Lehman Brothers Holdings Inc. Overview

Lehman Brothers Holdings Inc.

An international provider of financial services, Lehman Brothers Holdings Inc. was established in 1847. Lehman had roughly 25,000 workers globally and was the fourth-largest investment bank in the United States (after Goldman Sachs, Morgan Stanley, and Merrill Lynch) before declaring bankruptcy in 2008. Investment banking, stock, fixed-income and derivatives sales and trading (particularly in U.S. Treasury securities), research, investment management, private equity, and private banking were all areas of business that it was active in.

Henry Lehman, a 23-year-old Jewish cattle salesman from Rimpar, Bavaria, immigrated to the United States in 1844. He made his home in Montgomery, Alabama, and started a dry goods company there called “H. Lehman.” His brother Emanuel Lehman joined the company in1847, and the business changed its name to “H. Lehman and Bro.” When Mayer Lehman arrived in1850, the business underwent another name change and was officially established as “Lehman Brothers.”

One of the most significant crops in the United States during the 1850s was cotton, which was also the highest-earning cash crop in Alabama. Slaves made up about 45% of Alabama’s population in1860, and until the American Civil War, slaves produced almost all of the country’s cotton. In the 1860 U.S. Census, Mayer Lehman was listed as the owner of seven slaves, “three males and four females ranging in age from 5 to 50.”

Profiting from the high market value of cotton, the three brothers started frequently accepting raw cotton from slave plantations in exchange for goods, eventually starting a second company that dealt in cotton. Within a few years, this business expanded to take the lead position in their operations. The remaining brothers kept concentrating on their commodities-trading/brokerage businesses when Henry passed away from yellow fever in 1855.

By 1858, New York City, where factors and commission houses were situated, had become the center of cotton trading, leaving the South behind. At 119 Liberty Street, where Lehman established its first outpost, Emanuel, then32, relocated to serve as the office’s manager. As a result of the Civil War’s negative effects, the company partnered with cotton dealer John Durr in 1862 to become Lehman, Durr & Co. The business provided funding for Alabama’s reconstruction after the war. The company subsequently relocated its headquarters to New York City, where it assisted in the establishment of the New York Cotton Exchange in1870, which helped to commodify the crop; Up until1884, Emanuel served on the board of directors. Lehman Brothers Holdings Inc. also entered the expanding railroad bond market and the financial advising industry. Lehman Brothers Holdings Inc. joined the Coffee Exchange in1883, followed by the New York Stock Exchange in 1887. Lehman Brothers Holdings Inc. financed the International Steam Pump Company’s preferred and common stock issue, which was its first public offering, in 1899.

Despite supplying International Steam, the company did not truly transition from a commodities house to a house of issue until 1906. In that year, the company collaborated with Goldman, Sachs & Co. to launch the General Cigar Co.,  which was quickly followed by Sears, Roebuck and Company. F.W. Woolworth company, May Department Stores Company, Gimbel Brothers, Inc., R.H. Macy & Company, The Studebaker Corporation, the B.F. Goodrich Co., and Endicott Johnson Corporation were a few of these.

Robert “Bobbie” Lehman succeeded his father as the company’s CEO after Philip Lehman retired in 1925. During Bobbie’s leadership, the business survived the Great Depression’s financial crisis by concentrating on venture capital until the stock market rebounded.

The first non-family employee to join the company was John M. Hancock in1924, who was seconded by Monroe C. Gutman and Paul Mazur, who joined as partners in1927. By1928, the company had relocated to its One William Street site.

Lehman financed the first television manufacturer DuMont Laboratories’ initial public offering in the 1930s and contributed to the funding of the Radio Corporation of America (RCA). Additionally, it contributed to the financing of the oil sector, which is expanding quickly and includes Halliburton and Kerr-McGee. Lehman sponsored the initial public offering of Digital Equipment Corporation in the 1950s. Later, it orchestrated Compaq’s purchase of Digital.

