Bankruptcy of Lehman Brothers: Causes, Impact & Reasons

The bankruptcy of Lehman Brothers took place on September 15, 2008 in the United States.

The bankruptcy of Lehman Brothers was one of the most striking of the global financial crisis that began in 2008. In fact, the collapse of this bank is considered, by many analysts, as the starting point of the crisis.

However, other banks had already fallen during 2007, although it is true that their size was smaller. One of the most important characteristics of this bankruptcy was that, contrary to what was done in other cases, such as Northern Rock in the United Kingdom, or Bear Stearns in the United States of America, the governments did not allocate public money to rescue the entity from the collapse.

Lehman Brothers was founded in 1850. It established itself as a global financial services company in the United States. However, his areas of expertise included investment banking, financial asset management and fixed income investments, commercial banking, service management and banking services in general. It owned numerous subsidiaries and dependent companies, creating a very powerful holding company. Its headquarters were in New York, while it had other regional headquarters in other cities, such as Tokyo and London.

The origins of Lehman Brothers have their roots in a business founded in 1844, although its definitive name dates from 1850. It was founded by brothers who emigrated from Germany to Alabama. His first success was accepting raw cotton as a means of payment from his customers. At that time, this material was trading higher and, with it, they entered the treated cotton market, which gave them a good base from which to project their expansion.

The company changed its location and settled in New York in 1858, the city to which the cotton marketing business moved. The company successfully passed the test of the American Civil War. In fact, it managed to become one of the main players in the cotton trade. In 1894, he participated in the founding of the financial market for cotton as a commodity market in New York.  

Throughout the 20th century, Lehman Brothers bet on the diversification of the business. To do this, it participated in other markets, such as tobacco or radio television. Throughout this century, it acquired, merged, or associated with different companies. With this policy, it managed to overcome the Great Depression of 1929 and consolidate its growth after the serious crisis.

In the 1970s, Lehman Brothers became the fourth most powerful investment bank in the United States of America.  This success was achieved thanks to the acquisition of the financial institution Abraham & Co. and the merger with Kuhn, Loeb & Co. In the 1980s, Lehman Brothers partnered with American Express, as a result of some financial difficulties, for two decades.

Lehman Brothers had managed to overcome difficult historical moments: the Civil War, the Great Depression and various scandals about its financial activities. However, it could not bear the situation that was generated during the 2008 crisis.

The subprime credit crisis, which began in 2007, reached Lehman Brothers. As a result, over the next year, 2008, the company suffered serious losses from mortgage-backed securities. In fact, as a consequence of the declared losses, in the first half of 2008, its stock market value fell 73%.

The situation was serious, to the point that in September the President of the Federal Reserve Bank of New York called a meeting to discuss the situation created at Lehman Brothers. In it, the possibility of cleaning up the company through the sale of assets was transferred. Faced with this situation, the Bank of America and Barclays showed interest in a possible purchase option. However, it was not possible to complete the operation, so on September 15, the company filed for bankruptcy before the court.

The bankruptcy of Lehman Brothers meant a change in the operation of the American banking system. The authorities left the bank to its own devices, contrary to what it did at other times, such as Fannie Mae and Freddie Mac. At the time of bankruptcy, Lehman Brothers was the fourth largest investment bank in the United States. The company had a liability of $613 billion and assets worth $640 billion. It also had 25,935 employees worldwide.

Lehman Brothers had a large group of creditors, willing to demand payment of the debt contracted with them. The Japanese Bank Aozora Bank, with a loan of $463 million, was the first of the list. After this, the Mizuho Bank, with $382 million. Lehman owed $155 billion to other entities, such as Citygroup and New York Bank Mellon, as the principal trustees of the bondholders.

Finally, on March 6, 2012, Lehman Brothers officially abandoned the bankruptcy situation. This meant the beginning of the payment of $22,500 million to the creditors. This amount was only a small part of the 65,000 million dollars agreed with the creditors. An amount, the latter, well below the claims received, which exceed 370,000 million dollars.

In 2014, the secured creditors had already recovered 100% of their money. Instead, that same year, unsecured creditors, including employees, banks, or investment firms, continued the process to recover as much as possible.

The bankruptcy of Lehman Brothers was considered by some as the starting point of the 2008 crisis. In this sense, the fall of one of the large investment banks was seen as a turning point: the end of a boom and bust time. the beginning of the crisis.

However, with a historical perspective, analysts consider that this bankruptcy of the banking giant was more a symptom than a cause. Problems had arisen as early as 2007, with many smaller banks suffering major losses or even bankruptcies. In fact, the BNB Paribas Bank, in August 2007, decided to suspend three of its funds. Also in 2007, various Central Banks decided to carry out joint actions to alleviate the already battered situation.

In short, Lehman Brothers has been a symbol, perhaps the most striking, of a time when unbridled optimism led to the first great financial crisis of the 21st century.