, engulfed by the subprime meltdown that swept through financial markets and cost an estimated $10 trillion in lost economic output.

In this article, we examine the events that led to the collapse Lehman Brothers.

Key Takeaways:

  • Lehman Brothers had humble beginnings as a dry-goods store, but eventually branched off into commodities trading and brokerage services.
  • The firm survived many challenges but was eventually brought down by the collapse of the subprime mortgage market.
  • Lehman first got into mortgage-backed securities in the early 2000s before acquiring five mortgage lenders.
  • The firm posted multiple, consecutive losses and its share price dropped.
  • Lehman filed for bankruptcy on September 15, 2008, with $639 billion in assets and $619 billion in debt.

Lehman Brothers had humble origins, tracing its roots to a general store founded by German brothers Henry, Emanuel and Mayer Lehman in Montgomery, Alabama, in 1844. Farmers paid for their goods with cotton, which led the company into the cotton trade. After Henry died, the other Lehman brothers expanded the scope of the business into commodities trading and brokerage services.

The firm prospered over the following decades as the U.S. economy grew into an international powerhouse. But Lehman face plenty of challenges over the years. The company survived the railroad bankruptcies of the 1800s, the Great Depression, two world wars, a capital shortage when it was spun off by American Express (AXP) in 1994 in an initial public offering, and the Long Term Capital Management collapse and Russian debt default of 1998.

Despite its ability to survive past disasters, the collapse of the U.S. housing market ultimately brought Lehman to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step.

Disclaimer: This is not a paid or sponsored article. The sources and information quoted are to correct time of reference. Opinions herewith are not intended to market make or manipulate trading interests of any parties. Readers may/may not forecast trading decisions from these findings. Alexander Solomon bears no responsibility to market adjustments due from publish of this report.

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Alexander Solomon is an independent industry commentator and the author of adventure novels ‘Aces High @ 23 Wall Street’ and ‘F-A-M-E ‘ze Great’. He has worked in Singapore Police Force, Singapore International Monetary Exchange, Singapore Exchange, Mediacorp and Philip Capital.