About Lehman Brothers
An American financial services firm, Lehman Brothers was founded in 1847. Back in 2008, it was the Fourth Largest Investment Bank in The United States of America and was deemed “too big to fail” by many, as it was expected that a failure of a bank of its scale would lead to a decimation of the American economic systems.
The success story of the Investment Banking Behemoth
American Express acquired Lehman Brothers in 1984 for a reported $360 Million. From 1984 until 1994, American Express controlled Lehman Brothers; after that, it handed off the business through an IPO that brought in more than $3 billion in fresh funding. After the horrors of 9/11, Lehman Brothers prevailed as a dominant force in the Investment Banking Industry.
A Timeline of Lehman Brothers’ demise
The business expanded into mortgage-backed securities and collateral debt obligations, just as many other financial institutions. Lehman purchased five mortgage lenders in 2003 and 2004, when the U.S. housing bubble was already well underway, in addition to BNC Mortgage and Aurora Loan Services, a company that specialized in Alt-A loans. These debtors received loans without complete paperwork.
Lehman’s acquisitions first appeared wise. From 2004 to 2006, Lehman’s real estate division helped the capital markets unit’s revenues increase by 56%. In 2006, the company securitized $146 billion worth of mortgages, an increase of 10% over 2005. From 2005 through 2007, Lehman recorded record profits each year. On $19.3 billion in sales, it reported a $4.2 billion net profit in 2007.
March 2008
Lehman’s shares fell by over 48% as investors worried that it would be the next Wall Street company to fail after Bear Stearns’ near-collapse.
April 2008
Confidence in the company somewhat increased following the $4 billion preferred stock offering, which was convertible into Lehman shares at a 32% premium to its then-current price. However, hedge fund managers began to question the valuation of Lehman’s mortgage portfolio.
June 2008
Lehman said that it had secured an additional $6 billion from investors by June 12 and recorded a second-quarter loss of $2.8 billion, its first loss since being spun out by American Express.
September 2008
The stock plunged 77% in the first week of September 2008, amid plummeting equity markets worldwide. The Korean Development Bank’s last minute rescue of Lehman disappeared on September 9, as the state-owned South Korean bank put the talks on hold. Facing a $3.9 billion loss, which included a $5.6 billion write-down, the firm announced an extensive strategic corporate restructuring effort. By September 11, the stock had suffered another massive plunge (42%) due to these developments.
D Day, 15th September 2008
On Monday, September 15, Lehman declared bankruptcy, resulting in the stock plunging 93% from its previous close on September 12.
Author: Shourya Gupta
