Lehman Brothers was considered "too big to fail" but failed on September 15, 2008, marking the largest bankruptcy filing in U.S. history. The document outlines Lehman Brothers' history from 1850 to 2008, including its expansion through acquisitions. It discusses the factors that led to Lehman Brothers' collapse, including losses from the subprime mortgage crisis, high leverage, and liquidity issues. The collapse had widespread impacts, including job losses, falling stock prices, and tightened credit. Lessons included debunking the myth that a company could be "too big to fail" and the need for prudent risk management and regulations.

1. Lehman Brothers
The last days of

2.  Lehman Brothers considered “too big to fail” actually failed
on September 15, 2008. It was believed that company this
big would be saved but “was never saved”.
 Why
 What
 When
 How

3. Agenda
 History
 Backstage
 The last days
 What led to this collapse?
 Impact of the collapse
 How this collapse could have been prevented?
 Lessons learned

4. History
1. 1850 - 1969
 Founded in 1850
 Started as a dry-goods store then to a cotton trader.
 By 1884 started financial advisory services and underwriting
2. 1969 - 1984
 Merged with Kunh, Loeb & Co – was the 4th largest investment bank.
3. 1984 - 1994
 Shearson acquired Lehman Brothers
4. 1994 - 2008
 Went public for the first time.
 CEO – Richard S Fuld
 14 straight years of profit

5. Backstage
 The main business areas of Lehman was typical investment banking as well
as equities, fixed income, capital markets and investment management.
Their investment banking business provided financial services such as
mergers and acquisitions, underwritings and issuing securities.
 After 9/11 attacks there was a long period of low interest rates.
 Shifted from lower risk brokerage model to high risk capital intensive IB
model.
 8 months – from 4th largest investment bank to bankruptcy.
 Broke the myth that even “too big can fail”.

6. Timeline
 1850: Henry Lehman and brothers Emanuel and Mayer opened a cotton
trading business in Montgomery, Alabama, naming it Lehman Brothers.
 2007: The firm bypasses smaller rival Bear Stearns Cos. as the largest
underwriter of mortgage-backed securities.
 2007: Closes BNC Mortgage LLC subprime-lending unit, eliminates 1,200
jobs.

7. 2008
 March 17: Lehman shares fall as much as 48 percent on concern it would
be the next Wall Street firm to collapse after Bear Stearns was forced to sell
itself for 7 percent of its market value the day before.
 May, 21: Hedge fund manager David Einhorn questions Lehman's
earnings report, saying the bank under-reported its problems in its first
quarter.
 June 9: The firm announces its first quarterly loss since going public and
sells $6 billion of stock to bolster capital.
 Aug. 19: Lehman shares drop 13 percent on reports that the firm solicited
buyers for its investment-management division and that third-quarter
write-downs would be worse than estimated.

8.  Sept. 9: Lehman shares plunged 45 percent after talks about a capital
infusion from Korea Development Bank ended.
 Sept. 10: Lehman reports a $3.9 billion third-quarter loss, the largest in its
history, on $5.6 billion of write-downs.
 Sept. 12: Lehman shares sink 42 percent after Moody's Investors Service
said the firm must find a ”stronger financial partner” or it will downgrade
the company's credit rating.
 Sept. 13: Finance leaders meet at the Federal Reserve Bank of New York
seeking a solution

9.  Sept. 14: Barclays pulls its bid after failing to secure guarantees against
losses, Bank of America withdraws hours later. Firms meet to net trades, or
cancel those that offset each other, as Lehman liquidation or bankruptcy
draws near.
 Sept. 15: Lehman petitions for Chapter 11 bankruptcy, listing $639 billion
of assets in the largest filing in U.S. history.
 Sept.16: Barclays announces $2bn deal to buy a large part of Lehman’s
US business out of bankruptcy.

10. Causes
1. Repeal of the Glass – Steagall Act 1933
 The act allowed commercial banks to carry out investment banking
activities.
 Lehman Brothers in order to compete with other companies acquired
many commercial and investment banks which exposed them to
several risks.
2. Complex capital structure
 Acquired various firms to compete in the market.
 Conducted business over 3000 different legal entities.
 Expansion strategy

11. 3. Losses
 $2.8 billion in second quarter and $3.8 billion of third quarter of 2008.
 Heavily exposed to the U.S real estate market.
4. Liquidity
 Unable to meet short term obligations.
 Lost market confidence.
5. Leverage
 Leverage ratio increased from 20 to 44 to 1 shareholder equity.
 Coupled with sliding of prices of assets due sub- prime crisis.

12. 6. Sub prime mortgage crisis
 Banking panic
 Excessively lent loans to unqualified borrowers without full
documentation.
 To capitalize on speculative opportunities and to reduce risk Lehman
entered into derivatives (credit default swaps).
 Fall in the prices of collateralized debt obligations.
7. Unethical management practices
 Use of Repo 105 & Repo 108
 Violated Sarbanes-Oxley Act.
 Financial statement fraud
 Payment of excessive bonuses to directors.

13. 8. Risks
 Market risk
 Credit risk
 Liquidity risk
 Operational risk
 Reputational risk
9. Unsuccessful bailout & takeover attempts
 Korean Development Bank
 Failed takeover attempts by Bank of America & Barclays.

14. Impact
Key Highlights :
 Almost 6 million jobs were lost.
 Unemployment rate almost doubling to 10%
 Popular index DOW JONES fell by 5000 points.
 57% drop in stock prices from 2007 peak, coupled with homes now
worth tens of thousands of dollars less.

15. 1. Impact on banks
 Subject to greater govt. regulations
 Inter banking lending rates spiked.
 Operating with less borrowed money.
2.Impact on economy
 Reduction in retail sales & employment opportunities.
 Skimpier profits of U.S based companies.
 Cost of borrowings also increased.
3. Impact on Global economy
 GDP fall to 4.8%
 Banks of Japan, Germany & England faced huge losses.

16. 4.Impact on investors
 Turned conservative
 Stared shifting to CDs and money market funds.
5. Impact on consumers
 Way of spending got interrupted.
 Uplifted the level of savings among households.

17. Prevention
 Proactive risk management
 Do not do business which you can’t understand.
 Control greed
 Look for early threat signs.
 Stricter regulations

18. Lessons learned
 The myth “too big to fail” was broken.
 Any company even as big as Lehman Brothers should follow
some basic rules.
 “Greed is good” but not always.
 Always invest in securities which you can understand.
 Relation between strict regulations and good corporate
governance.
 Goals are good, try hard to achieve it but never overdo it.

19. References
 Wikipedia
 Various case studies
 The last days of Lehman Brothers (BBC television film)
 Too big to fail (film)