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Page 1 of 2 News / US Equities
Lehman Brothers has come front and center in the ongoing saga of the US financial crisis. But who or what is Lehman Brothers and what effects will its current financial woes have on our local market?
Lehman Brothers has come front and center in the ongoing saga of the US financial crisis. But who or what is Lehman Brothers and what effects will its current financial woes have on our local market? As we already know, Lehman Brothers belongs to an elite list of US investment banks, a list that includes Merrill Lynch, Goldman Sachs, Morgan Stanley and Bear Stearns. It has over 26,000 employees worldwide and over US $59 billion in revenues in 2007. At the time it filed for Chapter 11, its market cap declined from US$130 billion in 2007 to US$100 million. As of end 2007, its total assets at US$690 billion, US$22 billion of that amount was in equity. The company is into investment banking, equity trading and brokering, fixed income trading, research and trading, investment management, private equity and private banking. Founded in 1850 by Herman Lehman and his brothers as a cotton trading company, it shifted to being a commodities house to underwriting. It combined with Goldman Sachs to underwrite General Cigars and Sears Roebuck. In the 1920s, Lehman Brothers helped underwrite May Dept. Stores, RH Macy and Co., Studdebaker and BF Goodrich. The next decade, the company helped underwrite the first television company, Dumont Inc. which eventually became Radio Corp. of America or RCA. In the decades after, Lehman Brothers rose in stature until 1975 when it became the fourth largest US investment bank after Salomon, Goldman and First Boston after a series of mergers. The company came into controversy in 2003 when it became one of ten firms which entered into a settlement with the US Securities and Exchange Commission (SEC), the Office of the New York State Attorney General and various other securities regulators, regarding undue influence over each firm’s research analysts by their investment-banking divisions. As a whole, through its history, Lehman Brothers survived the railroad bankruptcy of late 1800s, two World Wars, the Great Depression, the 70s stagflation, and the dot com bust. But it failed with the subprime crisis.
Lehman Brothers’ subprime saga started in August 2007 when the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27-million reduction in goodwill. The start of 2008 saw Lehman face an unprecedented loss in the continuing subprime mortgage crisis. Lehman’s loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches. Whether Lehman did this because it was simply unable to sell the lower-rated bonds or whether it made a conscious decision to hold on to them, is unclear. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman’s stock lost 73% of its value as the credit market continued to tighten.
In August 2008, Lehman reported that it intended to release 6% of its work force, or 1,500 employees, just ahead of its third quarter report deadline in September.
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