Lehman Brothers Holdings Inc. (former NYSE ticker symbol LEH) () was a global financial services firm (4th largest investment bank in the USA behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) which, until declaring bankruptcy in 2008, participated in business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. It was a primary dealer in the U.S. Treasury securities market. Its primary subsidiaries included Lehman Brothers Inc., Neuberger Berman Inc., Aurora Loan Services, Inc., SIB Mortgage Corporation, Lehman Brothers Bank, FSB, Eagle Energy Partners, and the Crossroads Group. The firm's worldwide headquarters were in New York City, with regional headquarters in London and Tokyo, as well as offices located throughout the world.
On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. The filing marked the largest bankruptcy in U.S. history. The following day, Barclays announced its agreement to purchase, subject to regulatory approval, Lehman's North American investment-banking and trading divisions along with its New York headquarters building. On September 20, 2008, a revised version of that agreement was approved by U.S. Bankruptcy Judge James M. Peck.
During the week of September 22, 2008, Nomura Holdings announced that it would acquire Lehman Brothers' franchise in the Asia Pacific region, including Japan, Hong Kong and Australia. as well as, Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. The deal became effective on 13 October 2008.
Lehman Brothers' investment management business, including Neuberger Berman, was sold to its management on December 3, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known as Neuberger Berman Group LLC. It is the fourth largest private employee-controlled asset management firm globally, behind Fidelity Investments, The Capital Group Companies and Wellington Management Company.
A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firm’s financial condition in late 2007 and 2008."
History
Under the Lehman family (1850–1969)
In 1844, 23-year-old
Henry Lehman, the son of a cattle merchant, emigrated to the
United States from
Rimpar,
Bavaria. He settled in
Montgomery, Alabama, In 1847, following the arrival of his brother
Emanuel Lehman, the firm became "H. Lehman and Bro." With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded.
During the 1850s, cotton was one of the most important crops in the United States. Capitalizing on cotton's high market value, the three brothers began to routinely accept raw cotton from customers as payment for merchandise, eventually beginning a second business trading in cotton. Within a few years this business grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855, the remaining brothers continued to focus on their commodities-trading/brokerage operations.
By 1858, the center of cotton trading had shifted from the South to New York City, where factors and commission houses were based. Lehman opened its first branch office in New York City's Manhattan borough at 119 Liberty Street, Following the war the company helped finance Alabama's reconstruction. The firm's headquarters were eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870; Emanuel sat on the Board of Governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business.
Official U.S. Senate Photo]]
Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887. to bring the General Cigar Co. to market, followed closely by Sears, Roebuck and Company. May Department Stores Company, Gimbel Brothers, Inc., R.H. Macy & Company, followed by Monroe C. Gutman and Paul Mazur in 1927. By 1928, the firm moved to its now famous One William Street location.
In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation.
In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont, and helped fund the Radio Corporation of America (RCA). It also helped finance the rapidly growing oil industry, including the companies Halliburton and Kerr-McGee. Later, it arranged the acquisition of Digital by Compaq.
An evolving partnership (1969–1984)
Robert Lehman died in 1969 after forty-four years as the patriarch of the firm, leaving no member of the Lehman family actively involved with the partnership. Robert's death, coupled with a lack of a clear successor from within the Lehman family left a void in the company. At the same time, Lehman was facing strong headwinds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973,
Pete Peterson, Chairman and Chief Executive Officer of the
Bell & Howell Corporation, was brought in to save the firm. Peterson led the firm from significant operating losses to five consecutive years of record profits with a
return on equity among the highest in the investment-banking industry.
By the early 1980s, hostilities between the firm's investment bankers and traders (who were driving most of the firm's profits) prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.
Upset bankers who had soured over the power struggle, left the company. Steve Schwarzman, chairman of the firm's M&A; committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm.
Merger with American Express (1984–1994)
Logo]]
Shearson/American Express, an
American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express.
From 1983 to 1990, Peter A. Cohen was CEO and Chairman of Shearson Lehman Brothers, where he led the one billion dollar purchase of E.F. Hutton to form Shearson Lehman Hutton. During this period, Shearson Lehman was aggressive in building its leveraged finance business in the model of rival Drexel Burnham Lambert. In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco but were ultimately outbid by private equity firm Kohlberg Kravis Roberts, who was backed by Drexel.
