Lehman Brothers was a global financial services company in the United States that was founded in 1850. It was the fourth-largest investment bank in the country and had $680 billion before going bankrupt. Despite being a well-positioned bank at the time, it was not known as much for its contributions to clients as it was for the magnitude of the failure that led to its bankruptcy.
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Its services included investment banking, asset management, fixed-income investments, commercial banking, investment management, and general banking services. It had numerous subsidiaries and entities created to fulfill specific tasks. Its complex financial structure allowed delinquent mortgage loans to be sold to investors worldwide, but it didn't take long for this operation to have its consequences.
These actions caused a chain reaction that resulted not only in the bankruptcy of Lehman Brothers but also in a major financial collapse in the banking sector worldwide. In this new case study, we will explain in detail the chronicle of an announced end. Discover the Lehman Brothers case.
Lehman Brothers was founded in 1850 by Henry, Emanuel, and Meyer Lehman in Alabama. It started as a company that accepted cotton as payment to trade. It successfully survived the US Civil War in the 1860s and played a significant role in establishing a cotton financial market in New York. Since then, it diversified its business by venturing into tobacco, coffee, and railroads trading.
After World War I, the United States became the world's leading power and the main exporter of products to European countries. That era of relative prosperity was known as the Roaring Twenties. However, like all good things, it came to an end when inflation skyrocketed, leading to the biggest stock market crash of the time. While Lehman Brothers managed to survive the financial crisis, many entities had to close due to the banks' lack of investment.
In 1933, President Roosevelt enacted the Glass-Steagall Act with the purpose of preventing banks from participating in the securities sector to avoid unfair competition and monopolies. In simple terms, this law aimed to ensure that banks provided loans to individuals and companies in a proper and legal manner, without fraud or irregularities.
However, these measures were eliminated during the 1980s by President Reagan, and it was then that banks, free from these restrictions, began to get involved in the stock market and other financial markets that were previously off-limits. Around the same time, Lehman Brothers was experiencing some financial difficulties that forced it to partner with American Express and be divided into several entities grouped with other companies.
Finally, the firm became Shearson Lehman/American Express and EF Hutton & Co, later united as Shearson Lehman Hutton Inc. In the 2000s, it separated from American Express and regained economic autonomy, formally establishing Lehman Brothers Holding Inc.
In 2007, the entity experienced a financial crisis caused by subprime mortgages. It had accumulated significant losses from mortgage-backed securities during 2008, resulting in $2.8 billion in losses in the fiscal second half, and the company had to sell $6 billion in assets. A month before the bankruptcy, Lehman announced its intention to lay off 1,500 employees.
Although on September 13, 2008, the President of the Federal Reserve Bank of New York called a meeting to discuss the future of Lehman Brothers in an attempt to orchestrate a rescue maneuver such as asset liquidation or sale, two days later, on September 15, the company formally announced its bankruptcy. With liabilities of $613 billion, it is considered the largest bankruptcy in history.
Lehman Brothers had made significant and risky investments in the real estate sector, granting subprime mortgages and a massive amount of unprofitable loans to individuals. In 2007, the situation of the entity was desperate, with losses of $2.8 billion and a 95% drop in its stock value in the moments leading up to the collapse. Only the acquisition of the company by another firm could save it from ruin. But that did not happen.
When bankruptcy was inevitable, most financial and banking entities did not fully comprehend its impact, despite many companies going bankrupt before Lehman due to the subprime mortgage crisis of 2007. If the company didn't fall earlier with all the missteps it had been taking, it was because it still held $63 billion in assets before the bankruptcy. Hence, when it finally collapsed, the New York Stock Exchange crashed, recording the worst single-day drop in history.
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Not content with destabilizing the US financial markets, the bankruptcy of Lehman Brothers had a butterfly effect on the rest of the world. Consequently, the global economy experienced a violent recession in the markets that jeopardized financial activity in the following months.
Faced with the strong financial shock worldwide, markets had to take measures to rescue banks and increase liquidity. They lowered interest rates and made efforts to prevent a new inflation by implementing control systems to prevent other banking companies from repeating Lehman's history.
Concerned, governments made efforts to find culprits, shifting the weight of the law onto them, or at least ensuring they didn't get away with their shady financial dealings. However, as is often the case, the most powerful banking corporations, which bear some or all responsibility, are the ones that suffer the least consequences for their actions. Instead, it is the hardworking citizens who end up being harmed and impoverished by the deals that enriched a few.
So, if there was a choice who to save from ruin, governments chose the banks that still had enough power to avoid another collapse, so they applied recessionary measures and cuts to offset the spending of the bank bailout. However, sacrificing the weak for the stronger worked against the less creditworthy countries of Europe that had to resort to the rescue of the European Central Bank to get out of recession.
When the debt generated by the banks was transferred to the governments, many countries adopted austerity measures that directly affected the health and education sectors, among others. Instead, in an attempt to reactivate the markets and facilitate the reactivation of companies, these same measures sought to benefit their interests to the detriment of workers' rights. The result was more poverty, unemployment and a middle class that drastically lowered their standard of living. Curious the butterfly effect that the bankruptcy of Lehman Brothers produced in the world economy.
“The fluttering of a butterfly can cause a typhoon somewhere in the world” - Chinese proverb applied to chaos theory.
In final words, the Lehman Brothers case has been recorded in the annals of history as the company bankruptcy that generated the greatest consequences globally, producing a financial collapse that led many countries around the world to a severe recession from which they It has been difficult to fully recover after more than 10 years. It was a powerful bank, and yet its subprime mortgages sooner or later bankrupted it. And just as the weight of his presence in the world was, so was his fall and the shock wave he left behind.