Lehman Brothers

» see lehman.com as it lived, on the wayback machine

~ the obit ~

Henry Lehman arrived in Mobile from Bavaria in 1844 and opened a dry goods store in Montgomery a couple of years later. Cotton farmers in central Alabama had crops and no money, so the store began accepting raw cotton against merchandise, which meant it had to learn to value and resell cotton. Emanuel joined in 1847 and Mayer in 1850, and with the third brother in place the sign was changed to read Lehman Brothers. Within a decade the merchandise was incidental and the commodity trading was the business.

Everything after that was the same move applied to progressively more abstract things. Cotton became a seat on the New York Cotton Exchange in 1870 and then railroad bonds, and by the turn of the century the firm was underwriting retailers that no established bank would touch. The firm was sold to American Express in 1984 and spun back out in 1994. By 2007 it was the fourth largest investment bank in the United States, with roughly twenty five thousand people and a record year behind it.

It filed for bankruptcy protection shortly before one in the morning on Monday 15 September 2008. The assets on the filing came to $639 billion against $613 billion of bank debt and $155 billion of bonds, which made it roughly six times the size of the previous American record. Barclays bought the North American operation and the headquarters building for $1.35 billion within the week. Nomura took the Asian business for $225 million and the European one for two dollars.

~ the rap sheet ~

~ one hundred and fifty eight years ~

The length is what makes it strange. This was a firm that had survived the American Civil War with its home state on the losing side, the failure of its own cotton market, two world wars, the 1929 crash and the Depression that followed, a takeover, a decade inside a credit card company, and a spin-off. It had outlasted every other name on the Montgomery of 1850 by more than a century. Then it took on a mortgage book at roughly thirty dollars of borrowing for every dollar of its own, and the whole thing ran out in about eight months.

~ the weekend ~

The end was negotiated in the Federal Reserve Bank of New York on Liberty Street across Saturday 13 and Sunday 14 September, with the heads of most of Wall Street in the building. Bank of America looked and went to buy Merrill Lynch instead. Barclays was willing and got as far as terms, then needed a shareholder vote it could not hold in a weekend and a guarantee from the British authorities that they declined to give.

The official position was that there would be no public money, which had been the position at the start of the weekend and was mostly held to. Six months earlier the same building had put $29 billion behind the Bear Stearns sale to JPMorgan. The day after this filing the Federal Reserve lent AIG $85 billion, and the inconsistency across those three weekends is what the subsequent decade of hearings kept returning to.

~ the export shock ~

Turkey took this crisis through its factories rather than through its banks. The Turkish banking system had already had its collapse in 2000 and 2001 and had been rebuilt with capital rules strict enough that it went through 2008 without a single failure, so the mechanism that destroyed Lehman had been closed off here years before by people who had learned it the expensive way.

What came instead was demand. More than half of Turkish exports went to the European Union under the customs union, and European orders stopped. Exports fell about twenty five percent in 2009 and output fell 14.3 percent year on year in the first quarter, the sharpest quarterly drop in three decades, ending in a 4.8 percent contraction for the year. That was a worse annual number than the United States recorded.

So the name itself arrived as television. There were no Lehman branches to queue outside and no Turkish depositors to make whole, so the story was watched here as a foreign one for roughly two months. Then the European orders stopped coming and it became a local one.

~ the numbers that survived ~

The estate ran for years and paid out more than most people assume. Unsecured creditors eventually recovered around forty cents on the dollar, well above the eight to twelve cents estimated at the start, because a great deal of what looked worthless in 2008 was merely illiquid. Total distributions passed $130 billion. The brokerage unit finished its liquidation on 28 September 2022, fourteen years and thirteen days after the filing.

Richard Fuld, who had run the firm since 1994, was never charged with anything. The headquarters at 745 Seventh Avenue is still a working office building with a different bank's name on it, and the sign was changed over a weekend. What the collapse actually produced was the proof that a firm can be too entangled to fail safely, which is a different claim from too big, and every rule written since has been an attempt to answer it.

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