Divestment and independence (1994–2008)
In 1993, under newly appointed
CEO,
Harvey Golub, American Express began to divest itself of its banking and brokerage operations. It sold its retail brokerage and asset management operations to
Primerica and in 1994 it spun off Lehman Brothers Kuhn Loeb in an
initial public offering, as Lehman Brothers Holdings, Inc.
Despite rumors that it would be acquired again, Lehman performed quite well under Chairman and CEO Richard S. Fuld, Jr.. By 2008, Fuld had been with the company for 30 years, and would be the longest-tenured CEO on Wall Street. Fuld had steered Lehman through the 1997 Asian Financial Crisis, a period where the firm's share price dropped to $22 USD in 1998, but he was said to have underestimated the downturn in the US housing market and its effect on Lehman's mortgage bond underwriting business. Fuld kept his job as the subprime mortgage crisis took hold, while CEOs of rivals like Bear Stearns, Merrill Lynch, and Citigroup were forced to resign. In addition, Lehman's board of directors, which includes retired CEOs like Vodafone's Christopher Gent and IBM's John Akers were reluctant to challenge Fuld as the firm's share price spiraled lower.
In 2001, the firm acquired the private-client services, or "PCS", business of Cowen & Co. and later, in 2003, aggressively re-entered the asset-management business, which it had exited in 1989. Beginning with $2 billion in assets under management, the firm acquired the Crossroads Group, the fixed-income division of Lincoln Capital Management These businesses, together with the PCS business and Lehman's private-equity business, comprised the Investment Management Division, which generated approximately $3.1 billion in net revenue and almost $800 million in pretax income in 2007. Prior to going bankrupt, the firm had in excess of $275 billion in assets under management. Altogether, since going public in 1994, the firm had increased net revenues over 600% from $2.73 billion to $19.2 billion and had increased employee headcount over 230% from 8,500 to almost 28,600.
At the 2008 ALB China Law Awards, Lehman Brothers was crowned:
Deal of the Year - Debt Market Deal of the Year
Deal of the Year - Equity Market Deal of the Year
Response to September 11 terrorist attacks
.]]
On September 11, 2001, Lehman occupied three floors of
One World Trade Center where one of its employees was killed in the attacks of that day. Its global headquarters in
Three World Financial Center were severely damaged and rendered unusable by falling debris, displacing over 6,500 employees. The bank recovered quickly and rebuilt its presence. Trading operations moved across the Hudson River to its
Jersey City,
New Jersey, facilities, where an impromptu trading floor was built in a hotel and brought online less than forty-eight hours after the attacks. When stock markets reopened on September 17, 2001, Lehman's sales and trading capabilities were restored.
In the ensuing months, the firm fanned out its operations across the New York City metropolitan area in over forty temporary locations. Notably, the investment-banking division converted the first-floor lounges, restaurants, and all 665 guestrooms of the Sheraton Manhattan Hotel into office space.
The bank also experimented with flextime (to share office space) and telecommuting via virtual private networking. In October 2001, Lehman purchased a 32-story, office building for a reported sum of $700 million. The building, located at 745 Seventh Avenue, had recently been built, and not yet occupied, by rival Morgan Stanley.
With Morgan Stanley's world headquarters located only two blocks away at 1585 Broadway, in the wake of the attacks the firm was re-evaluating its office plans which would have put over 10,000 employees in the Times Square area of New York City. Lehman began moving into the new facility in January and finished in March 2002, a move that significantly boosted morale throughout the firm.
The firm was criticized for not moving back to its former headquarters in lower Manhattan. Following the attacks, only Deutsche Bank, Goldman Sachs, and Merrill Lynch of the major firms remained in the downtown area. Lehman, however, points to the facts that it was committed to stay in New York City, that the new headquarters represented an ideal circumstance where the firm was desperate to buy and Morgan Stanley was desperate to sell, that when the new building was purchased, the structural integrity of Three World Financial Center had not yet been given a clean bill of health, and that in any case, the company could not have waited until May 2002 for repairs to Three World Financial Center to conclude.
