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Lehman Brothers

Lehman Brothers, fourth-largest investment bank in the U.S. filed for Chapter 11 bankruptcy protection on September 15, 2008.  The case was filed with the U.S. Bankruptcy Court, Southern District of New York (Manhattan).  With $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy filing was the largest in the U.S. corporate history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron.

Lehman Brothers had humble origins and the roots can be traced to a small general store founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844.  Over the years the firm prospered as the U.S. economy grew into an international powerhouse.  In 2003 and 2004, when  the U.S. housing boom was well under way, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage which lent to homeowners with poor credit or heavy debt loads and Aurora Loan Services, which specialized in Alt-A loans made to borrowers without full documentation.  Lehman reported record profits every year from 2005 to 2007. At the time Lehman was the biggest underwriter of US bonds backed by mortgages, accumulating an $85 billion portfolio.  However, by the first quarter of 2007, cracks in the U.S. housing market began surfacing as defaults on subprime mortgages rose to a seven-year high. Lehman’s stocks fell sharply in 2007 with the fall of two Bear Stearns hedge funds.  As the crisis deepened, Lehman Brothers had to close its subprime-lending unit and lay off 2500 employees of the BNC and other mortgage related units. In addition, it also closed offices of Alt-A lender Aurora in three states.  Later, when correction in the US housing market gained momentum, Lehman continued to be a major player in the mortgage market.  However, the firm did not take the opportunity to trim its massive mortgage portfolio which proved detrimental.

Some of Lehman’s losses were from leveraged loans, used by private equity firms and others for buyouts. The firm was stuck with the loans, which they had aimed to package and sell, when the leveraged buyout market froze in the second half of 2007.  By March 2008, the markets tumbled as defaults by homeowners surged, housing prices fell further and the US headed toward a recession. On March 17, 2008, following the near collapse of Bear Stearns – the second-largest underwriter of mortgage-backed securities Lehman shares fell further.

In the year 2008 Lehman had to suffer bigger and bigger losses caused by lower-rated mortgage-backed securities, culminating in $2.8 billion losses and a decline of stock value of 73%. Over the summer of 2008, Lehman’s management made unsuccessful overtures to a number of potential partners.  In August 2008, Lehman laid off 1500 jobs, being 6% of its workforce.

Numerous high level meetings were held to solve the issue by finding a buyer for Lehman. Government was not willing to assure the potential buyers, as they were worried that it will establish a situation of moral hazard. As a deal to rescue the firm could not be settled, Lehman succumbed to Bankruptcy in September 2008. Only Lehman Brothers Holdings Inc. filed for Bankruptcy, while the subsidiaries continued to operate business.

Barclays acquired the Manhattan core business of Lehman for $1.35 billion, with the responsibility of around 9000 employees. Nomura, a wealthy Japanese stockbroking tycoon bought Lehman’s franchise in Japan, Hong Kong and Australia and Lehman’s investment banking and equities businesses in Europe and Middle East.

The Lehman Brothers collapse stunned the global financial markets in 2008 and resulted in a worldwide economic meltdown. Now four years since Lehman Brothers have exited Chapter 11 bankruptcy protection and has started repaying creditors, whose claims total about $450 billion. The company continues to operate, in the same midtown Manhattan headquarters it was in before bankruptcy, albeit on fewer floors, as it sells off its remaining assets before finally closing up shop.

Inside Lehman Brothers