After 44 years as the company’s CEO, Robert Lehman passed away in1969, leaving the partnership without an active Lehman family member. The early 1970s’ challenging economic climate presented Lehman with significant challenges at the same time. By1972, the company was in financial trouble, and Pete Peterson, chairman and CEO of the Bell & Howell Corporation, was brought in to save it in 1973.

As chairman and CEO, Peterson oversaw the company’s 1975 acquisition of Abraham & Co. and its 1975 merger with Kuhn, Loeb & Co. to become Lehman Brothers, Kuhn, Loeb Inc., the fourth-largest investment bank in the US behind Salomon Brothers, Goldman Sachs, and First Boston. Peterson oversaw the company’s turnaround from large operating losses to five years in a row of record profits with one of the strongest returns on equity in the investment banking sector.

Peterson appointed Lewis Glucksman, the company’s president, COO, and former trader, as his co-CEO in May 1983 as a result of tensions between the firm’s investment bankers and traders at the beginning of the 1980s. A power struggle that led to Peterson’s dismissal and the appointment of Glucksman as the sole CEO followed a number of changes that Glucksman made that had the effect of escalating tensions. These factors included Glucksman’s management style and a decline in the markets.

Bankers that were upset with the corporation left because of the power struggle. In a February 2003 interview with Private Equity International, Stephen A. Schwarzman, the company’s M&A committee chairman, noted that “Lehman Brothers had a tremendously competitive internal climate, which ultimately proved dysfunctional.” As a result of the collapse, the business suffered, and Glucksman was under pressure to sell it.

The company merged with Shearson American Express. Peter A. Cohen served as the CEO and chairman of Shearson Lehman Brothers from 1983 to1990[51], where he oversaw the $1 billion acquisition of E.F. Hutton to create Shearson Lehman Hutton. F. Ross Johnson’s management team attempted to take out RJR Nabisco in 1989 with the support of Shearson, but Kohlberg Kravis Roberts, a private equity firm backed by Drexel Burnham Lambert, ultimately outbid them.

Under the leadership of newly hired CEO Harvey Golub, American Express started to sell up its brokerage and banking businesses in 1993. It transferred Primerica ownership of its retail brokerage and asset management businesses. Additionally, in 1994 it separated off Lehman Brothers Kuhn Loeb as Lehman Brothers Holdings, Inc. through an IPO. Dick Fuld assumed the position of company CEO following the spinoff. Lehman was led by Fuld through the 1997 Asian Financial Crisis[58] and the 1998 bankruptcy of the Long Term Capital Management hedge fund.

The company bought the private-client services, or “PCS,” division of Cowen & Co. in2001. In2003, the company aggressively returned to the asset-management sector, which it had left in 1989. The company bought the Crossroads Group, the fixed-income branch of Lincoln Capital Management and Neuberger Berman, starting with $2 billion in assets under management. The company bought the Crossroads Group, the fixed-income branch of Lincoln Capital Management and Neuberger Berman, starting with $2 billion in assets under management. These firms made up the Investment Management Division, which brought in about $3.1 billion in net revenue, along with the PCS company and Lehman’s private equity division.

The company entered into a settlement with the Securities and Exchange Commission (SEC), the Office of the New York State Attorney General, and various other securities regulators in June 2003 regarding the undue influence that each firm’s investment-banking divisions had over its research analysts. This settlement involved ten different companies. Regulators said that the companies offered favorable, market-moving research coverage in exchange for underwriting chances and illegally linked analyst compensation with the companies’ investment banking earnings. The settlement, referred to as the “global settlement,” included structural reforms such as the complete separation of investment banking departments from research departments, no analyst compensation derived directly or indirectly from investment-banking revenues, and the provision of free, impartial third-party research to the clients of the firms. Financial penalties totaling $1.4 billion, including $80 million against Lehman, were also included in the settlement.

The company shut down BNC Mortgage, a subprime lender, in August2007, losing 1,200 jobs across 23 locations and incurring a $25 million after-tax penalty and a $27 million impairment in goodwill. Poor mortgage market circumstances “required a major reduction in its resources and capacity in the subprime arena,” according to Lehman.

