The Rise and Fall of

LEHMAN BROTHERS
 1844-1850
 1844 - 23-year-old Henry Lehman comes from
Bavaria to Birmingham, Alabama. He opened
a dry goods store, “H. Lehman”

 1847 – Emanuel Lehman arrives and the

company is renamed to “H. Lehman and Bro”

 1850 – Mayer Lehman arrives. The company

is renamed once more, to the “Lehman
Brothers”
 1850’s
• Lehman Brothers began accepting cotton as
payment and reselling. This became the
most important part of their business.
• 1855 – Henry Lehman dies of the yellow
fever. The other brothers continue with
the business.
• 1858 – The Lehman Brothers create a branch
at 119 Liberty Street in Manhattan in
order to represent their business in the
most central economic place in the
country.
 1960’s and the Civil
War
• Due to stress on the company from the
Civil War, the Lehman Brothers teamed up
with John Durr, a cotton merchant. They
formed Lehman, Durr & Co.
• The company helped in the Reconstruction
of Alabama after the Civil war, giving
financial aid.
 1870’s
• In 1870, the Lehman Brothers company
played a major role in the creation of the
New York Cotton Exchange, as well as the
Coffee and Petroleum Exchanges.
• The company was also appointed as
Alabama’s financier. The company took care
of bonds, debts, and interest payments.
This marked their entry into the railroad
bond and finacial advisory businesses.
 Railroad Bonds
• As railroads became increasingly popular,
bonds of the railroad companies became
available for the individual.
• The Lehman Brothers began to trade bonds
the same way they had begun to do with
cotton in the 1850’s.
• The trading of these bonds and securities
led the Lehman Brothers to join the New
York Stock Exchange and give up
commodities trading for the sake of
merchant-banking and financial advisory.
 Early 1900’s
• Starting in 1906, the Lehman Brothers, now
under Emanuel’s son Philip, began to
partner with Goldman, Sachs & Co. in order
to boost the economy and help new or
faulty businesses.
• Philip Lehman retired and his son Robert
took over in 1925.
 The Great Depression
• The Lehman Brothers company was able to
survive the Great Depression by moving to
venture capital. VC is the investment by
non-government 3rd party in a risky
enterprise that cannot get bank loans.
• In 1924, the family chain was broken and
John M. Hancock joined the firm.
• By the end of the Depression, the Lehman
Brothers had relocated to 1 William Street
 1930’s-1970’s
• The Lehman Brothers, over the years, began
to help finance things such as television
and oil, as well as many new technologies,
even early computers.
• Robert Lehman died in 1969, and the
company has been led by non-Lehman’s ever
since.
• The company began to fail, and Bell and
Howell CEO Pete Peterson was appointed to
help save the company.
 Power
struggle/American
•
Express
Pete Peterson, in an effort to alleviate
internal hostilites, promoted Lewis
Glucksman to be his co-CEO. He was
pressured out and Glucksman was left in
charge.
• With this poor management in place, the
firm was forced to merge with American
Express and Shearson, one of its
subsidiaries.
 Divestment
• American Express, in 1993, wished to
divest and Lehman Brothers became its own
company again.
• New CEO Richard Fuld went against all
expectations and the company excelled for
the coming years.
 9-11
• When the World Trade Centers collapsed,
their one-floor office there was destroyed
and debris rendered the Lehman Brothers
main office unusable. They relocated to
New Jersey temporarily, and ended up
keeping that office as well as many more
in Manhattan and the rest of New York.
 8-Sep-08 12.00 12.87 2.46 2.64 2,621,800 2.64
1-Sep-08 10.60 12.00 10.15 11.12 27,400 11.12
25-Aug-08 9.90 11.01 8.95 11.01 21,000 11.01
18-Aug-08 10.88 11.20 8.40 10.08 28,100 10.08
11-Aug-08 12.55 13.19 10.33 11.60 7,900 11.60
4-Aug-08 11.75 13.37 11.50 12.13 4,600 12.13
28-Jul-08 10.93 11.60 9.50 10.80 6,900 10.80
21-Jul-08 12.35 13.91 10.90 11.12 13,300 11.12
14-Jul-08 9.40 12.63 7.40 12.50 56,200 12.50
7-Jul-08 14.51 15.00 8.50 8.74 13,600 8.74
30-Jun-08 14.00 15.28 12.49 14.48 3,000 14.48
23-Jun-08 15.50 16.40 14.12 14.30 2,900 14.30
16-Jun-08 16.95 18.21 14.95 15.30 10,000 15.30
10-Jun-08 19.00 19.00 14.25 16.34 9,200 16.34
2-Jun-08 23.34 23.71 18.40 21.09 10,400 21.09
26-May-08 23.19 24.55 21.90 24.55 4,600 24.55
19-May-08 27.67 28.80 23.33 23.33 1,100 23.33
12-May-08 28.02 28.55 27.05 28.54 100 28.54
5-May-08 30.40 30.40 27.60 28.30 0 28.30
28-Apr-08 29.81 31.26 29.63 31.26 100 31.26
21-Apr-08 28.55 29.95 27.38 29.84 200 29.84
14-Apr-08 25.06 30.02 24.72 30.02 700 30.02
7-Apr-08 28.00 29.08 24.85 25.70 1,000 25.70
31-Mar-08 23.74 29.15 22.61 27.39 4,500 27.39
24-Mar-08 29.55 30.29 24.66 24.99 1,400 24.99
17-Mar-08 22.10 29.55 15.52 29.55 7,800 29.55
10-Mar-08 29.78 30.83 26.50 26.72 300 26.72
3-Mar-08 34.40 34.40 29.52 31.41 1,100 31.41
