# Lehman Brothers Collapse: History and Impact on the Great Recession

## What Was Lehman Brothers?

Lehman Brothers was a global financial services firm. It provided investment banking, trading, investment management, private banking, research, brokerage, private equity, and associated services. The firm was one of the largest [investment banks](https://www.investopedia.com/terms/i/investmentbank.asp) in the United States until Sept. 15, 2008, when it declared bankruptcy.

Its failure was largely caused and accelerated by the [subprime mortgage crisis](https://www.investopedia.com/terms/s/subprime-meltdown.asp). Its bankruptcy remains the largest ever; this major event was the catalyst for the Great Recession. At the time of its Chapter 11 filing, Lehman Brothers had been in operation for 164 years. Lehman's assets, such as real estate holdings and operations, were sold off in a fire sale. A majority of the company's assets were acquired by Barclays and Nomura.  

### Key Takeaways

*   Lehman Brothers, once the fourth-largest investment bank in the U.S., declared bankruptcy on September 15, 2008, marking the largest bankruptcy filing in U.S. history and a pivotal moment in the global financial crisis.
*   The collapse of Lehman Brothers was primarily driven by its overexposure to subprime mortgage loans, which became illiquid, leading to massive losses and a subsequent credit crunch that it could not withstand.
*   Despite efforts to save Lehman through emergency meetings and potential sales to other banks, a lack of viable collateral and government support led to its downfall, stirring significant turmoil in global financial markets.
*   Lehman Brothers' failure is often cited as a key trigger of the Great Recession, bringing new regulatory scrutiny and reforms to the financial industry in an attempt to prevent future financial system collapses.

## The Rise and Vulnerability of Lehman Brothers

Lehman Brothers was considered one of the major players in the global banking and financial services industries. At the time of its bankruptcy filing, Lehman held some $600 billion in assets diversified globally and was the fourth-largest investment firm in the U.S. It invested heavily in mortgage origination in the U.S. from 1996 to 2006, in large part by utilizing leverage (at its peak at a ratio of about 30:1). As such, some say the firm became a de facto real estate [hedge fund](https://www.investopedia.com/terms/h/hedgefund.asp). When real estate values peaked and began to falter between 2007 and 2008, Lehman Brothers became especially vulnerable. 

Throughout 2008, Lehman tried to reduce losses by issuing stock, selling assets, and cutting costs, but issuing debt was nearly impossible. It had huge [tranches](https://www.investopedia.com/terms/t/tranches.asp) of subprime and low-rated mortgage loans on its books that it either could not or chose not to sell.

When these loans became [illiquid](https://www.investopedia.com/terms/i/illiquid.asp), the firm experienced a [credit crunch](https://www.investopedia.com/terms/c/creditcrunch.asp) and couldn't pay its creditors. Lehman could not raise cash by issuing debt or issuing stock diluted shares, which drove down the share price. Meanwhile, housing prices dropped as buyers hesitated due to market conditions and credit issues. As a result, the global financial system was [under threat of collapse](https://www.investopedia.com/lehman-moment-6752348) with the absence of any additional loans being made and the firm's significant threat of failure.

The [Federal Reserve Bank of New York](https://www.investopedia.com/terms/f/federal-reserve-bank-of-new-york.asp) and several large U.S. investment banks met on Sept. 12, 2008, to discuss an emergency liquidation of Lehman in an attempt to stabilize the markets. The goal was to avoid a costly government bailout, such as the $25 billion loan the government made to [Bear Stearns](https://www.investopedia.com/terms/b/bear-stearns.asp) in March 2008. Talks of a sale to Bank of America or Barclays failed, vetoed by the Bank of England and the U.K. Financial Services Authority. Attempts to secure federal intervention were also unsuccessful.  

> **Fast Fact**
>
> Lehman Brothers' failure placed the subprime mortgage crisis prominently into the public eye and presaged the deepening of the Great Recession.

## The Evolution of Lehman Brothers: From Dry Goods to Finance

Lehman Brothers was established by Henry Lehman, who emigrated from Germany. He opened a dry-goods store in Montgomery, Alabama, in 1844. The store became known as Lehman Brothers with the arrival of his brothers Emmanuel and Mayer. Their operation quickly expanded from dry goods into cotton and other [commodities trading](https://www.investopedia.com/terms/c/commodity-trader.asp).

The firm's operations shifted to New York in 1858. At that time, the city became home to cotton and other commodities trading. Henry Lehman was responsible for the first incarnation of the grocery and general store business, while his brothers laid the groundwork for what would become a financial industry powerhouse.

Over the next century and a half, the company underwent numerous changes and engaged in several alliances and partnerships. While the [Lehman Brothers bankruptcy](https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp) did not cause the Great Recession or even the subprime mortgage crisis, its downfall triggered a massive selloff in the global markets.  
  

> **Important**
>
> Lehman Brothers was allowed to fail. The repercussions were felt immediately and globally. For instance, the Dow Jones Industrial Average (DJIA) fell 500 points the same day that Lehman declared bankruptcy. Its failure is regarded as a contributor to the Great Recession that followed.

## The Aftermath and Legacy of Lehman Brothers

Lehman Brothers' assets, real estate holdings, and operations were sold off in a [fire sale](https://www.investopedia.com/terms/f/firesale.asp) liquidation to repay investors. Within a month, Japanese bank Nomura bought the firm's operations in the Asia-Pacific region (Japan, Hong Kong, Australia), and also its investment banking and equities trading businesses in the Middle East and Europe. Barclays purchased its North American investment banking and trading operations, as well as its New York headquarters.

