LEHMAN BROTHERS CASE

ALFRED JOHNSON
MBA– GENERAL
 THE COLLAPSE OF LEHMAN BROTHERS
INTRODUCTION
IT WAS A GLOBAL FINANCIAL SERVICES FIRM. BEFORE DECLARING BANKRUPTCY
IN 2008, LEHMAN WAS THE FOURTH-LARGEST INVESTMENT BANK IN THE UNITED
STATES (BEHIND GOLDMAN SACHS, MORGAN STANLEY, AND MERRILL LYNCH),
DOING BUSINESS IN INVESTMENT BANKING, EQUITY AND FIXED-INCOME SALES
AND TRADING (ESPECIALLY U.S. TREASURY SECURITIES), RESEARCH, INVESTMENT
MANAGEMENT, PRIVATE EQUITY, AND PRIVATE BANKING. LEHMAN WAS
OPERATIONAL FOR 158 YEARS FROM ITS FOUNDING IN 1850 UNTIL 2008.
• ON SEPTEMBER 15, 2008, THE FIRM FILED FOR CHAPTER 11 BANKRUPTCY
PROTECTION FOLLOWING THE MASSIVE EXODUS OF MOST OF ITS CLIENTS,
DRASTIC LOSSES IN ITS STOCK, AND DEVALUATION OF ASSETS BY CREDIT
RATING AGENCIES, LARGELY SPARKED BY LEHMAN’S INVOLVEMENT IN THE
SUBPRIME MORTGAGE CRISIS, EXCESSIVE RISK TAKING AND SUBSEQUENT
ALLEGATIONS OF NEGLIGENCE AND MALFEASANCE. LEHMAN’S BANKRUPTCY
FILING IS THE LARGEST IN US HISTORY, AND IS THOUGHT TO HAVE PLAYED A
MAJOR ROLE IN THE UNFOLDING OF THE LATE-2000S GLOBAL FINANCIAL CRISIS
 HISTORY OF LEHMAN BROTHERS

• LEHMAN BROTHERS HAD HUMBLE ORIGINS, TRACING ITS ROOTS BACK TO A

SMALL GENERAL STORE THAT WAS FOUNDED BY GERMAN IMMIGRANT HENRY
LEHMAN IN MONTGOMERY, ALABAMA IN 1844. IN 1850, HENRY LEHMAN AND HIS
BROTHERS, EMANUEL AND MAYER, FOUNDED LEHMAN BROTHERS. WHILE THE
FIRM PROSPERED OVER THE FOLLOWING DECADES AS THE U.S. ECONOMY GREW
INTO AN INTERNATIONAL POWERHOUSE, LEHMAN HAD TO CONTEND WITH
PLENTY OF CHALLENGES OVER THE YEARS.
• LEHMAN SURVIVED THEM ALL – THE RAILROAD BANKRUPTCIES OF THE 1800S,
THE GREAT DEPRESSION OF THE 1930S, TWO WORLD WARS, A CAPITAL SHORTAGE
WHEN IT WAS SPUN OFF BY AMERICAN EXPRESS CO.
• IN 1994, AND THE LONG TERM CAPITAL MANAGEMENT COLLAPSE AND RUSSIAN
DEBT DEFAULT OF 1998. HOWEVER, DESPITE ITS ABILITY TO SURVIVE PAST
DISASTERS, THE COLLAPSE OF THE U.S. HOUSING MARKET ULTIMATELY BROUGHT
LEHMAN BROTHERS TO ITS KNEES, AS ITS HEADLONG RUSH INTO THE SUBPRIME
MORTGAGE MARKET PROVED TO BE A DISASTROUS STEP
 CAUSES OF LEHMAN’S BANKRUPTCY

LEHMAN’S BANKRUPTCY HAD FOUR UNDERLYING CAUSES:

