Lehman Brothers: The Rise and Fall of Lehman Brothers. A History that Goes Beyond the Great Depression.

Lehman Brothers, an investment bank that dates back to 1850, prior to the Civil War has now filed for bankruptcy.  A storied institutions that has survived two World Wars, the Great Depression, and practically every other calamity in its 158-year history is no longer solvent.  As of 1am on September 15, 2008 the investment bank announced that it would file for Chapter 11 bankruptcy protection.

This astonishing news comes during a weekend when most of the market on Friday was expecting that someone would surely come to the table to help the firm.  Whether it was a private purchase or a government sponsored bailout like what occurred with Bear Stearns and JP Morgan, bankruptcy was not expected by many.  Early talks indicated that Bank of American and Barclays were in close talks to take over the troubled investment bank.  The Federal Reserve which aided in helping the Bear Stearns deal and the U.S. Treasury which just last weekend entered into the biggest bailout known to humankind by aiding Fannie Mae and Freddie Mac both seemed unwilling to come to the aid of Lehman Brothers.  I am sure as time goes on more and more details will emerge as to why this occurred.

Bank of America in an unprecedented move went ahead and managed to get their hands on Merrill Lynch for a stunning $29 a share deal.  It is stunning enough that Bank of America went after Merrill Lynch especially given that the Friday close per share value was $17.  This is the same Bank of America who recently completed its take over of troubled mortgage lender Countrywide Financial.  If you recall the deal, BofA offered a higher share price than the current market price for Countrywide but only months later, implied that they would not be back stopping all the debt of Countrywide.  The Federal Home Loan Bank had extended a stunning amount of loans to Countrywide so it is yet to be seen how things playout with the Merrill Lynch purchase since the fate of Merrill was very likely going to precede that of Lehman Brothers.

It is unprecedented that in only six months, 3 of the top 5 investment houses on Wall Street are no longer in their previous form.  I can imagine that at this point all eyes must be on Goldman Sachs and Morgan Stanley.
The story of Lehman Brothers takes us back to 1844 when a 23 year old Henry Lehman emigrated to the United States from Bavaria.  He decided to settle in all places Montgomery Alabama where he decided to open a dry-goods store.  In 1847 another brother arrived and in 1850 yet another.  The firm changed its name in 1850 to the current Lehman Brothers name.

Cotton had a high market value and seeing a market for this, the 3 brothers started to accept payment in cotton for goods and also created a secondary market for trading in cotton.  It makes you wonder how many tranches can be spun from a shipment of cotton?  Seeing the need to be closer to the liquid market of cotton in New York the firm relocated to New York in 1858.  It later joined the Coffee Exchange and also the New York Stock Exchange.  It was sometime before the initial founding of the firm that Lehman Brothers actually underwrote its first public offering.  In 1899 it underwrote a public offering for the International Steam Pump Company.  It wasn’t until 1906 that the firm started underwriting some bigger public offerings.  The names of Sears Roebuck and Company, Woolworth, Macy & Company, and B.F. Goodrich where all part of their earlier team deals with Goldman Sachs.  It was making a big name for itself on Wall Street.

During the Great Depression, much of the focus of Lehman went toward venture capital as the equity markets were being hammered.  In the 1930s Lehman Brothers underwrote the IPO for DuMont and also helped to provide capital to get RCA going.  It also had its hand in financing Halliburton.  Like I said, Lehman Brothers has a storied past.

In 1975 the firm merged with Kuhn, Loeb and Company to form at the time the 4th largest investment bank.  The merger didn’t go quite as planned and strife arose in the firm.  The firm was sold to American Express.  AMEX started to break away from banking and brokerage operations and sold off operations to Primerica which in 1994 was broken off as an IPO for the current Lehman Brothers ticker.  The firm did exceptionally well purchasing fixed income such as Lincoln Capital Management and Neuberger Berman which still are profitable today.  Since the IPO in 1994 Lehman had steadily increased revenues and grew in employees from 8,500 to approximately 28,000.

As glorious as this past may seem Lehman could not resist the subprime markets.  In August of 2007 Lehman closed its subprime lender BNC Mortgage which left 1,200 positions gone.  This clearly was only the beginning for Lehman and their mortgage and credit problems.  In 2008 Lehman was posting unprecedented losses.  For the most part their problems arose from holding onto lower grade tranches and holding on too long to subprime mortgages.  It is up in the air whether they held onto to these assets because of a foolish investment move or whether their simply wasn’t a market for these assets.  For the 2nd quarter the frim had $2.8 billion in losses and was forced to liquidate $6 billion in assets.  It is simply stunning to see the stock movement for the firm:

Lehman Brothers

It is hard to believe that only one year ago, this once behemoth of Wall Street had a $47 billion market cap and now is filing for bankruptcy.  As the troubles mounted in late August rumors started piling on that a bailout from the Korea Development Bank was in the works.  This never materialized.  On September 10 Lehman announced another stunning loss of $3.9 billion and made it clear that they were also in the works of selling off the prized jewel in Neuberger Berman to raise capital.  The rest we already know and weekend talks broke down and Lehman was forced with no other option but to file for bankruptcy.

