the collapse of lehman brothers case study pdf

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Lehman Brothers History

The prime culprit, the colossal miscalculation, the beginning of the end, hurling toward failure, too little, too late, where are they now, the bottom line.

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The Collapse of Lehman Brothers: A Case Study

Lehman Brothers filed for bankruptcy on September 15, 2008. Hundreds of employees, mostly dressed in business suits, left the bank's offices one by one with boxes in their hands. It was a somber reminder that nothing is forever—even in the richness of the financial and investment world.

At the time of its collapse, Lehman was the fourth-largest investment bank in the United States with 25,000 employees worldwide. It had $639 billion in assets and $613 billion in liabilities. The bank became a symbol of the excesses of the 2007-08 Financial Crisis, engulfed by the subprime meltdown that swept through financial markets and cost an estimated $10 trillion in lost economic output.

In this article, we examine the events that led to the collapse of Lehman Brothers.

Key Takeaways

• Lehman Brothers had humble beginnings as a dry-goods store, but eventually branched off into commodities trading and brokerage services.
• The firm survived many challenges but was eventually brought down by the collapse of the subprime mortgage market.
• Lehman first got into mortgage-backed securities in the early 2000s before acquiring five mortgage lenders.
• The firm posted multiple, consecutive losses and its share price dropped.
• Lehman filed for bankruptcy on September 15, 2008, with $639 billion in assets and $619 billion in debt.

Lehman Brothers had humble origins, tracing its roots to a general store founded by German brothers Henry, Emanuel and Mayer Lehman in Montgomery, Alabama, in 1844. Farmers paid for their goods with cotton, which led the company into the cotton trade. After Henry died, the other Lehman brothers expanded the scope of the business into  commodities  trading and  brokerage services .

The firm prospered over the following decades as the U.S. economy grew into an international powerhouse. But Lehman faced plenty of challenges over the years. The company survived the railroad bankruptcies of the 1800s, the Great Depression , two world wars, a capital shortage when it was spun off by American Express ( AXP ) in 1994 in an initial public offering, and the Long Term Capital Management collapse and Russian debt default of 1998.

Despite its ability to survive past disasters, the collapse of the U.S. housing market ultimately brought Lehman to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step.

The company, along with many other financial firms, branched into mortgage-backed securities and collateral debt obligations . In 2003 and 2004, with the U.S. housing bubble well under way, Lehman acquired five mortgage lenders along with BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans. These loans were made to borrowers without full documentation.  

At first, Lehman's acquisitions seemed prescient. Lehman's real estate business enabled revenues in the capital markets unit to surge 56% from 2004 to 2006. The firm securitized $146 billion of mortgages in 2006—a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, it announced $4.2 billion in net income on $19.3 billion in revenue.  

In February 2007, Lehman's stock price reached a record $86.18 per share, giving it a market capitalization of nearly $60 billion.   But by the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent. Defaults on subprime mortgages began to rise to a seven-year high. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that rising defaults would affect Lehman's profitability, the firm reported record revenues and profit for its fiscal first quarter. Following the earnings report, Lehman said the risks posed by rising home delinquencies were well contained and would have little impact on the firm's earnings.  

Lehman's stock fell sharply as the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds. During that month, the company eliminated 1,200 mortgage-related jobs and shut down its BNC unit.   It also closed offices of Alt-A lender Aurora in three states. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market.

In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85 billion portfolio, or four times its shareholders' equity . In the fourth quarter of 2007, Lehman's stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound . However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.  

In 2007, Lehman's high degree of leverage was 31, while its large mortgage securities portfolio made it highly susceptible to the deteriorating market conditions. On March 17, 2008, due to concerns that Lehman would be the next Wall Street firm to fail following Bear Stearns' near-collapse, its shares plummeted nearly 48%.  

By April, after an issue of preferred stock —which was convertible into Lehman shares at a 32% premium to its concurrent price—yielded $4 billion, confidence in the firm returned somewhat.   However, the stock resumed its decline as hedge fund managers began to question the valuation of Lehman's mortgage portfolio.

On June 7, 2008, Lehman announced a second-quarter loss of $2.8 billion, its first loss since it was spun off by American Express, and reported that it raised another $6 billion from investors by June 12.   According to David P. Belmont, "The firm also said it boosted its liquidity pool to an estimated $45 billion, decreased gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about 25."  

These measures were perceived as being too little, too late. Over the summer, Lehman's management made unsuccessful overtures to a number of potential partners. The stock plunged 77% in the first week of September 2008, amid plummeting equity markets worldwide, as investors questioned CEO Richard Fuld's plan to keep the firm independent by selling part of its asset management unit and spinning off commercial real estate assets. Hopes that the Korea Development Bank would take a stake in Lehman were dashed on September 9, as the state-owned South Korean bank put talks on hold.  

The devastating news lead to a 45% drop in Lehman's stock, along with the firm's debt suffering a 66% increase in credit-default swaps .   Hedge fund clients began abandoning the company, with short-term creditors following suit. Lehman's fragile financial position was best emphasized by the pitiful results of its September 10 fiscal third-quarter report.  