RISK: THE BANK HAD TAKEN ON TOO MUCH RISK WITHOUT A CORRESPONDING
ABILITY TO RAISE CASH QUICKLY. IN 2008, IT HAD $639 BILLION IN ASSETS,
TECHNICALLY MORE THAN ENOUGH TO COVER ITS $613 BILLION IN DEBT.
HOWEVER, THE ASSETS WERE DIFFICULT TO SELL. AS A RESULT, LEHMAN
BROTHERS COULDN’T SELL THEM TO RAISE SUFFICIENT FUNDS. THAT CASH FLOW
PROBLEM IS WHAT LED TO ITS BANKRUPTCY.
• CULTURE: MANAGEMENT REWARDED EXCESSIVE RISK-TAKING. LEHMAN’S
CHIEF RISK OFFICER SAID THAT TOP MANAGEMENT IGNORED MANY OF HER
RISK-MANAGEMENT STRATEGIES. TOP MANAGERS WANTED TO STAY AHEAD OF
COMPETITORS THAT ALSO USED HIGH-RISK STRATEGIES, AND THEY ALSO
THOUGHT THE COMPANY WAS TOO SMART TO FAIL.
OVERCONFIDENCE: THE FIRM RELIED ON COMPLICATED FINANCIAL PRODUCTS BASED ON
QUICK REAL ESTATE GROWTH JUST AS THE REAL ESTATE MARKET BEGAN TO DECLINE.
BETWEEN 2000-2006, ITS REVENUE GREW 130% THANKS TO EARLY SUCCESSES WITH
MORTGAGE-BACKED SECURITIES. IN 2003-2004, LEHMAN BROTHERS BOUGHT FIVE
MORTGAGE LENDERS, WHICH ALLOWED IT TO ORIGINATE AND UNDERWRITE SUBPRIME
LOANS, INCREASING ITS PROFITABILITY. IN MARCH 2006, LEHMAN BOUGHT HEAVILY INTO
COMMERCIAL REAL ESTATE AND RISKY LOANS AND INSTEAD OF SELLING THEM RIGHT
AWAY, IT KEPT THEM ON ITS BOOKS. MANAGEMENT THOUGHT IT WOULD MAKE MORE
MONEY OWNING THESE ASSETS BUT ITS TIMING COULDN’T HAVE BEEN WORSE, AS REAL
ESTATE PRICES WERE FALLING.
• REGULATOR INACTION: THE SECURITIES AND EXCHANGE COMMISSION AND OTHER
REGULATORS DIDN’T TAKE ACTION. AS EARLY AS 2007, THE SEC ( SECURITIES AND
EXCHANGE COMMISSION) KNEW LEHMAN BROTHERS WAS TAKING ON TOO MUCH RISK,
BUT THE AGENCY NEVER REQUIRED LEHMAN TO DO ANYTHING ABOUT IT. IT ALSO DIDN’T
PUBLICLY DISCLOSE TO RATING AGENCIES THAT THE BANK HAD EXCEEDED RISK
 WHAT ACTUALLY HAPPENED ?

• LEHMAN BROTHERS HID OVER $50B IN LOANS BY CLASSIFYING THEM AS SALES

• AUDITOR, ERNST & YOUNG, MANIPULATED THE BOOKS BY USING ACCOUNTING
TRICK “REPO 105”
• REPO 105 WAS A REPORT THAT WAS “MATERIALLY MISLEADING”
• IT TEMPORARILY MOVED $50B OF ASSETS AT THE END OF EACH QUARTER
• THIS MADE THEM APPEAR TO BE FAR LESS DEPENDENT ON BORROWED MONEY
THAN THEY ACTUALLY WERE
 IMPACT

• AT THE TIME WHEN LEH FILED FOR BANKRUPTCY, THE LEHMAN BROTHERS’ WORTH WAS
ESTIMATED AT $639 BILLION WHILE ON THE OTHER HAND THE LEHMAN BROTHERS WERE $613
BILLION IN DEBT.
• AFTER THE LEHMAN BROTHERS HAD FILED FOR BANKRUPTCY IN THE US, THE FINANCIAL
MARKETS IN THE COUNTRY NEARLY COLLAPSED WHEN THE WASHINGTON MUTUAL FAILED, A
DOUBLE TRAGEDY FOR THE AMERICAN ECONOMY
• PUTNAM INVESTMENTS, A UNIT OF CANADA’S GREAT-WEST LIFE CO, SHUT A $12.3 BILLION MONEY-
MARKET FUND AS IT FACED “SIGNIFICANT REDEMPTION PRESSURE” ON SEPTEMBER 17, 2008. •
LEHMAN BROTHERS INTERNATIONAL HELD CLOSE TO 40 BILLION DOLLARS OF CLIENTS ASSETS
WHEN IT FILED FOR CHAPTER 11 BANKRUPTCY. OF THIS, 22 BILLION HAD BEEN RE-HYPOTHECATED
THANK YOU …