Now truly these are unparalleled times.  The ink is only drying on the Fannie Mae and Freddie Mac deal which puts at risk $200 billion of taxpayers’ money and given the current housing market is very likely to use up every single penny.  Even though many pundits are quick to tell us no money is lost most unbiased analyst are quick to point out that some money will come out of the taxpayers’ wallet.  This is the first major bankruptcy of a major investment bank and it is yet to be seen how the already weak markets are going to respond.  The Federal Reserve also announced that they will be accepting equities which is simply astounding.  Clearly this weekend meeting has the smell of panic more than anything else.

It is easy to lose perspective of what really is going on.  You need to remember that debt is at the center of all this.  Most of the debt is secured by residential housing but also commercial real estate.  We can all rest assured that most of the balance sheets of many of these firms have been overly generous in estimating the value of their assets.  A forced mark to market in today’s market is not going to go well.  It is a game of financial brinkmanship and many are trying to offload as many toxic debt products without being stuck with the debt.  The financial musical chairs are quickly running out.  We go from Fannie Mae and Freddie Mac to this in one week.  Clearly the balance sheets of these companies are weaker than anticipated.  And with housing showing no signs of recovery, we can expect more of the same.  The next question that comes to mind is what will happen to Goldman Sachs and Morgan Stanley?  The mortgage market looks to be dominated by the government for the foreseeable future through Fannie Mae and Freddie Mac so it makes you wonder what role these companies will have in the debt markets.

If anyone had any doubts that too much leverage is a bad thing, we are quickly realizing how a small dry-goods store can turn into a massive investment bank years later that has brought the entire world’s attention onto it.  A systemic crisis seems more and more probable as the year progresses.

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16 Responses to “Lehman Brothers: The Rise and Fall of Lehman Brothers. A History that Goes Beyond the Great Depression.”

  • After reading this at 4 a.m. local time:
    My first thought was, “DHB will probably have something posted on Lehman by now.” 🙂
    What floored me was the lead in the above story as of 10 p.m. PDST (last night), Lehman’s bankruptcy, Merrill’s stampede to BoA’s tender arms, and AIG’s great big tin cup were all still matters of speculation. Six hours later these are all presented as a done deal, like the invention of the chastity belt.
    Opening market news shows slats kicked out of economies worldwide. Maybe this is by design. That is to say, the viciously rich may have intended this all along. They tipped their hand with globalization/NAFTA/GATT—pitting people against each other on an unprecedented new scale. And now macroeconomically. They sold “free trade” to the US by saying we’d get rich by having cheap imported crap up the wazooties. They turned around and emptied out US productive capacity, leaving us with a national culture of political correctness and dumbassification (and workers too stupid to follow cartoon summaries of their job tasks–as Toyota learned in the Deep South a few years back). Then they turned to other nations, promising money to buy the stuff that appealed to those aspiring to a US standard of life without, you know, having to fight and win two world wars. Now they’re taking those nations down as well?
    In all ages, the richest of the rich stop at nothing in worship of their idol MORE.
    I am thinking of October 20, 1987. I was camping just outside of Duluth when Black Monday happened, and won’t maunder on in my anecdotage about that. Maybe later, because it ties back to how the roots of this entire crisis were in Reaganomics and the elevation of (pardon, Doc) ticky-tacky SoCal consumption and luxe to the national standard. Designer this, gourmet that, upscale the other.
    It’s my sore right knee awoke me, by the way, and the bright full moon. Spent the week drilling and setting 4×4 and 6×6 fence posts for an extensive food gardens expansion.
    It’s going to be a helluva day. A lot of imaginary money–and real jobs, real wealth, real hope–are going to evaporate. I hear that if you’re of a political bent, there are people selling even hope…and raising $66 million each month in doing so. Let’s get to work setting up a market for that–and trading standards–and futures and hedge funds and all.
    I think I’ll go short.

  • the unraveling has begun, and soon only cold cash will matter. credit will be sneered at, as it already is in the form of diminished junk mail offering credit cards.

    you can thank alan greenspan for all this.

  • I’ll go back to something I’ve said before, the baby boom generation might someday be remembered as the generation that wrecked America. Lehman withstood 158 years of powerful challenges but was pulverized by the greed and mismanagement of the baby boomers. Lehman is but a symbol of the times in which we live.

    OK, if Lehman is now BK without the doomsday scenario all the experts predicted for Bear/Fannie/Freddie (as of Monday AM), does is strike anyone besides me as odd? Certainly, Lehman was enmeshed in the international markets as much as any of the others. Maybe the government-sponsored rescue plan for the others wasn’t necessary after all. Maybe we were once again sold on bad intel like WMDs in Iraq. Anyone see a pattern here?