Facing a $3.9 billion loss, which included a $5.6 billion write-down , the firm announced an extensive strategic corporate restructuring effort. Moody's Investor Service also announced that it was reviewing Lehman's credit ratings , and it found that the only way for Lehman to avoid a rating downgrade would be to sell a majority stake to a strategic partner. By September 11, the stock had suffered another massive plunge (42%) due to these developments.  

With only $1 billion left in cash by the end of that week, Lehman was quickly running out of time. Over the weekend of September 13, Lehman, Barclays, and Bank of America ( BAC ) made a last-ditch effort to facilitate a takeover of the former, but they were ultimately unsuccessful.   On Monday, September 15, Lehman declared bankruptcy, resulting in the stock plunging 93% from its previous close on September 12.

Lehman stock plunged 93% between the close of trading on September 12, 2008, and the day it declared bankruptcy.

Former chair and CEO Richard Fuld runs Matrix Private Capital Group, which he founded in 2016. The company manages assets for high-net worth individuals, family offices and institutions. He reportedly sold an apartment in New York City for $25.9 million as well as a collection of drawings for $13.5 million.

In years following the collapse, Fuld acknowledged the mistakes the bank made though he remained critical of the government for mandating that Lehman Brothers file for bankruptcy while bailing out others. In 2010, he told the Financial Crisis Inquiry Commission the bank had adequate capital reserves and a solid business at the time of its bankruptcy.

Erin Callan (now Erin Montella) became chief financial officer at the age of 41 and resigned in June 2008 following suspicions she had leaked information to the press. Her LinkedIN profile lists her as an advisor at Matrix Investment Holdings. Other stints include six months serving as head of hedge fund coverage for Credit Suisse and co-founding a non-profit that provides paid maternity leave to mothers. In 2016, Montella published an autobiography, Full Circle: A Memoir of Leaning in Too Far and the Journey Back , about her experiences in the financial world.

Lehman's collapse roiled global financial markets for weeks, given its size and status in the U.S. and globally. At its peak, Lehman had a market value of nearly $46 billion, which was wiped out in the months leading up to its bankruptcy.

Many questioned the decision to allow Lehman to fail, compared with the government's tacit support for Bear Stearns, which was acquired by JPMorgan Chase ( JPM ) in March 2008. Bank of America had been in talks to buy Lehman, but backed away after the government refused to help with Lehman's most troubled assets. Instead, Bank of America announced it would buy Merrill Lynch on the same day Lehman filed for bankruptcy.

Yale School of Management. " The Lehman Brothers Bankruptcy: An Overview ."

Yale School of Management. " The Lehman Brothers Bankruptcy A: Overview ," Page 3.

Yale School of Management. " The Lehman Brothers Bankruptcy A: Overview ," Pages 3-5.

International Journal of Accounting Research. " What Caused the Failure of Lehman Brothers? Could it have been Prevented? How? Recommendations for Going Forward ," Page 1.

Hong Kong Institute of Bankers. " Bank Asset and Liability Management ." John Wiley & Sons, 2018.

United States District Court Southern District of New York. " Lehman Brothers Equity/Debt Securities Litigation, 08 Civ. 5523 (LAK) ," Page 51.

David P. Belmont. " Managing Hedge Fund Risk and Financing: Adapting to a New Era ," Pages 72-73. Jon Wiley & Sons (Asia), 2011.

Claudio Scardovi. " Restructuring and Innovation in Banking, " Page 18. Springer, 2016.

Matrix Private Capital Group. " About Us ."

Richard Fuld. " Written Statement Of Richard S. Fuld, Jr. Before The Financial Crisis Inquiry Commission ," Page 8.

Rosalind Z. Wiggins, Thomas Piontek and Andrew Metrick. " The Lehman Brothers Bankruptcy A: Overview ," Page 8. Yale Program on Financial Stability Case Study, October 2014.

LinkedIn. " Erin Callan Montella ."

Erin Callan Montella. " Full Circle: A Memoir of Leaning in Too Far and the Journey Back ." Triple M Press, 2016.

Rosalind Z. Wiggins, Thomas Piontek and Andrew Metrick. " The Lehman Brothers Bankruptcy A: Overview ," Pages 11, 20 and 21. Yale Program on Financial Stability Case Study, October 2014.

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The Rise and Fall of Lehman Brothers

By: Stuart C. Gilson, Kristin Mugford, Sarah L. Abbott

The September 2008 bankruptcy of Lehman Brothers was the largest in U.S. history. In 2007, Lehman achieved record earnings. What happened? Who is to blame?

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Discussion of the causes of financial distress and the importance of liquidity strategies to manage through crisis; management accountability and ethics; role of the board of directors in risk management and financial oversight; discussion of the role of government in financial oversight and risk management; benefits and costs of filing for bankruptcy.