After the attacks, Lehman's management placed increased emphasis on business continuity planning. Unlike its rivals, the company was unusually concentrated for a bulge-bracket investment bank. For example, Morgan Stanley maintains a trading-and-banking facility in Westchester County, New York. The trading floor of UBS is located in Stamford, Connecticut. Merrill Lynch's asset-management division is located in Plainsboro Township, New Jersey. Aside from its headquarters in Three World Financial Center, Lehman maintained operations-and-backoffice facilities in Jersey City, space that the firm considered leaving prior to 9/11. The space was not only retained, but expanded, including the construction of a backup-trading facility. In addition, telecommuting technology first rolled out in the days following the attacks to allow employees to work from home was expanded and enhanced for general use throughout the firm.
2003 SEC litigation
In 2003, the company was one of ten firms which simultaneously entered into a settlement with the
U.S. Securities and Exchange Commission (SEC), the
Office of the New York State Attorney General and various other securities regulators, regarding undue influence over each firm's research analysts by their investment-banking divisions. Specifically, regulators alleged that the firms had improperly associated analyst compensation with the firms' investment-banking revenues, and promised favorable, market-moving research coverage, in exchange for underwriting opportunities. The settlement, known as the “
global settlement”, provided for total financial penalties of $1.4 billion, including $80 million against Lehman, and structural reforms, including a complete separation of investment banking departments from research departments, no analyst compensation, directly or indirectly, from investment-banking revenues, and the provision of free, independent, third-party, research to the firms' clients.
Collapse
Causes
Subprime mortgage crisis
In August 2007, the firm closed its
subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in
goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space".
In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.
On September 17, 2008 Swiss Re estimates its overall net exposure to Lehman Brothers as approximately CHF 50 million.
Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P; 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank. The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.
The next day, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman. Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.
Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize." former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman Henry Waxman said the committee received thousands of pages of internal documents from Lehman and these documents portray a company in which there was “no accountability for failure".
An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to the demise of both Lehman and Bear Stearns. A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Lehman Brothers and Bear Stearns, and found "no evidence that stock price declines were caused by naked short selling".
Bankruptcy
On Saturday, September 13, 2008,
Timothy F. Geithner, the president of the
Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. Lehman reported that it had been in talks with
Bank of America and
Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.
The next day, Sunday, September 14, the International Swaps and Derivatives Association (ISDA) offered an exceptional trading session to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day. Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.
on September 15, 2008]]
Shortly before 1 a.m. Monday morning (New York time), Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. It further announced that its subsidiaries would continue to operate as normal. A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government. The morning witnessed scenes of Lehman employees removing files, items with the company logo, and other belongings from the world headquarters at 745 Seventh Avenue. The spectacle continued throughout the day and into the following day.
Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant after clearing-houses terminated their contracts with the firm. Lehman shares tumbled over 90% on September 15, 2008. The Dow Jones closed down just over 500 points on September 15, 2008, which was at the time the largest drop in a single day since the days following the attacks on September 11, 2001.
In the United Kingdom, the investment bank went into administration with PricewaterhouseCoopers appointed as administrators. In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding company filed for civil reorganization on September 16, 2008, in Tokyo District Court. On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.
On March 16, 2011 some three years after filing for bankruptcy and following a filing in a Manhattan U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek creditor approval of its reorganization plan by October 14 followed by a confirmation hearing to follow on November 17.
Liquidation
Barclays acquisition
On Tuesday, September 16, 2008,
Barclays plc announced that they would acquire a "stripped clean" portion of Lehman for $1.75 billion, including most of Lehman's North America operations. On September 20, this transaction was approved by U.S. Bankruptcy Judge
James Peck.
On September 20, 2008, a revised version of the deal, a $1.35 billion (£700 million) plan for Barclays to acquire the core business of Lehman (mainly its $960-million headquarters, a 38-story office building in Midtown Manhattan, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7-hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency."
Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be $1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays. Barclays acquired a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days.
Nomura acquisition
Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for $225 million and parts of the European division for a nominal fee of $2. It would not take on any trading assets or liabilities in the European units. Nomura negotiated such a low price because it acquired only Lehman's employees in the regions, and not its stocks, bonds or other assets. The last Lehman Brothers Annual Report identified that these non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.
Sale of Neuberger Berman
On September 29, 2008, Lehman agreed to sell Neuberger Berman to a pair of private-equity firms,
Bain Capital Partners and
Hellman & Friedman, for $2.15 billion. The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy Court; however, a competing bid was entered by the firm's management, who ultimately prevailed in a bankruptcy auction, held on December 3, which scuttled the deal with Bain and Hellman.