    Before long, the only institution left unscathed will be Goldman. Coincidence perhaps???

  • Now we all know what size of company is too small to bail instead of too big to fail.

    Agreed on the Boomer Gen ruining the country with their lack of vision and self interest over the better interest of the nation. Greedy, grubby, and destined for failure.

  • Hey frnd,

    I needed to know if AIG collapses, will it have effect in INDIA? In INDIA, AIG is tied up with TATA to provide life and general insurance….

    I hope it won’t……… Plz reply on my blog

    Ojal Suthar,

  • One reason for why the Fed didn’t bail out Lehman is that, from what I’ve read, Lehman was associated with less than 1 Trillion in derivatives (while Bear Sterns had more than that). That may be the dividing line.

  • Who here remembers When the OC went broke. It was do to dirivitives that went bad. Here we go again, but on a much larger scale. Who’s next, Wamu? Wacovia? Suntrust? It’s not going to be pritty, & I wonder what the spin mysters at CNBC really think vs the crap they pass off to us as news.

  • A sparse crowd, this thread. I understand; it’s kinda hard to write while standing in line outside your lending institution waiting to get your money out.

    Here’s a question for DHB or anyone else. What’s happening to the part of the bond market that cities, counties, special improvement districts and developers issue to build infrastructure that is the backbone of the new home construction market? It seems to me that many of the institutions that underwrote and insured those deals are on life support or dead. Depending on your location, these bonds are collateralized or repaid through mil levies, transfer taxes, property taxes or in some form tied to home values and sales. Should we be worried about infrastructure projects stopping midway or getting built but not maintained? It’s one thing to have decaying vacant homes, its quite another to have decaying roads, sewer and water systems.

  • Blutown, my sense is that the shock-and-awe part isn’t over yet, and thus the relative lack of comment.
    Talking to the in-laws in the Midwest tonight, we heard the dad unit opine that infrastructure decay is very very bad. However he doesn’t want to pay any more taxes. I personally think we’re spending too much of our property tax bill on upscale luxuries for the local schools. Kids can learn, and learn how to think and work, without, for example, orchestra camp in Europe, a staff of full-time athletic trainers, Olympic-scale sports facilities, and multimedia labs.
    In our part of the world (Puget Sound, USA), a lot of the developers’ fees were siphoned for this luxe consumption for the minority with kids who don’t want to buy these upscale entitlements for themselves. Education here has become a matter of buying access into a particular social standing.
    I’m with you. Sewer and water comes first; without that, what ya got is epidemics.

  • Bill Clinton wanted affordable housing and forced lenders to relax lending standards. Osama worked for ACORN which pushed for equality in lending and lower standards for home loans.
    “W” inherited the scheme but did nothing to stop it and actually took credit for the increase in individual home ownership.
    We as Americans want “affordable” housing, education, healthcare, etc. for everyone. Politicians reacted and gave.
    Problem is, we in fact can’t afford most of it; thus our debt. Now we can’t pay our debt to the banks, thus their failure.
    Listen to either presidential candidate… still making promises they can’t keep. We never learn.

  • What’s the impact of the Leyman bankruptcy on mortgages and housing prices (particularly in SoCal)?

    What’s the impact going to be if AIG fails, or if Wamu is bought?

    Also: With this new “we don’t bailout” policy… what’s going to happen to Wamu? If it fails and doesn’t get bought, what happens to my deposits (under FDIC limit, naturally)? FDIC will likely ensure them, but how long could I be potentially waiting on access to my money?

  • oilwelldoctor:

    Thank you. I am SO sick of hearing people bemoan one side or the other in the political game for their responsible role in this mess when it was in fact movements on both sides that brought us here, along with voter complacency letting these polished turds stay in office.

  • compass rose,

    Part of the problem is schools are caught up in an arms race. Neighborhood property values rise or fall based on how desirable their schools are. In areas that allow school choice, schools with the “luxuries” you mention also have a competitive advantage and so get more students (and hence more funding.) School choice is like any other market — once marketing comes into the picture the focus is on flash and not on fundamentals.

  • Lehman’s fate was sealed when they left the south. They never would have gotten involved with all that Yankee finance. 😉

  • Anyone who didn’t catch Charlie Rose on tv last night should check it out on the web:

    “A discussion about the crisis on Wall Street with Lawrence Summers, Andrew Ross Sorkin of The New York Times Charles Gasparino of CNBC, Josh Rosner of Graham Fisher & Co. and Nouriel Roubini. Lehman Brothers, the fourth-largest US investment bank, has filed for bankruptcy protection, stock markets and the US dollar have tumbled in reaction to Lehman’s collapse.”

  • The Obama administration would not offer a bailout because of the Lehman Brothers background in cotton.

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