Lehman Brothers

Definition

Lehman Brothers was a global financial services firm, headquartered in New York and operating worldwide, majorly known for its business in investment banking. It was declared bankrupt in 2008, which was the largest bankruptcy filing in U.S. history and a major event in the global financial crisis. Today, Lehman Brothers is often cited as a symbol of the systemic risk that the banking sector can pose to the wider economy.

Phonetic

The phonetics of the keyword “Lehman Brothers” is: “Lee-muh n Bruh-thurz”

Key Takeaways

1. Lehman Brothers was a global financial services firm, which filed for bankruptcy in 2008. This bankruptcy marked the largest in U.S history and it significantly contributed to the 2008 financial crisis.
2. The company’s downfall was primarily due to its involvement in the subprime mortgage crisis, where they had immense exposure to the mortgage market. They had accumulated large amounts of toxic assets, and when the real estate bubble burst, they were left in a hazardous position.
3. The failure of Lehman Brothers highlighted the systemic risk posed by large financial institutions. In the aftermath of its collapse, regulators worldwide moved to implement stricter banking regulations to reduce the risk of a similar occurrence in the future.

Importance

Lehman Brothers is a significant term in business/finance due to its pivotal role in the 2008 global financial crisis. As a major global financial services institution, Lehman Brothers was the fourth-largest investment bank in the United States before declaring bankruptcy in September 2008. The bankruptcy, the largest in U.S. history, was largely due to Lehman Brother’s heavy involvement in subprime mortgages, risky loans that began to default en masse as the housing market collapsed. This event dramatically intensified the financial crisis, leading to a global economic downturn. The name “Lehman Brothers” has since become synonymous with the reckless risk-taking and lack of oversight that characterized the pre-crisis financial industry, leading to significant regulatory changes worldwide.

Explanation

Lehman Brothers Holdings Inc. was a global financial services firm primarily involved in investment banking, trading and securities issuance, brokerage, asset management as well as various financial and wealth services for private and institutional clients. Established in 1850, its purpose was to facilitate capital market transactions, help raise finance for businesses, distribute risk, provide liquidity, and promote economic growth and efficiency by connecting investors and borrowers across the financial market. Illustrious for their role in financial services, they were considered one of the critical pillars in the global capital market. Their banking and wealth management services helped corporations, governments, and individual entities manage their financial resources better and undertake critical investment decisions strategically. However, the firm’s risky lending practices and significant exposure to subprime mortgages resulted in a devastating financial meltdown — chiefly culminating in its bankruptcy in 2008 — playing a crucial role in triggering the Global Financial Crisis.

Examples

1. Lehman Brothers Bankruptcy in 2008: This is perhaps the most infamous example related to Lehman Brothers. In 2008, the firm filed for bankruptcy due to their heavy investment in subprime mortgages without adequate risk management practices. This was the largest bankruptcy filing in U.S. history and was a major event that precipitated the global financial crisis. 2. Spin-off of Neuberger Berman: Before their collapse, Lehman Brothers had a successful asset management division called Neuberger Berman. In order to raise capital and focus on their core operations, Lehman decided to spin-off Neuberger Berman into a separate company. This allowed Neuberger Berman to separate from the financial woes of Lehman Brothers and continue operating successfully. 3. Barclays’ acquisition of Lehman Brothers’ North American division: After the bankruptcy of Lehman Brothers, parts of the company were sold off to other financial institutions. One notable example was the acquisition of Lehman’s North American division by UK-based Barclays. This allowed Barclays to significantly increase their operations in North America and helped them become a more global banking institution.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Subprime Mortgage Crisis
• Bankruptcy
• Financial Services Industry
• Investment Banking
• Chapter 11 Protection

Sources for More Information

• Investopedia
• Wikipedia
• Capital.com
• Corporate Finance Institute