Web Article of the Month
Lehman Brothers Holdings Inc. – A Storied Business Taken down by the Current “Credit Tsunami”
by Stephanie Brun de Pontet, Ph.D.
We all understand that we are undergoing some sort of financial crisis. Call it a recession, an economic down-town, or an inevitable dip in the cycle in of otherwise healthy market. However you see the current marketplace, it is clear that one of the defining moments in the current financial crisis was the announcement, on September 14th, that Lehman Brothers Holdings Inc. would file for liquidation.
Lehman, a 158 year-old business and financial goliath thrived as a family business for more than a century of its operation. It had weathered mergers, divestitures, September 11th, and a range of other business disturbances both small and large, was finally brought down last month due to major losses in the mortgage market and a broader loss of investor confidence.
Lehman’s own website suggests the growth of their business “parallels the growth of the United States” and documents a long and storied history. Still, even this once stronghold of family business succumbed to economic tsunami or perfect storm, if you will.
Lehman’s story is similar to many family businesses in America. The business was founded in Alabama as a general store by a German immigrant named Henry Lehman in 1844. Three of his brothers joined the business shortly thereafter, and the brothers made a living trading cotton crops for currency or merchandise, eventually becoming commodity brokers and financial advisors.
Through the early 20th Century the Lehman Brothers firm was involved in financing growing and emerging businesses throughout North America. As it grew in size and financial influence, it is interesting to point out that Lehman Brothers remained a family-only partnership until 1924, when the first non-family member joined the firm. While the firm grew to a scale to include non-family professionals, family members remained at the helm of the business until 1969, when Robert Lehman died, the last family member to lead the company.
The loss of family leadership, coupled with a difficult financial environment in the early 1970s, put the business in jeopardy. A series of mergers temporarily put the firm back on stable footing, but then internal strife lead to new challenges that culminated with the acquisition of the business by American Express in the mid 1980s. Ten years later, American Express decided to divest itself of non-core holdings and the Lehman Brothers firm was spun out as an independent entity once more through an Initial Public Offering.
Though the tumultuous environment on Wall Street meant the company had good years and bad, on balance Lehman Brothers thrived through the 1990s and early 2000s. To replace facilities damaged in the September 11th attacks, and befitting its position as the 4th largest investment-banking firm in the nation, Lehman Brothers bought a 32-story building in Times Square for a reported $700 million in 2001.
Only a few years later, the firm faced what was the beginning of the end for them. In 2007, Lehman was forced to close its subprime mortgage business, laying off over 1,000 people and taking a substantial financial loss. However, this was not enough – in 2008 Lehman faced mounting losses due to the firm’s continuing exposure to the subprime mortgage crisis through bonds and other complex financial instruments it was still holding that were adversely affected by the ongoing weakness in the US housing market.
Reported losses in the second quarter of this year were close to $3 billion, forcing the company to sell off billions in assets – and decimating the value of the stock as the credit market continued to tighten. In desperation the company began to look for a buyer but the situation started to spiral out of control as prospective buyers became more anxious about the security of the bank and the US government made clear they would not assist in facilitating a deal. Sadly, liquidation of this storied firm was the only outcome possible at that point.
The company will now be sold in pieces. For example Barclays plc of London announced last month they would purchase Lehman’s building, data centers and the company’s trading and debt security businesses – likely saving thousands of jobs for Lehman employees and providing Barclays with an excellent US presence at a very bargain price.
Capturing well the magnitude of the shock of those in the industry that such an outcome was possible for as venerable an institution as Lehman Brothers, judge James Peck, who is overseeing the bankruptcy proceedings in New York was quoted as saying: “I have to approve this transaction [Barclays offer] 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.”
Stark words from a veteran New York judge – and we can all hope that Judge Peck will not have to sit through another proceeding such as this any time soon! We can only wonder whether Lehman would have suffered the same fate if remained a family business.