Lehman Brothers Crisis: Biggest Bankruptcy In History
Before 2000s:
Lehman Brothers Holding Inc. was founded as global financial services in 1847. It was fourth largest investment bank in United States. The company was involved in investment banking, equity and fixed income sales and trading research, private equity and private banking. In 1844 a 23 years old guy named Henry Lehman opened a dry-goods store named as "H.Lehman" in Alabama. After 3 years his brother named Emanuel Lehman and the name of firm became "H.Lehman and Bro". In the year of 1950 their youngest brother "Mayer Lehman "joined them then firm named as "Lehman Brothers". During 1850s cotton was the most important crops in US and Alabama was the biggest producer of the cotton. Capitalizing cotton market, Lehman brothers began to routinely accept raw cotton from customers as the payment for merchandise. Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887. The company survived them all—the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express (AXP) in 1994 in an initial public offering (IPO), and the Long Term Capital Management collapse and Russian debt default of 1998.
image: Lehman Brothers
After 2000s:
Lehman Brothers was one of the first Wall Street firms to move into the business of mortgage origination . In 1997, Lehman bought Colorado-based lender Aurora Loan Services, an Alt -A lender. In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC. Lehman quickly became a force in the subprime mortgage . By 2003 Lehman made $18.2 billion in loans and ranked third in lending. By 2004, this number topped $40 billion. By 2006, Aurora and BNC were lending almost $50 billion per month.
Lehman had morphed into a real estate hedge fund disguised as an investment bank. By 2008, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its risky commercial real estate holdings were thirty times greater than capital. In such a highly leveraged structure, a three- to five-percent decline in real estate values would wipe out all capital.
Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008, an intricate process known as leveraging or gearing. A significant portion of this investment was in housing-related assets, making it vulnerable to a downturn in that market. One measure of this risk-taking was its leverage ratio, a measure of the ratio of assets to owners equity, which increased from approximately 24:1 in 2003 to 31:1 by 2007. While generating tremendous profits during the boom, this vulnerable position meant that just a 3–4% decline in the value of its assets would entirely eliminate its book value of equity. Investment banks such as Lehman were not subject to the same regulations applied to depository banks to restrict their risk-taking.
In August 2007, Lehman closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took a $25-million after-tax charge and a $27-million reduction in goodwill.
The Final Breathe:
In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and decided to raise $6 billion in additional capital by offering new shares. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[7] In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September. It culminated on September 9, 2008, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold. Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business.On September 12, 2008, Timothy F. Geithner, then president of the Federal Reserve Bank of New York, called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.Bankers representing all the major Wall Street firms were in attendance. The meeting goal was to find a private solution in rescuing Lehman and extinguish the flame of the global financial crisis. Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. The New York Times reported on September 14, 2008, that Barclays had ended its bid to purchase all or part of Lehman and a deal to rescue the bank from liquidation collapsed. It emerged subsequently that a deal had been vetoed by the Bank of England and the UK's Financial Services Authority. Leaders of major Wall Street banks continued to meet late that day to prevent the bank's rapid failure. Bank of America's rumored involvement also appeared to end as federal regulators resisted its request for government involvement in Lehman's sale. By Sunday, September 14, 2008, after the Barclays deal fell through, the news of impending doom swept through Lehman, and many employees arrived at the headquarters to clean out their offices. By Sunday afternoon, the government summoned Harvey Miller of Weil, Gotshal & Manges to file for bankruptcy before the markets opened on Monday.
Lehman Brothers filed for Chapter 11 bankruptcy protection on Monday, September 15, 2008. According to Bloomberg, reports filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan) on September 16 indicated that JPMorgan Chase & Co. provided Lehman Brothers with a total of $138 billion in "Federal Reserve-backed advances". The "Federal Reserve-backed advances" as provided by JPMorgan Chase were for $87 billion on September 15 and $51 billion on September 16.
Current Position :
Former chairman and CEO Richard Fuld now runs Matrix Private Capital Group, a firm he founded in 2016 after the collapse of Lehman. The firm is an asset management firm that services high-net worth individuals. Fuld sold an apartment in New York City, as well as a collection of art he owned. He is still fairly critical of the U.S. government for not bailing out Lehman Brothers like it did with the other banks. At the time, officials said the bank was much weaker than its peers and that the government was unable to find a buyer for Lehman.
Erin Callan Montella was in her early 40s when she assumed the role of Chief Financial Officer (CFO) of Lehman. She resigned from the bank in June 2008 shortly after it reported its second-quarter loss. She did a short stint at Credit Suisse working with hedge funds. She decided to leave the financial world altogether in 2009.
Now, 12 years later, both the holding company and the broker-dealer are nearing the end of the wind down. The estates have worked through the vast majority of claims. Of the $1.2 trillion of claims originally filed against the holding company, all but $4.1 billion have been resolved. It has returned nearly $125 billion to creditors thus far; the broker-dealer has returned another $120 billion to its customers and creditors.
Key takeaways:
- Lehman Brothers started as dry-goods store, in Alabama. Later Capitalize the cotton industry.
- The US government refused to bail out Lehman Brothers, which was finding it impossible to roll over its borrowings in the markets. The global money markets froze, and banks and insurance companies in most of the developed world also suddenly found they could not borrow either.
- The firm posted multiple, consecutive losses and its share price dropped.
- Lehman filed for bankruptcy on Sept. 15, 2008, with $639 billion in assets and $619 billion in debt.
Learn more about Lehman Brothers case:
The Lehman Trilogy: A NovelInside Lehman Brothers
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