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Eight The Collapse of Lehman Brothers

• Published: August 2021
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This chapter assesses the collapse of Lehman Brothers in September of 2008, which was a watershed event that pushed the global financial system and economy to the brink. The worst-case scenario was avoided, however, when governments and central banks around the world began to liquefy markets and stabilize financial asset prices as the magnitude of the crisis became evident. The turmoil of the months following the collapse of Lehman was one of the most unforgettable episodes during the author's tenure as governor of the Bank of Japan. The chapter begins by looking at the collapse of the US housing bubble. The bursting of the US housing bubble quickly became evident in sluggish housing investments, but it took some time before the overall economy began to suffer. The chapter then considers how the Bank of Japan did everything within its powers to maintain the stability of the financial system and the economy.

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Managing Reputation in The Banking Industry pp 101–119 Cite as

The Case Study of Lehman Brothers

• Vincenzo Pacelli 3  
• First Online: 16 April 2016

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This chapter analyzes the case study of Lehman Brothers, highlighting the internal and environmental determinants of reputational crisis. In particular, the chapter focuses on corporate social responsibility, corporate governance, remuneration policies, stakeholder engagement, quantitative indicators of the bank’s financial statements, dynamics of the share price and deepens the impact of administrative or judicial inquiries and the dissemination of negative news through the media on the credit ratings and reputation of Lehman Brothers.

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This index, created in 2001 by the FTSE Group, was designed and managed by the Ethical Investment Research Services (EIRIS) to measure the performance of companies that meet the standards of globally recognized corporate responsibility, such as the transparency and the applicability of sustainability criteria.

It is an award presented by the Chinese government and the Guangming Daily, a leading publication of news distributed in China.

See: http://www.ricerca24.ilsole24ore.com

It is calculated by the ratio of interest expenses and the average of the last 2 years of the total liabilities.

In current assets, we consider cash and cash equivalents and securities purchased with resale agreements, while in current liabilities, we consider securities sold under repurchase agreements, short-term loans, including the current portion of long-term pre-loans and installments due immediately.

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Pacelli V (2014) Consulenza finanziaria e ottimizzazione di portafoglio. Bancaria editrice, Rome

Stevens B, Buechler S (2013) An analysis of the Lehman Brothers code of ethics and the role it played in the firm. J Leadership Account Ethic 10(1):43–57

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Pacelli, V. (2016). The Case Study of Lehman Brothers. In: Dell’Atti, S., Trotta, A. (eds) Managing Reputation in The Banking Industry. Springer, Cham. https://doi.org/10.1007/978-3-319-28256-5_5

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Home > JOURNAL-OF-FINANCIAL-CRISES > Vol. 1 (2019) > Iss. 1

The Lehman Brothers Bankruptcy A: Overview

Rosalind Z. Wiggins , Yale School of Management, Yale School of Management Follow Thomas Piontek , Research & Analysis, Office of Financial Research, U.S. Department of the Treasury Follow Andrew Metrick , Yale School of Management Follow

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Case series.

The Lehman Brothers Bankruptcy

On September 15, 2008, Lehman Brothers Holdings, Inc., the fourth-largest U.S. investment bank, sought Chapter 11 protection, initiating the largest bankruptcy proceeding in U.S. history. The demise of the 164-year old firm was a seminal event in the global financial crisis. Under the direction of its long-time Chief Executive Officer Richard Fuld, Lehman had been very successful pursuing a high-leverage, high-risk business model that required it to daily raise billions of dollars to fund its operations. Beginning in 2006, Lehman began to invest aggressively in real-estate-related assets and soon had significant exposures to housing and subprime mortgages, just as these markets began to sour. Lehman employed a cadre of accountants and risk professionals to continually monitor its balance sheet, key ratios, and risks. It undertook desperate and questionable actions to stay alive. Nevertheless, Lehman ultimately failed because of an inability to finance itself. This overview case provides background information about Lehman’s business and key personnel and also the economic environment during 2006-2008. It may be utilized individually or in connection with any of the other seven YPFS Lehman case studies.

Recommended Citation

Wiggins, Rosalind Z.; Piontek, Thomas; and Metrick, Andrew (2019) "The Lehman Brothers Bankruptcy A: Overview," Journal of Financial Crises : Vol. 1 : Iss. 1, 39-62. Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol1/iss1/2

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The Collapse of Lehman Brothers-A Case Study

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Rosalind Wiggins

khaldoun al-qaisi

The purpose of this paper is to provide a critical study over enterprise risk management. For this, the paper has reviewed theoretical and empirical literature in management of risk. Theoretical literature depicts that no theory can explain about the risk management techniques alone. While empirical literature providesthe importance of enterprise risk management to be used in the organization for managing the risk, exist in portfolio structure of the organization. The paper besides that also provides theoretical and empirical literature and depicts about the effect on working of the organization by implementing the enterprise risk management. The paper has discussed many theories on the implications on organization. The paper briefly discusses about how the performance of organization structure, firm value, default risk perspective, and disclosure requirement would be affected due to implication of enterprise risk management model. The paper has discussed the importance of technique...

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