### Lehman Brothers in Popular Culture: Movies, Television, and Theater

Not only was Lehman Brothers mentioned, but the firm's leadership at the time of its bankruptcy was portrayed in several financial-themed movies since 2008, such as and [_The Big Short_](https://www.investopedia.com/search?q=the+big+short).

The 2019 Showtime series _Black Monday_ is a dark comedy about a [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp). The show features Larry and Lenny Lehman, two fictional siblings who were inspired by the real Lehman brothers.

In 2016, Erin Montella, a former Lehman [chief financial officer (CFO)](https://www.investopedia.com/terms/c/cfo.asp) who resigned in 2008, published an autobiography, _Full Circle: A Memoir of Leaning in Too Far and the Journey Back._ The book was about her experiences in the financial world.

Most notably, [_The Lehman Trilogy_](https://thelehmantrilogy.com/) is a three-act play by Italian novelist and playwright Stefano Massini. It follows the lives of three immigrant brothers from when they arrive in America and establish their dry-goods business up through the collapse of the company in 2008. 

The production made its Broadway debut in March of 2020 and performed briefly before the COVID-19 pandemic, and resumed performances in the fall of 2021. The production received universal critical acclaim and eight Tony Award nominations, winning five awards, including for Best Play, Best Direction of a Play for Sam Mendes, and Best Actor in a Play for Simon Russell Beale.  

## Why Did Lehman Brothers File Bankruptcy?

Lehman Brothers was forced to file for bankruptcy after its subprime mortgage portfolio was exposed to be worth far less than people had thought. Clients began to abandon Lehman as its stock price plummeted, and soon, creditors would not lend the bank money. On Sept. 15, 2008, Lehman declared bankruptcy.

## Why Was Lehman Brothers Not Bailed Out?

Regulators claimed they could not have rescued Lehman because it did not have adequate [collateral](https://www.investopedia.com/terms/c/collateral.asp) to support a bailout loan under the Federal Reserve's emergency lending powers. Furthermore, the financial system was by then more fragile compared to when the Fed saved Bear Stearns. This was one reason why the government was not able to find a private-sector buyer for Lehman.

Some have alternatively speculated that regulators wanted to make an example out of Lehman to show the cost of fiscal irresponsibility and excessive risk-taking on Wall Street; however, if true, this proved disastrous as contagion from Lehman's failure rippled throughout the global economy.

## Who Were the Lehman Brothers?

A new immigrant from Germany to the U.S., Henry Lehman opened a dry goods store in Montgomery, Alabama. With the subsequent arrival of his two brothers, Emmanuel and Mayer, the store became known as Lehman Bros. During the U.S. Civil War, cotton became an increasingly important domestic commodity. The Lehman brothers decided to capitalize on this by provisioning raw cotton at the dry goods store and then engaging in cotton trading in New York. The firm eventually abandoned the South entirely, relocating its headquarters to New York, where it focused almost entirely on commodities trading and brokerage. In the following decades, the operations expanded into a full-service financial firm.

> **Article Sources**
>
> 1.  Yale School of Management. "[The Lehman Brothers Bankruptcy A: Overview](https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises)," Pages 39 and 43-48.
>     
> 2.  Federal Reserve History. "[Subprime Mortgage Crisis](https://www.federalreservehistory.org/essays/subprime-mortgage-crisis)."
>     
> 3.  Yale School of Management. "[The Lehman Brothers Bankruptcy A: Overview](https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises)," Page 45.
>     
> 4.  Yale School of Management. "[The Lehman Brothers Bankruptcy A: Overview](https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises)," Page 40-45.
>     
> 5.  Yale School of Management. "[The Lehman Brothers Bankruptcy A: Overview](https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises)," Page 45-48.
>     
> 6.  EveryCRSReports. "[Bear Stearns: Crisis and “Rescue” for a Major](https://www.everycrsreport.com/files/20080319_RL34420_b352e25f14638f24df1d7d92bccab47075fd4250.pdf)
>     
>     [Provider of Mortgage-Related Products](https://www.everycrsreport.com/files/20080319_RL34420_b352e25f14638f24df1d7d92bccab47075fd4250.pdf)," Page 4.
>     
> 7.  Federal Reserve Bank of New York. "[The Failure Resolution of Lehman Brothers](https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412flem.pdf)."
>     
> 8.  Yale School of Management. "[The Lehman Brothers Bankruptcy A: Overview](https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1000&context=journal-of-financial-crises)," Page 41.
>     
> 9.  Wharton Business School. "[Not Too Big To Fail: Why Lehman Had to Go Bankrupt](https://knowledge.wharton.upenn.edu/article/the-good-reasons-why-lehman-failed/)."
>     
> 10.  Nomura Holdings. "[Nomura to Acquire Lehman Brothers' Asia Pacific Franchise](https://www.nomuraholdings.com/news/nr/holdings/20080922/20080922.html)."
>      
> 11.  Federal Reserve Bank of New York. "[The Failure Resolution of Lehman Brothers](https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412flem.pdf)," Pages 178-180.
>      
> 12.  Erin Callan Montella. "Full Circle: A Memoir of Leaning in Too Far and the Journey Back." Triple M Press, 2016.
>      
> 13.  Brookings Institute. "[History Credits Lehman Brothers' Collapse](https://www.brookings.edu/research/history-credits-lehman-brothers-collapse-for-the-2008-financial-crisis-heres-why-that-narrative-is-wrong/)."