25-Feb-08 36.13 38.30 35.00 35.00 0 35.00
18-Feb-08 36.86 37.87 35.97 36.50 0 36.50
11-Feb-08 41.00 41.00 36.45 36.45 0 36.45
4-Feb-08 43.98 45.07 39.32 41.23 100 41.23
28-Jan-08 38.94 43.60 38.94 43.22 100 43.22
21-Jan-08 36.00 40.88 33.00 40.88 200 40.88
14-Jan-08 38.65 39.99 36.80 37.20 300 37.20
7-Jan-08 39.25 40.20 36.51 40.20 100 40.20
31-Dec-07 44.18 44.18 40.50 40.50 0 40.50
24-Dec-07 42.74 44.44 42.74 44.18 0 44.18
17-Dec-07 42.72 43.59 41.72 42.74 100 42.74
10-Dec-07 42.81 44.35 41.00 42.25 100 42.25
3-Dec-07 42.16 42.69 40.05 42.69 100 42.69
26-Nov-07 41.49 44.00 38.20 44.00 300 44.00
19-Nov-07 42.11 42.11 38.02 39.47 200 39.47
12-Nov-07 39.21 45.15 39.21 41.64 100 41.64
5-Nov-07 40.99 41.10 37.70 37.75 400 37.75
29-Oct-07 41.52 43.85 41.10 41.10 100 41.10
22-Oct-07 39.61 41.23 37.81 41.10 1,100 41.10
15-Oct-07 45.75 45.88 41.23 41.60 300 41.60
8-Oct-07 44.86 45.80 44.38 45.62 200 45.62
1-Oct-07 43.82 45.86 43.82 45.10 700 45.10
24-Sep-07 45.02 45.30 42.25 44.10 400 44.10
17-Sep-07 43.41 48.20 41.80 44.76 1,200 44.76
• Here are the stock prices of Lehman brothers at the start
of each week going back to over a year ago.
• Date, Open, High, Low, Close, Avg Vol, Adj Close*
• Take note of the incredible change over time of the stock
for this past year.
_Aug. 22, 2007: Announces plans to shutter its subprime mortgage business, eliminating 1,200 jobs.
_ Sept. 20: Chief Financial Officer Chris O'Meara steps down to head global risk management division. Erin Callan, head of
the investment banking practice for hedge funds, succeeds him.
_ Dec. 13: Reports fiscal fourth-quarter profit of $870 million and full-year earnings of $4.2 billion.
_ Jan. 17, 2008: Lehman says it will stop originating mortgages through wholesale channels amid continued weakness in the
housing and real estate markets.
_ March 16: The federal government and JPMorgan Chase & Co. bail out Bear Stearns Cos. Analysts question whether other
investment banks might also collapse.
_ March 17: Reports suggest Southeast Asian bank DBS Group Holdings Ltd. instructed its traders to cease working with
Lehman, though those instructions were later rescinded.
_ March 18: Announces it earned $489 million during its fiscal first quarter.
_ April 1: Raises $4 billion in capital.
_ April 15: Speaking at the investment bank's annual shareholder meeting, Chairman and Chief Executive Richard Fuld tells
investors that the worst of the credit crisis is behind Wall Street, but that the environment "will remain challenging."
_ May 16: Announces it is cutting 1,400 jobs, or about 5 percent of its work force.
_ June 9: Estimates it lost about $3 billion for the second quarter and that it is raising $6 billion in fresh capital.
_ June 12: Removes Callan as CFO and Joseph Gregory as chief operating officer. Herbert McDade replaces Gregory, while
Ian Lowitt replaces Callan.
_ Aug. 29: The New York Times reports Lehman is preparing to cut 1,500 jobs.
_ Sept. 2: Reports indicate state-owned Korea Development Bank was considering buying a 25 percent stake in Lehman.
_ Sept. 8-9: Shares of Lehman plunge 52 percent amid worries the investment bank was struggling to find new investors
and raise capital. Reports say the talks with KDB have ended.
_ Sept. 10: Lehman says it lost $3.9 billion during its fiscal third quarter and plans a number of moves to shore up its
balance sheet. The announcement, coming a day after Lehman shares lost 45 percent, is an attempt to assuage market
worries. Fuld says the firm will consider all "strategic alternatives."
_ Sept. 11: Lehman shares skid another 42 percent as investors reject the plan, forcing Lehman executives to scour Wall
Street for a financial lifeline.
_ Sept. 12: Late Friday night Wall Street executives and top U.S. financial officials convene at the New York Fed to discuss
how resolve Lehman's situation before it shakes investor confidence in the U.S. banking system.
_ Sept. 13: The group reconvenes at the New York Fed as foreign finance ministers urge a solution before Asian markets
open.
• The storied firm's decline occurred in slow motion this year.
Heavily exposed to troubled real-estate investments, the firm
tried to raise fresh capital, only to be thwarted. The most
recent disappointment came last Monday when a possible deal
with a Korean bank faded, sending Lehman's shares down 45% the
next day. They had already fallen 80% since the start of 2008.
• Potential Buyers Bank of America and Barclays wanted
government assistance to help with the bailout, so they could
then buy Lehman, its stock was continuously believed to be
overpriced and not representative of the company’s actual
value thus turning away potential buyers.
• On September 17, 2008, the New York Stock Exchange delisted
Lehman Brothers.
 How Did Lehman
Collapse?
 Bought risky assets in form of warehouse
and apartment real estate

