LEHMAN BROTHERS : The Rise and Fall of Investment Giant

Lehman Brothers, world's topmost investment bank that dates back to 1850 (even prior to the civil war) now dissapeared. It survived two World War , the Great Depression of 1929 and all other financial problems that arises in its 158 year old history, but this ongoing financial crisis break its beakbone. On September 15,2008, it filed for Chapter 11 Bankruptcy Protection. Before talking furthur about its collapse , let us take a look on Lehman's 158 year old history.

• Established in 1850, by Henry Lehman, Emanuel Lehman and Mayer Lehman. They named their business as Lehman Bros.
• They started their business with commodity trading. The main attraction was cotton crop. Cotton had a high market value and seeing a market for this, the 3 brothers started to accept payment in cotton for goods and also created a secondary market for trading in cotton.   Soon, they become the broker for buying and selling of the crop. In 1958, they opened their office in New York City.
• Then in 1862,  period of Civil war came which disrupted its business. Lehman Bros. joined hands with cotton merchant John Durr. From that moment Lehman Bros. became Lehman,Durr Co.
• After Civil War, they start dealing in railroad bonds and also they started the financial Advisory Business. Soon Lehman became a member of NYSE.
• Between 1900-1909, Lehman Bro. acts as a founder financier of emerging retailers including Sears, Roebuck & Company, Gimbel Brothers Inc. and R.H.Macy & Company. Along with these retailers Lehman Help in settling down of many film studios like RKO, Paramount and 20th Century FOX. They were the pioneers in arranging loans between Blue chips borrowers and private Leaders.
• Between 1940-1949, Lehman Bros. became an important financial advisor as unprecedented era of prosperity ignited.
• Between 1950-59, it start-up financing, IPO underwriting.
• Between 1960-79, it started working with leading players such as IBM, DECand Coral.It also acquired Abraham and Co. in 1975.
• In 1984, American Express acquired Lehman Brother and merged the firm with Shearson.
• In 1993, American Exp. divested Shearson and the independent firm once again became known solely as Lehman Brothers.
• In 2000, Lehman Brothers celebrated its 150th year anniversery. It joined the S&P 100 Index and its stock price hit $100 for the first time.
• In 2001, it bring its first IPO.
• In 2002, it moved to its new Global headquarter in Midtown Manhatten.
• In 2005, it opens office in Mumbai ( Financial Capital of India, Asia).

And then America's fourth largest Investment BAnk filed the biggest bankruptcy petition known to mankind. A bank who never reported any quaterly loss even once in its 158 year old history collapsed.The bankruptcy was of the size of $639 billion.

The main reason of this collapse is the Sub-prime mortgage crisis. Lehman Brothers knuckle down to subprime crisis. A huge loss of $60 billion forced Lehman to file for bankruptcy. According to many people this was the outcome of excessive greed and pride of Lehman's CEO Richard Fuld. Seeing this condition of Lehman Brothers other banks start refusing to do any business with Lehman. They didnot feel comfortable with Lehman's complex and opaque way of trading.

Due to rise in ROI ( rate of interest) in America, borrowers were unable to repay loans, it worsened the financial condition of Lehman Brother. Due to this Lehman Brother faced a huge loss which forced them to shut down all its business.

Barclay and Bank of America tried to take over Lehamn Brothers. Now the main question arisis  why Barclay want to buy Lehman when other banks are running away from Lehman. According to barclay they actually want to buy the firm at cheap price and re-run it when the favourable conditions will come. Because Barclay knows that the main cause was the greed of Lehman's CEO and only subprime is not responsible for its fall. According to Wall Street it will make the recession in America more worse. 

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Sub Prime Crisis

Sub-prime loans ( Housing loans or junk loans) are given to those people whose income is very less or we can say they fall in unstable income group who are not eligible for the loans issued by banks. Sub-prime loans are for those needy people. Although subprime  loans are very risky but it is very profitable.

Bank directly can’t provide loans for people who falls in low credit group. Those people can’t fulfill the bank’s essential requirements. So banks give loans to the big Institutions at certain rate of interest. Those Institutions divide that big amount of loan in smaller amount and give them out to low credit people in the form of home loans at much higher rate of interest than the rate at which they borrowed money from the bank. This higher rate of interest is knows as Sub-Prime rate and this home Loan market is referred as Sub-prime home loan market. A simple man now get a loan, although at higher ROI but its better than no loan.

US government kept the rate of interest low for a long time to encourage low credit population for the sub-prime loans.  Due to low interest rates the subprime loan EMI remain low for long time. Attracting towards the low EMI , people kept on taking big loans to fulfill their dreams. Due to so much interest in making houses , real estate prices goes high. Stock market zoomed. Everything was hoping a great future. But suddenly bolt from the blue comes. 

Its impossible to keep interest rate low for a long time. Government start increasing the ROI (rate of interest) gradually . But its hit the low credit group seviourly. As the ROI increased Institutions also kept on increasing ROI on subprime loans which means EMI ( Equated monthly installments) start increasing. And thus , more and more borrower start defaulting. Also real estate prices starts going down.

When the US Economy begans to slow down ,the crisis began with the bursting of the US housing bubble :- 

• Slowing economy
• Increasing Inflation
• Increase in crude oil price
• High interest rates
• Fluctuating real estate prices

All these factors cause 

• Job losses on big scale
• Defaults
• Stock market falling

and many other.

Due to all these , people unable to pay their EMI. Institutions securitise the loans , thus the risk was at the investors who invest in their stocks. On the other hand , institutions keep on taking loans from banks as they were able to repay the loans before the time.

Institutions spend the loans in securities too so that they will get return much earlier. As people getting defaulting , Institutions were unable to repay the loan amount to banks and start selling the securities. Investors move away from those securities , which furthur dragged the stock market. 

Now to repay the loans and to fix their losses, investors start taking out their money from other markets especially Indian , Japan and other asian markets where they were performing well. This Sensex ( Indian stock market) starts tumbling as selling of FII’s were much more than buying so sensex fall.

This was actually sub prime crisis which mainly hit US,UK and many part of Europe. 

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