Lehman Brothers (1850-2008), one of the top banks in New York, went broke on Monday September 15th 2008. It was the biggest bankruptcy in American history. The next day Barclays bought up the banking and trading parts of the company. Lehman almost went under in 1998. It employed 25,000 people.
In 2007 Lehman made $4 billion in profits. But then the following spring it lost $3 billion and then another $4 billion in the summer. It was unable to cover its mounting losses.
This comes on the heels of Merrill Lynch, an even larger New York bank, being sold to Bank of America and six months after the fall of Bear Stearns, a smaller bank.
In different times the government might have saved it. It chose not to. If it saved Lehman the markets would believe that a bank could be “too big to fail”. With the government as a safety net, banks would show even poorer judgement than they have and taxpayers would wind up paying for it all. There would be no road back to health for the banks or the country.
The big banks on Wall Street made this mess, what is known as the subprime mortgage crisis or the credit crunch.
They had done so well over the past ten years that they began to believe they were the gods of the universe, that the rules of banking no longer applied to them.
In this frame of mind they started making what they knew were bad loans: they lent money to people with bad credit histories to buy houses. Because of their credit histories, they knew these people, for whatever reason, were bad at paying back debts. But the banks thought it would not matter if they put the bad loans together with good loans. Instead it had the opposite effect: once these loans went bad, it affected even the good loans. Like bad apples.
In August 2007 it all started to fall apart.
So in March 2008 Bear Stearns went under, and now in September it is Lehman. Merrill Lynch almost went under. The other New York banks that are still standing made the same mistakes as Lehman and are losing billions and billions of dollars. There is no reason to believe that Lehman will be the last to fall.
Lehman Brothers started out in 1850 as a dry goods store in the state of Alabama. It accepted cotton as payment, so it got into trading cotton. In time moved to New York, the place where cotton was bought and sold in large quantities. There it got into trading coffee and dealing in railroad bonds.
In 1887 it joined the New York Stock Exchange and started issuing stocks. It helped to bring Sears Roebuck, RCA and other companies into the stock market. From 1969 to 1994 it was a part of American Express.
Having made it through civil war, the Crash of 1929 and the Great Depression it could not make it through the times we live in now.