eFinancialCareers

What is was it?

Lehman Brothers was a pugnacious investment bank, which collapsed spectacularly on 15 September 2008. Founded in the 1850s, it started out as a commodities trading house, before moving vigorously into bond trading, equities and investment banking advisory services.

Lehman went through various iterations during its long lifetime. In 1984, it was sold to American Express after the departure of some of its top bankers (to form Blackstone) left it short of capital. American Express tried to follow a ‘financial supermarket strategy’ for the next decade, but gave up in 1994 and spun Lehman out as an independent entity. The Lehman Brothers of recent times was born.

What’s it got to do with the financial crisis?

Together with Bear Stearns, Lehman Brothers shares the dubious distinction of having practically disappeared from the face of the earth due to the credit crunch.

But while Bear Stearns was acquired by JPMorgan after the Federal Reserve approved a $30bn credit line to help JPMorgan execute the deal, Lehman received no help from the US government at all. As a result, it was left to file for bankruptcy before Barclays Capital stepped in and offered to buy the US brokerage business and select parts of Lehman’s operations in Europe.

So where did Lehman go wrong? It was partly down to leverage. Lehman began 2008 with its liabilities outnumbering its assets by around 30:1. It reduced this as the year progressed, but was still reliant on overnight funding to meet its commitments. Once no one wanted to lend to Lehman, the bank couldn’t go on.

Why, therefore, didn’t banks want to lend to Lehman? Their reluctance was largely down to Lehman’s large exposure to the US property market – both directly and through derivative products.

When Lehman filed for redundancy, it still had $53bn of mortgage assets and leveraged loans on its books – almost double the value of its shareholders’ funds, according to the writedowns and announced another $3.9bn loss in the days before its demise. It ideally needed to raise more capital to cover the risk of further losses and reassure its investors, and had been in talks with the Korean Development Bank, but they fell through.

At the very last minute, and on the edge of bankruptcy, Lehman tried to draw up plans to spin off around $30bn of its illiquid commercial property assets in a separate entity. However, it lacked the funds necessary to pull this off. And no other banks were prepared to lend the money required.

Last updated on 7 September 2009.

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