The Collapse of Lehman Brothers

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Case Details:

Case Code : FINC051
Case Length : 17 Pages
Period : 2006-2008
Pub. Date : 2009
Teaching Note : Available
Organization : Lehman Brothers
Industry : Banking & Financial Services
Countries : US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The collapse of Lehman Brothers has sent a major jolt through global financial markets as it is by far the biggest victim of the credit crisis that started in August 2007 and had been considered too big to fail." ¹

- Howard Archer, Economist, Global Insight, in 2008.

"Lehman announced bad earnings around the middle of June, and we told Fuld that if he didn't have a solution by the time he announced his third-quarter earnings, there would be a serious problem. We pressed him to get a buyer." ²

- Henry M. Paulson Jr., United States Treasury Secretary, in September 2008.

Introduction

On September 15, 2008, US-based Lehman Brothers (Lehman), one of the top five investment banks in the US, filed for Chapter 11 bankruptcy³ sending shock waves through the financial sector the world over. As per the details filed by Lehman in its bankruptcy filings, it held assets worth US$ 639 billion⁴ whereas its total liabilities stood at US$ 613 billion. With this, Lehman earned the dubious distinction of having filed the biggest bankruptcy ever in the world.

The bank reported a loss of US$ 2.8 billion in the second quarter of 2008 ending May 2008, its first loss since it went public in the year 1994.

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However, on September 10, 2008, Lehman again reported a net loss of US$ 3.9 billion (after provisioning for US$ 5.6 billion in write-downs) for the third quarter ending August 2008 (Refer to Exhibit I for the financial highlights of Lehman Brothers between 2003 and 2007). To turn around its operations, the bank announced a restructuring plan that intended to sell a majority stake in its investment management business (Refer to Exhibit II for the business segments of Lehman Brothers). The plan also included spinning off a majority of its remaining commercial real estate holdings that had gone bad, into a new public limited company.

The Collapse of Lehman Brothers - Next Page>>

1] "Lehman Brothers Collapse Causes Stock Markets to Plunge," www.news.com.au, September 16, 2008.

2] Joe Nocera, Edmund L. Andrews, "Struggling to Keep Up as the Crisis Raced On," www.nytimes.com, October 22, 2008.

3] Chapter 11 bankruptcy is a form of corporate financial reorganization in which a company's assets gets sold off to remunerate past due creditors.

4] A significant portion of these assets were bad assets. Lehman had gross position of US$ 329 billion in mortgage backed securities at the time of its bankruptcy.

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