What is (or was) Lehman
Brothers?
America's
fourth-largest investment bank Lehman Brothers Holdings Inc has
filed the biggest bankruptcy
petition known to mankind.
The
158-year-old firm was founded by brothers Henry, Emanuel and Mayer
Lehman, Jewish immigrants to
the US from Germany, in 1850. Henry set up a general store in
Alabama in 1844 and was later joined by his brothers.
In 1850 they set up the merchant bank in New York after having made money in railway bonds.
So what went wrong?Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many
an economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse
of Long-Term Capital Management in the 1990s.
Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged
after Lehman filed a Chapter 11petition with US Bankruptcy Court in Manhattan.
The $613
billion (some estimates put the size at $639 billion) bankruptcy
thus throws up the question: why did the Wall Street giant go
bust?
Here's why. . .
The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United
States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices.
The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.
However, the
fall of the 158-year-year institution that started cotton trade in
US before the American Civil War and financed the railroad that
built a nation, got hit by a large dose of bad luck, pride,
arrogance and greed. Primarily, the pride of its chief executive
office Richard Fuld.
Lehman's
collapse was also triggered by the refusal of other banks to do
business with it because of its complex and, at
times, opaque ways of trading. Housing loans made by the bank to
people with little support made these loans very risky, and when
interest rates rose, these borrowers could no more repay Lehman. This led to huge losses, the extent of which is not yet clear.
Thus other banks stopped trading with Lehman. This led to it losing almost all business and triggered its fall.
The final straw for Lehman was the fact that both Barclays Plc of the United Kingdom and Bank of America Corp pulled out of
takeover talks. BofA bought out Merrill Lynch for $50 billion.
However,
Barclays has now said that it is in discussions with Lehman
Brothers about buying certain assets of the stricken US
investment
bank.
"Barclays
confirms that it is discussing with Lehman Brothers the possible
acquisition of certain Lehman Brothers assets on terms that
would
be attractive to Barclay's shareholders, "
Britain's third largest bank said in a statement.
