#1: LEHMAN BROTHERS
The Global Financial Crisis in 2009 had a profound effect on the world, with consequences lasting for years. One of the main causes of this global crisis was the collapse of Lehman Brothers. Lehman Brothers was a global financial services firm who dealt with multiple facets of banking. After succeeding for over 150 years, the company dramatically filed for bankruptcy in 2008. The shockwaves from this bankruptcy and subsequent credit crisis is still felt all this time on. So how did Lehman Brothers – at one point a behemoth of the financial world – collapse? In this article, we take a look.
Lehman Brothers had a storied history, dating back to 1850. The company that would eventually be known as Lehman Brothers was founded in 1850 by three brothers who had each emigrated from Germany to Alabama, USA. The trio initially founded a dry-goods store, before using their entrepreneurial flair to diversify their business – dominating the lucrative cotton market. Over the course of the following decades, the business eventually settled into finance.
From the 1900s to the years preceding their collapse, they successfully overcame several issues. These included succession problems when there wasn’t anyone left from the Lehman family to take over the business, overcoming the Great Depression of the 1930s, and the intense competition facing the company (including internal competition- which resulted in various power struggles). By the 21st century, the company had diversified into multiple areas of finance – including equity, consumer finance and mortgages.
Their eventual collapse began back in 2003, when the US Housing boom was in full swing. Lehman saw the boom as an opportunity to make money, and acquired various mortgage lenders, including some subprime lenders. Despite initial success for Lehman, their fortunes changed when the housing bubble burst, due in part to the plethora of subprime mortgages that had been handed out – many of which by Lehman. Lehman were far from the only financial firm to be affected.
The firm reached a point in which they had an $85bn portfolio of mortgage-backed securities – four times the value of the equity in the business. This left Lehman vulnerable, and city analysts speculated that Lehman would follow fellow major financial firm Bear Stearns into financial disarray. Indeed, after dismal-looking accounts were submitted, their stock plunged heavily. Efforts were made to revamp the business, as well as sell key assets, but they appeared to attempt change too late.
Last-ditch takeover bids were launched, but no eleventh-hour deal could be secured. The US Government declined to get involved as they had done with Bear Stearns – a decision which was criticised by many. On Monday 15th September 2008, Lehman declared bankruptcy. Following its liquidation, Barclays eventually acquired Lehman’s remaining US assets. Nomura Holdings acquired the Asian and European divisions of Lehman, paying a paltry $2 for the latter. This summed up the fall from grace for Lehman.
Almost a decade on, Lehman Brothers’ bankruptcy continues to be the biggest in US history. At the time, there was an overriding feeling that financial firms were ‘too big to fail’ – though Lehman proved otherwise, in a collapse that would see its effects reverberate around the world. It is sad that a business that began in humble ways as a family, lost its direction as others got involved. Ten years on, Lehman Brothers is no more, yet their legacy lives on.