The Downfall of Lehman Brothers: A Critical Analysis

Running head: THE DOWNFALL OF LEHMAN BROTHERS
The downfall of Lehman Brothers
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1THE DOWNFALL OF LEHMAN BROTHERS
Lehman Brothers Holdings Inc. was one of the largest investment banks in the Unites
States of America, up to the year 2008. The company, a global provider of financial services,
was only behind Goldman Sachs, Merrill Lynch and Morgan Stanley, as far as the competition in
the Wall Street was concerned. The company was founded in the year 1850 in Alabama and had
its headquarters in New York City, United States. The company provided various financial
services worldwide, which included fixed income sales, trading, investment banking, equity,
private banking and so on. On 15th September, 2008, the company filed for bankruptcy (ABC
News 2018). The company had been in operations for approximately 158 years when it became
defunct in 2008 itself. The company had filed under Chapter 11 Bankruptcy Protection, owing to
the exodus of all its clients, the disastrous crash in the stock market and devaluation of all its
assets by the credit rating companies (Wolff 2018). The company’s mortgage crisis is considered
to be primarily responsible for the fall of the Lehman dynasty. This massive scandal was one of
the largest of its kind and this can also be said to be the beginning of the global financial crisis
that plagued the world in the 2000s (Fleming and Sarkar 2014). The question arises as to what
or who was actually responsible for the downfall of the Lehman Brothers. The following
essay takes a critical and analytical look at the Lehman Brothers controversy.
The Lehman Brothers, before its fall, had been one of the strongest and most powerful
names, not just on Wall Street, but also across the globe. As the economy of the United States
grew over the decades since its establishment, the company prospered and continued to grow for
a period of nearly 150 years. It would not be an understatement to call the company an
international powerhouse. Yet, this is not to say that the company did not face severe
challenges over the years. However, the company managed to stand tall amidst several odds
which included the railroad bankruptcy in the 1800s, two World Wars, the Great Depression in

2THE DOWNFALL OF LEHMAN BROTHERS
the 1930s, the capital shortage by American Express Co. in 1994, the Russian Debt Default of
1998s and the Long Term Capital Management collapse. Despite having survived all these
obstacles and potential dealbreakers, the company finally succumbed to the fall of the housing
market in the United States, which proved to the disastrous for the company. It is thus important
to study, what exactly went wrong at the Lehman Brothers (International Business Times
2018).
In the years 2003 – 2004, the United States housing market was expanding at a rapid rate
and was expected to grow steadily for the next few years. Sensing an opportunity for good
investment, the Lehman Brothers acquired around five mortgages, which included the subprime
lender BNC mortgage and also the Aurora Loan Services. The investment seemed quite
sound and fail proof at the time. The real estate business of the company experienced a surge of
nearly 56 % between the years 2004 and 2006 (Lioudis 2018). This rate was quite impressive
and assuring, as compared to that of any other company in asset management and investment
banking. In the year, the company secured mortgages worth 146 billion US dollars, which was a
10 per cent increase from the year 2005. Until the year 2007, the company registered high
profits and had a net income of approximately 4.2 billion dollars and revenues worth 193 billion
dollars. In 2007 in February, the stocks had reached nearly 86 dollars, which endowed the
company with a market capitalization worth 60 billion dollars. However, by the middle of 2007,
the foundations of the US housing market was beginning to shift and cracks were
beginning to appear (Wiggins, Piontek and Metrick 2014). In March of 2007, the stock market
witnessed one of the biggest drops in the last five years, which is expected to have had an impact
on the profitability of Lehman Brothers. The management of the company claimed that despite

3THE DOWNFALL OF LEHMAN BROTHERS
the sudden shifts in the stock market, the delinquencies had been taken care of and no impact
would be felt on the earnings of the firm.
This was the beginning of the end for Lehman Brothers. The credit crisis began in
2007 and resulted in the failure of a number of hedge funds. At this time, the stock market for the
Lehman Brothers crashed. Additionally, the company was forced to shut down the BNC
mortgage unit and also terminate nearly 2500 employees who were employed in the mortgage
related jobs. However, at this point, the company had managed to retain its position as a top
player as far as the mortgage market was concerned (Dumontax and Pop 2013). By the end of
2007, the company had almost recovered from the initial shock and was beginning to regain its
footing. It can be argued that the company’s high leverage degrees were predominantly
responsible for the company’s ultimate failure. In the year 2007, the ratio of the assets of the
company to the shareholders’ equity was 31. Moreover, the number of mortgage securities which
had been exposed during the previous quarters of the fiscal year rendered the company
vulnerable to the rapidly deteriorating conditions of the market. By March 2008, the market
shares of the Lehman Brothers had fallen by almost 48 per cent. At this point, it could be
predicted that the next firm on Wall Street to fall would be Lehman Brothers. Despite the
numerous hurdles, the company managed to keep standing and even improved its positioning in
April by raising nearly 4 billion dollars in profits (Del Giovane, Nobili and Signoretti 2013).
Nevertheless, the value of their sticks began to decline rapidly since the managers in charge of
hedge funds were now beginning to question the valuation of the Lehman Brothers’ mortgage
portfolio.
Throughout 2008, the company attempted to fight off losses and devaluation by selling its
assets, issuing stick and also reducing costs. There were massive subprime or low rated