How Lehman Brothers became Bankrupt?

15th Sept 2008 has become a black day in the history of financial market with US fourth-largest investment bank Lehman Brothers filing for bankruptcy. Already Merrill Lynch has been acquired by the Bank of America and AIG is also verge of bankruptcy. How it happened? How 158 years old finance giant became bankrupt? Today I will discuss the reasons behind this biggest incident of bankruptcy in the history of mankind. So how Lehman started, how it became leader in financial-services and then became bankrupt. Let’s cover all points one by one.

Lehman Brothers founded in 1850, is a global financial-services firm. The firm does business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking. It is a primary dealer in the U.S. Treasury securities market. The firm’s worldwide headquarters are in New York City, with regional headquarters in London and Tokyo, as well as offices located throughout the world.

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, where he opened a dry-goods store, “H. Lehman”. In 1847, following the arrival of 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. In 1850 Lehman brothers set up the merchant bank in New York after making money in railway bonds. In this way this finance giant came into existence in USA.

The reason behind the downfall of Lehman Brothers ::

These days there is mortgage crisis in United States due to decline in prices of real-estates. As a result, housing loans made by the bank to people with little support made these loans very risky, and when interest rates were raised by these banks, these borrowers could no more repay Lehman. This led to huge losses for Lehman. It caused $60 billion loss in bad real estate loans for Lehman Bros. One of the main reason for its downfall was its poor relations with top banks of United States. They refused to do business with Lehman due to over-confidence of its CEO over the Lehman financial assets. And after big debt of $639 billion, when Lehman asked Barclays and Bank of America for acquisition, they simply rejected the offer.

Financial implications of bankruptcy of Lehman Brothers ::

• Over 5,000 employees in the UK have already lost their jobs, while about 20,000 in the US might as well forget going back to their work stations. About 2,500 Lehman employees in India will also soon get the pink slip.
• Wall Street has lost its glory in world business. Three of the Street’s five major independent brokers have disappeared. Now we have only Goldman Sachs and Morgan Stanley left.
• Big loss for Indian software companies.
• Higher Credit rates and borrowing costs.
• Slow down of US economy and share markets.