Lehman Brothers

Lehman Brothers
Name	Lehman Brothers
Fate	Bankruptcy
Foundation	1850
Defunct	2008
Location	New York City
Industry	Investment banking
Products	Financial services, Securities

Lehman Brothers was a global investment banking firm founded in 1850 that became one of the largest securities and fixed income dealers in the world before its collapse in 2008. The firm operated across New York City, London, Tokyo, Hong Kong and other financial centers, engaging in merchant banking, investment management, and capital markets activities. Its failure precipitated major disruptions in Wall Street markets, accelerated government interventions by institutions such as the Federal Reserve and the Treasury Department, and influenced international responses by entities including the International Monetary Fund and the European Central Bank.

History

Lehman Brothers originated when Henry Lehman emigrated to Montgomery, Alabama and opened a general store; his brothers Emanuel Lehman and Mayer Lehman later joined, expanding into cotton trading and merchant banking. Throughout the late 19th and early 20th centuries the firm participated in financing railroad expansion, underwriting securities for corporations such as Union Pacific and engaging with firms like Goldman Sachs and J.P. Morgan. In the interwar and postwar periods Lehman developed businesses in municipal bonds, asset management, and broker-dealer activities, expanding internationally through offices in London and Tokyo. During the late 20th century, leadership under figures such as Pete Peterson and executives who joined from firms like Salomon Brothers and Bear Stearns helped pivot the firm toward securitization, mortgage-backed securities, and proprietary trading.

Business operations

Lehman's operations encompassed investment banking services, fixed income trading, equity sales and trading, asset management, and private equity through affiliates and partnerships with firms such as Barclays, Nomura, and BlackRock. The firm became a major underwriter of mortgage-backed securities, dealing with counterparties including Fannie Mae, Freddie Mac, AIG, and dealer banks like Citigroup and Bank of America. Its trading desks participated in repo markets, secured financing with counterparties such as Goldman Sachs and Morgan Stanley, and used structured products linked to indices maintained by firms like Standard & Poor's, Moody's Investors Service, and Fitch Ratings. Lehman also ran prime brokerage services used by hedge funds like Long-Term Capital Management and was involved in derivatives cleared through venues related to ISDA counterparties.

Role in the 2007–2008 financial crisis

Lehman played a central role in the expansion and collapse of the subprime mortgage and collateralized debt obligation markets by underwriting and holding large positions in mortgage-backed securities and asset-backed securities. Its leverage ratios and reliance on short-term funding from the repo and commercial paper markets exposed it to runs when prices of securities tied to issuers such as Countrywide Financial and New Century Financial Corporation deteriorated. Interactions with counterparties like AIG and trading firms including Deutsche Bank magnified systemic risk, prompting interventions by regulators such as the Federal Reserve Bank of New York and policy responses from the U.S. Treasury Department and lawmakers in the United States Congress. Market events surrounding Lehman influenced stresses in international markets including European banking systems and prompted coordination among central banks such as the Bank of England and the Bank of Japan.

Bankruptcy and liquidation

On September 15, 2008, following failed discussions with potential buyers including Barclays and Bank of America, the firm filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court in Manhattan. The filing represented the largest bankruptcy in U.S. history by assets at the time, affecting counterparties across New York Stock Exchange marketplaces, over-the-counter derivatives networks, and global clearinghouses. The bankruptcy triggered asset sales, including a purchase of parts of the investment banking franchise by Barclays and transfers of derivatives and securities positions to firms like Nomura. Liquidation proceedings involved trustees, creditors such as Goldman Sachs and Citigroup, and court-supervised distributions amid disputes over collateral in repo agreements and the treatment of secured creditors under bankruptcy law.

Legal actions and settlements

Post-collapse litigation included lawsuits by the firm’s estate against former executives and counterparties, actions by creditors and shareholders against underwriters and auditors including Ernst & Young, and regulatory investigations by agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. Settlements addressed claims related to disclosure, underwriting of mortgage-backed securities, and accounting practices; notable resolutions involved payments by banks and insurers to Lehman creditors and lawsuits concerning the sale of assets to Barclays. Civil and criminal inquiries engaged prosecutors in jurisdictions including New York and resulted in fines, civil penalties, and negotiated settlements rather than widespread criminal convictions of senior executives.

Legacy and impact on financial regulation

The firm’s collapse accelerated legislative and regulatory reforms, influencing passage and implementation of measures such as the Troubled Asset Relief Program, enhanced capital and liquidity requirements promulgated through standards like Basel III, and reforms to systemically important financial institution oversight enacted by agencies such as the Financial Stability Oversight Council and the Office of the Comptroller of the Currency. It prompted changes to bankruptcy rules for large financial firms, improvements in derivatives clearing and central counterparty frameworks involving organizations such as LCH.Clearnet and led to international coordination via the Financial Stability Board and the G20 to mitigate systemic risk. The collapse remains a case study cited by academics at institutions such as Harvard University, Princeton University, and London School of Economics and by policymakers assessing resolution regimes and market infrastructure resiliency.

Category:Financial services companies of the United States Category:Bank failures