The Collapse of Lehman Brothers

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History of Lehman 

It all started in 1844, when Henry Lehman, a German immigrant, came to Montgomery, Alabama and started a small general store in 1844. Henry Lehman and his brothers, Emanuel and Mayer, later founded Lehman Brothers in the year 1950. The company that started by selling dry-goods moved to cotton trade. After the death of Henry  Lehman, in 1855, the other brothers expanded Lehman Brothers and started commodities trading and brokerage services.

To complement the growth of the U.S. economy, Lehman Brothers prospered over the decades and reached a value of $600 billion before the collapse in 2008. Although, Lehman has overcome a lot of challenges over the years such as the railroad bankruptcies in the 1800s, the Great Depression in the 1930s, both world wars, the American Express spun off in 1994, the Long Term Capital Management collapse alongside the Russian debt defaults in 1998, the global recession or the subprime mortgage crisis was the one that landed Lehman to its grave.

How Lehman started digging its own grave

It all started in 2003 when Lehman and many other financial firms started investing in mortgage-backed securities(MBS) and other CDOs. As we know that the housing boom started alongside the same time-frame and during the boom, the MBS and CDOs were of real profit. To take more from the pie, Lehman acquired five mortgage lenders and also acquired subprime lenders that specialized in Alt-A loans such as BNC Mortgage and Aurora Loan Services. 

At first, the acquisitions seemed prescient which in turn generated huge profits. The revenue from the real estate surged 56% from 2004 to 2006 which in turn was the fastest growth rate than any other business in investment banking or asset management. Increasing the securitized mortgage to $146 billion - a 10% increase from 2005. So the model, even though flawed, was profitable and Lehman reported profits from 2005 to 2007 with a closing income of $4.2 billion on revenue of $19.3 billion in a single year.

Lehman during the crisis

Since 2003, Lehman was generating huge profits on the mortgage-backed securities and other CDOs but in 2008 when the public and banks became aware of the flawed model, that was returning huge profits, everyone started taking their money out, the securities became a depreciating asset and the mortgage doubled thus leading to more number of defaulters and thus leading to the Global Financial Crisis of 2008.

On March 17, 2008, as many suspected Lehman to the next Wall Street firm to collapse the shares plummeted by 48%. However, in April, Lehman issued preferred stock options at a 32% premium, these helped Lehman to raise $4 billion and the confidence of the general public returned.
Q2 loss of $2.8 billion announced on June 7 and another $6 billion raised from investors by June 12 added further to the incorrigible situation.

Lehman in Sept 2008

September started with the indication of the collapse of Lehman, as the stocks plunged 77% that too in the first week of Sept. The only way to save Lehman was by seeling some parts of the asset management unit and the commercial real estate assets. However, the Korea Development Bank had plans to save Lehman, the state-owned South Korean dropped the plan on Sept 9. This lead to a stock price drop of another 45%. On Sept 10, Lehman announced a Q3 loss of $3.9 billion and a $5.6 billion in write-down.  By Sept 11, the stock suffered another drop of 42%. By the end of the week, Lehman had only $1 billion in cash. Over the weekend of Sept 13, Lehman, Barclays PLC, and Bank of America (BAC) made their last-ditched efforts to facilitate a takeover of the former but were thrown away. On Monday i.e. 15 Sept 2008, Lehman declared Chapter 11 bankruptcy which resulted in a drop of 93% from the previous close on Sept 12.
Lehman Brothers Holdings, Inc., sought Chapter 11 protection, which is the largest bankruptcy proceeding in U.S. history.

Lehman total assets pre-filing were $639,063,000,800 which are equivalent to $765,710,284,480 in 2020.