 Real Estate no longer worth what it was

worth

 NY Times places blame on President Robert

Fuld for not recognizing the loss of value
 Real Estate Crunch

 Firms began reducing their exposure to

Real Estate Mortgages

 In the 3rd Quarter, Lehman reduced

exposure from $39.8 B to $32.6 B, but was
slower to do so than other firms
 Richard Fuld

 Joined Lehman in 1969

 Became CEO in 1993

 Chairman of the Board of Directors since

1994

 Attachment to the company clouded his

judgement
 Potential Buyers

 Korean Company, Barclay’s, Bank of America

 Bank of America opted for Merrill Lynch,

which was priced more reasonably

 Barclay’s backed out of agreements, but

then bought a portion of the portfolio
AFTER the Chapter 11.
 Why Not Save Lehman?

 Saved Bear, but not Lehman

 Didn’t save Lehman BECAUSE the gov’t saved

Bear

 Paulsen wanted to re-establish “Moral

Hazard”
 Moral Hazard

 Moral hazard is the prospect that a party insulated from

risk may behave differently from the way it would behave
if it were fully exposed to the risk

 Essentially, to reinstitute Moral Hazard, the government

has to let companies reap the consequences of their
actions, for the purpose of not making the same mistakes
twice
 Stocks
• Lead to market prices slipping.

• Banking and investments stock prices

plummet

• Followed by the Dow, NASDAQ, and S&P 500

having steep losses.
 Effects on Short
Selling
• Fed. put a freeze on selling stocks short

• Great Briton banned shot selling stocks

 Further Connections

• AIG collapse

• Government bail out