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What was the Lehman Brothers Collapse?

2016-10-07T17:05:35+00:00

The term 'Lehman Brothers Collapse' is included in the Banking edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

The Lehman Brothers collapse occurred officially on September 15 of 2008 when the firm filed for bankruptcy. At the time it had $619 billion in debts and $639 billion in assets. This made it the biggest filing for bankruptcy in all of history. Its assets were massively higher than the ones that had preceded it in infamous collapses such as Enron and WorldCom.

When the Lehman Brothers collapse occurred, it held the distinction of being the fourth biggest American based investment bank. The bank boasted 25,000 employees located in financial centers around the world. Its untimely fall turned it into the biggest casualty of the financial crisis that began from the U.S. subprime mortgage collapse. This crisis ran like wildfire through financial markets around the globe in 2008.

The crisis became so much worse because of this turning point moment when the Lehman collapse occurred. It was a major contributing factor to the destruction of $10 trillion worth of market capitalization off of global stock markets in just October of 2008. This represented the largest recorded single month decline when it happened.

The investment bank had managed to successfully navigate and survive numerous challenges over the years before the Lehman Brothers collapse. Their origins dated back to a Montgomery, Alabama general store that German immigrant Henry Lehman opened in 1844. Six years later, Henry with his two brothers Mayer and Emmanuel established Lehman Brothers. The firm moved increasingly into investment banking in the subsequent decades.

As the U.S. economy expanded into a first rate power, Lehman prospered. Among the challenges it faced were the 1800s’ railroad bankruptcies, the 1930’s Great Depression, and the two world wars. The firm also navigated being acquired and then spun off by American Express in 1994 with a capital shortage. It survived both the collapse of Long Term Capital Management and the Russians defaulting on their debt in 1998.

Though it had survived world rocking disasters in the past, the catastrophic collapse of the housing market in the U.S. proved to be too much for the investment bank. This was primarily because it had rapidly embraced the subprime mortgage market in the early 2000s, a misstep that was to cost the bank and its employees everything.

It was in the years 2003 and 2004 that Lehman made the acquisitions that led to the Lehman Brothers collapse. It purchased five different mortgage lenders, among them the subprime lenders Aurora Loan Services and BNC Mortgage. These companies made loans to those borrowers who did not have complete documentation. Such mortgages were officially known as Alt-A loans but became nicknamed “liar loans.”

At first the firm made enormous revenue gains in its real estate ventures. This capital markets division saw income roar up by 56% between 2004 and 2006. This massively outpaced growth in the asset management and investment banking divisions. From 2005 to 2007, the bank announced record profits. The year 2007 was the last one they could report such gains, with $4.2 billion in profits on $19.3 billion in revenues their best year ever.

When the housing market began to plunge and borrowers defaulted massively on their loans, the end approached for Lehman Brothers. Less than a year after their record 2007 profits, their failed mortgages, credit default swaps, and investments based on collateralized mortgage instruments brought them completely down.

The term 'Lehman Brothers Collapse' is included in the Banking edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.