This report revealed that Lehman Brothers used an accounting procedure termed
repo 105 to temporarily exchange $50 billion of assets into cash just before publishing its financial statements. The action could be seen to implicate both
Ernst & Young, the bank's accountancy firm and
Richard S. Fuld, Jr, the former CEO. This could potentially lead to Ernst & Young being found guilty of financial malpractice and Fuld facing time in prison.
According to the Wall Street Journal, in March 2011, the SEC announced that weren't confident that they could prove that Lehman Brothers violated US laws in its accounting practices.
Merger and acquisition history
The following is an illustration of the company's major mergers and acquisitions and historical predecessors (this is not a comprehensive list):
|2=Shearson, Hammill & Co.(est. 1902)
}}
|label2=Loeb, Rhoades, Hornblower & Co.(merged 1978)
|2=
|label2=Hornblower, Weeks, Noyes & Trask(merged 1953-1977)
|2=
}}
}}
}}
|label2=Lehman Brothers Kuhn Loeb(merged 1977)
|2=
|2=Kuhn, Loeb & Co.(est. 1867)
}}
}}
|label2=
|2=E. F. Hutton & Co.(est. 1904)
}}
|2 = Neuberger Berman(est. 1939, acq. 2003,sold to management 2009)
|3 = Crossroads Group(est. 1981, acq. 2003)
}}}}
Board of directors
Richard S. Fuld, Jr., Chairman and Chief Executive Officer
Michael L. Ainslie
119 Liberty Street, New York, NY (1858)
3 World Financial Center (1985)
745 Seventh Avenue, New York, NY (2002)
* Henry Lehman established his first store location on Commerce Street, in Montgomery, in 1845. In 1848, one year after Emanuel's arrival, the brothers moved "H. Lehman & Bro." to 17 Court Square, where it remained when Mayer arrived in 1850, forming "Lehman Brothers".
** Designated as a landmark by the New York City Landmarks Preservation Committee in 1996.
*** Sales and trading personnel had been in this location since 1977, when they were joined by the firm's investment bankers and brokers.
See also
American International Group (AIG)
Bear Stearns
Ben Bernanke
Credit rating agency
Fannie Mae and Freddie Mac
Fortis
Scott J. Freidheim, former Chief Administrative Officer subsequently took a job for Sears Holding Corporation
Alan Greenspan
Hypo Real Estate Bank
Lehman Brothers Bank
Henry Paulson
Valukas Report
References
Further reading
Auletta, Ken. Greed and Glory on Wall Street: The Fall of the House of Lehman. Random House, 1985
Bernhard, William, L., Birge, June Rossbach Bingham, Loeb, John L., Jr.. Lots of Lehmans - The Family of Mayer Lehman of Lehman Brothers, Remembered by His Descendants. Center For Jewish History, 2007
Birmingham, Stephen. Our Crowd - The Great Jewish Families of New York. Harper and Row, 1967.
Geisst, Charles R. The Last Partnerships. McGraw-Hill, 1997
Shirkhedkar, Jayant. Saving Lehman, One person at a time. McGraw-Hill, 2007
Lehman Brothers. A Centennial - Lehman Brothers 1850 - 1950. Spiral Press, 1950
Schack, Justin. (May 2005). "Restoring the House of Lehman". Institutional Investor, p. 24-32.
Wechsberg, Joseph. The Merchant Bankers. Pocket Books, 1968
Lawrence, G. McDonald . (Jul 2009) . Crown Business
Sorkin, A. Ross. (Oct 2009) Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves. Viking Adult
External links
Lehman Brothers case study - KPMG China
crisis-lehman - Lehman Brothers in Spain
Lehman Brothers bankruptcy site linked to from Lehman Brothers' home page
Melse, E. (2009-10-28), TEMA analysis of Lehman Brothers - Video in Dutch. Masterclass
The Lehman Brothers Treasure Trove - slideshow by Life magazine
Category:1850 establishments in the United States
Category:Banks based in New York City
Category:Banks established in 1850
Category:Banks disestablished in 2008
Category:Bank failures
Category:Barclays Group
Category:Companies that have filed for Chapter 11 bankruptcy
Category:Companies delisted from the New York Stock Exchange
Category:Defunct financial services companies of the United States
Category:Former investment banks
Category:History of Montgomery, Alabama
Category:Shearson Lehman/American Express
.svg)
