Lehman Brothers

Subprime Loans and the Collapse of Lehman Brothers

University of Maryland University College

September 15, 2008 marks the day of a significant event in financial history: an event that arguably led to the current financial crisis. With 250,000 employees worldwide, Lehman Brothers was the fourth largest U.S. investment bank and survived over 160 years and significant events in US history, including the 9-11 terrorist attacks on the World Trade Center, yet it was the mortgage lending crisis that ultimately led to their demise.

History of Lehman Brothers

In 1844, Henry Lehman immigrated from Rimpar, Germany to Montgomery, Alabama. Henry established a small shop selling groceries, dry goods, and utensils to local cotton farmers. By 1850, Henry’s two brother’s Emanuel and Mayer had joined him in the business and it was renamed Lehman Brothers. After Henry’s death in 1855, Emanuel and Mayer headed the firm for the next four decades.

In 1858, Lehman Brothers eventually opened an office in New York and later joined the Coffee and New York Stock Exchanges. Lehman Brothers planted their feet in finance by being designated as Alabama government’s fiscal agent and serviced the state’s debts, interest payments, and other obligations.

Lehman Brothers continued their growth as they supported emerging industries, such as railroad, entertainment, and electronics. As the business grew so did brief partnerships with companies such as American Express, which lasted only 9 years.

Subprime Lending

The failure of Lehman Brothers cannot rest solely on one cause. The Financial Crisis Inquiry Report by the Financial Crisis Inquiry Commission concluded “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis” (Edelberg & Cohen). The subprime market was one of the biggest factors influencing this financial devastation.

The real estate boom began with an extended period of low interest rates...