Joe Gregory appointed Erin Callan as CFO in September 2007. On March16,2008, market analysts predicted that Lehman would be the next significant investment bank to fail after rival Bear Stearns was acquired by JP Morgan Chase in a fire sale. Lehman reported a $489 million profit for the first quarter, its 55th consecutive profitable quarter, compared to losses of $5.1 billion for Citigroup and $1.97 billion for Merrill Lynch. Callan hosted the conference call for the company. Following the disclosure, the company’s stock price increased by 46%.

Lehman experienced an extraordinary loss in 2008 as a result of the ongoing subprime mortgage crisis. Lehman experienced an extraordinary loss in 2008 as a result of the ongoing subprime mortgage crisis. In any case, throughout2008, substantial losses accumulated in lower-rated mortgage-backed securities. Lehman reported losses of $2.8 billion and had to liquidate $6 billion in assets during the second quarter of the current fiscal year. Lehman stock lost 73% of its value in the first half of 2008 alone when the credit market tightened.

Lehman Brothers reported its first loss since being separated from American Express on June9,2008, for the second quarter of2008, when market volatility rendered several of its hedges ineffective. Lehman Brothers reported its first loss since being separated from American Express on June9,2008, for the second quarter of2008, when market volatility rendered several of its hedges ineffective. Hugh “Skip” McGee III, head of investment banking, convened a meeting with top executives as a result, and stripped CEO Richard Fuld and his lieutenants of their authority. As a result, Joe Gregory decided to step down as president and COO, and Erin Callan was then informed that she had to step down as CFO.

Lehman revealed in August 2008 that it planned to lay off 1,500 employees, or 6% of its workforce, shortly before the September reporting deadline for the third quarter. On August22,2008, Lehman’s stock rose 16% for the week and 5% for the day when news broke that the government-owned Korea Development Bank was considering purchasing the institution. As soon as word spread that Korea Development Bank was having trouble appeasing authorities and luring partners for the deal, the majority of those gains were rapidly erased.

Lehman’s shares dropped by 45% to $7.79 on September 9 following news that the state-run South Korean company had halted negotiations. On September9, the S&P 500 fell 3.4% as Lehman’s stock lost approximately half of its value, further eroding investor confidence. Due to investors’ worries about the bank’s security, the Dow Jones dropped 300 points that day. No plans were made public by the U.S. government to help with any potential financial catastrophe that resulted from Lehman’s failure.

Following the departure of the majority of its clients, sharp declines in its stock, and devaluation of assets by credit rating agencies, which were largely brought on by a loss of confidence, Lehman’s involvement in the subprime mortgage crisis, and its exposure to less liquid assets, the firm filed for Chapter 11 bankruptcy protection on September15, 2008. The financial crisis of 2007–2008 is regarded to have started when Lehman filed for bankruptcy, which was the biggest in US history. The “Too Big to Fail” notion was further strengthened by the market collapse.

The moment Lehman Brothers declared bankruptcy, the world’s markets collapsed. The following day, a significant and controlling interest in Lehman’s North American investment-banking and trading operations as well as its New York headquarters building will be purchased by prominent British bank Barclays, subject to regulatory approval. A revised version of that agreement was accepted by Judge James M. Peck of the U.S. Bankruptcy Court on September20, 2008. The following week, Nomura Holdings announced that it would purchase Lehman Brothers’ franchise in Europe and the Middle East as well as its investment banking and stocks businesses in the Asia-Pacific region, which includes Australia, Hong Kong, and Japan. The agreement went into force on October13, 2008.

According to a court-appointed examiner’s report from March2010, Lehman officials frequently utilized cosmetic accounting tricks at the end of each quarter to make the company’s finances seem less precarious than they actually were. This procedure amounted to a special kind of repurchase agreement that temporarily removed securities from the balance sheet of the business. Lehman, however, characterized these transactions as the outright sale of securities as opposed to standard buyback agreements, saying that they “materially misrepresented the firm’s financial status in late 2007 and early 2008.”