The subprime mortgage crisis significantly contributed to and accelerated the 2008 bankruptcy of Lehman Brothers, a large global financial services company. The company was the fourth-largest investment bank in the country at the time, and its bankruptcy is still the largest in living memory.
Lehman Brothers had been in existence for 158 years when it filed for bankruptcy on September 15, 2008. It offered investment banking, trading, asset management, private banking, research, brokerage, and private banking services. The failure of Lehman Brothers to brought the 2007-2009 subprime mortgage crisis into the spotlight and signaled the coming of the Great Recession.
What Was Lehman Brothers?
Lehman Brothers was once considered a key participant in the global banking and financial services industry. It began as a dry goods business in Montgomery, Alabama, in 1850 and quickly expanded into the trading of cotton and other commodities.
When cotton and other commodity trade moved to New York in 1858, the company’s activities there also changed. While the two brothers, Mayer and Emanuel, built the foundation for what would eventually become a banking sector powerhouse, Henry Lehman was responsible for the first generation of the grocery and general store company.
The business experienced several transformations and entered into numerous alliances and partnerships during the following 150 years. Although Lehman Brothers’ collapse didn’t start the Great Recession or even the subprime mortgage crisis, it did lead to a significant selloff in global markets.
Who Were the Lehman Brothers?
A recent arrival from Germany to the United States, Henry Lehman started a dry goods store in Montgomery, Alabama. The store was renamed “Lehman Bros.” once his two brothers, Emmanuel and Mayer, joined.
Cotton’s importance as a household good increased throughout the American Civil War. By buying unprocessed cotton in the dry goods business and then engaging in cotton trading in New York, the Lehman brothers decided to profit from this situation. Eventually, the company ultimately gave up on the South and moved its headquarters to New York, where it concentrated almost solely on commodities trading and brokerage.
Lehman Bros. grew during the following decades to become a full-service banking company.
The Bankruptcy of Lehman Brothers
The company had assets worth around $600 billion spread across worldwide markets when it filed for bankruptcy.
From 1996 through 2006, it has made significant investments in mortgage origination in the US, mostly using leverage. As a result, some claim the company had effectively turned into a real estate hedge fund. Lehman Brothers was particularly at risk as real estate values reached their peak and subsequently started to decline in 2007-2008. The company fought losses during most of 2008 by issuing shares, selling assets, and cutting expenses (issuing debt under such conditions became difficult to impossible). Large tranches of subprime and low-rated mortgage loans that it either couldn’t sell or didn’t want to sell were on its books.
Lehman Brothers experienced a credit crunch when these loans became unviable, and the company could not repay its debts. It could no longer make funds on the cheap through the issuance of debt, and when it issued stock under these circumstances, the shares were reduced, causing an adverse reaction, which caused the share price to drop.
As buyers stayed away from the market due to market circumstances and their inability to obtain finance, property prices dropped. Since no loans were being given out and the largest financial institutions in the world were at grave risk of failing, the whole global financial system was in danger of collapsing.
The Lehman Brothers Today
To pay back investors, Lehman Brothers promptly sold off its interests in real estate and business activities. The Japanese bank Nomura purchased the company’s activities in the Asia-Pacific area (Japan, Hong Kong, Australia) and its investment banking and stock trading businesses in the Middle East & Europe.
Meanwhile, Barclays bought its North American investment banking and trading activities and its New York headquarters.
Takeaways
- Lehman Brothers had been in existence for 158 years when it filed for bankruptcy on September 15, 2008.
- Lehman Brothers was once considered a key participant in the global banking and financial services industry.
- It had assets worth around $600 billion spread across various worldwide markets when it filed for bankruptcy.
- To pay back investors, Lehman Brothers promptly sold off its interests in real estate and business activities.
