Lehman Brothers—the fourth largest investment bank in
New York created headlines in all the leading newspapers
with its collapse in September 2008, followed by several
other appalling events. A company running successfully for the past
158 years, that survived World Wars, the South East Asian
financial crisis and the collapse of Long-Term Capital Management, could
not endure the dire conditions prevailing in the subprime market.
The collapse of Lehman Brothers was one of the worst events in
the history of financial markets—one after the collapse of
Drexel Burnham Lambert in 1990.
Lehman Brothers was engaged in the business of
investment banking, equity and fixed-income sales, research and
trading, investment management, private equity, and private banking.
The company, which actively participated in subprime lending
and lower-rated mortgage tranches market, escalated its
subprime market share from 7.2% in 2002 ($207.7 bn) to almost three
times, i.e., to 21.4% in 2006 (about $600 bn). However, the company
started incurring losses thereafter owing to the adverse developments in
the subprime market. In the second quarter of 2008, it lost $2.8 bn
and in the third quarter, losses mounted to $3.9 bn. In August 2007, the company blocked its
subprime lender, BNC Mortgage, retrenching 1,200 positions in 23 locations. The situation continued
to worsen and another 1,500 employees lost their jobs within a year. Such circumstances
eroded investors' confidence. As a result, the share price of the company collapsed from $66 to less than
$10 in February 2008. The collapse of Lehman Brothers triggered a widespread international
financial meltdown and crisis of a magnitude comparable only to The Great Depression. Let us trace back
and see how the events unfolded and finally led to the collapse of the financial behemoth. |
