Lehman Brothers

Lehman Brothers

What is Lehman Brothers?

Lehman Brothers was a global financial services company whose bankruptcy in 2008 was largely caused by – and accelerated – the subprime mortgage crisis. The company was the fourth largest investment bank in the United States at the time; his bankruptcy remains the largest ever recorded. At the time of Chapter 11 bankruptcy on September 15, 2008, Lehman Brothers had been in business for 158 years. It provided investment banking, trading, investment management, private banking, research, brokerage, private equity and related services. The failure of Lehman Brothers placed the subprime mortgage crisis of 2007-2009 in full view and predicted the worsening of the Great Recession.

Understanding Lehman Brothers

Lehman Brothers was once regarded as one of the main players in the global banking and financial services sectors. It opened in Montgomery Ala., In 1850, as a dry goods store and quickly developed into the trade of cotton and other raw materials. Its operations moved to New York in 1858 when the city became the headquarters of the trade in cotton and other basic commodities. Over the next century and a half, the company underwent many changes and entered into several alliances and partnerships. While the bankruptcy of Lehman Brothers did not cause the Great Recession or even the sub-prime mortgage crisis, its fall triggered a massive liquidation in the world markets.

Lehman Brothers bankruptcy

At the time of its bankruptcy, Lehman Brothers held some $ 600 billion in globally diversified assets. He had invested heavily in mortgaging in the United States from 1996 to 2006, largely using leverage (at its peak in a ratio of around 30: 1). As such, some claim that the company had de facto become a real estate hedge fund. When real estate values ​​peaked and then started to weaken in 2007-2008, Lehman Brothers became particularly vulnerable.

For much of 2008, the company fought losses by issuing stocks, selling assets, and cutting costs (issuing debt under such conditions has become difficult, if not impossible). She had huge slices of subprime and low-rate mortgages in her books that she could not sell or chose not to sell. When these loans became illiquid and the company was unable to repay its creditors, Lehman Brothers went through a credit crunch; he could no longer cheaply raise liquidity via the issuance of debt, and the issuance of shares under such conditions led to both a dilution of the shares and a negative sentiment, which caused a decline of the share price. Meanwhile, house prices plummeted, as buyers remained sidelined due to both market conditions and the inability to obtain credit. In the absence of loans and the world’s largest financial institutions threatened with failure, the global financial system was in danger of collapse.

The Federal Reserve Bank of New York and several large American investment banks met on September 12, 2008 to discuss an emergency liquidation of Lehman Brothers in order to stabilize the markets. The goal was to avoid a costly government bailout, such as the government’s $ 25 billion loan to Bear Stearns in March 2008. Discussions, which involved a potential sale to Bank of American and Barclays, failed (vetoed by the Bank of England and the UK Financial Services Authority), and efforts by potential buyers to obtain federal intervention have failed. Lehman Brothers was allowed to fail. The repercussions were felt worldwide; the Dow Jones Industrial Average fell 500 points the day Lehman Brothers declared bankruptcy.

Lehman Brothers today

The assets, real estate and operations of Lehman Brothers were quickly sold to reimburse investors. In one month, Japanese bank Nomura acquired the company’s activities in the Asia-Pacific region (Japan, Hong Kong, Australia), as well as its investment banking and equity trading activities in the Middle East and in Europe. Barclays purchased its investment and trading operations in North America, as well as its headquarters in New York. Lehman Brothers has been mentioned, and his leadership at the time of his bankruptcy has been described, in many films since 2008, as in Margin call and Too big to fail.

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