From humble beginnings in 1844 as H. Lehman, a dry-goods store in Montgomery, it evolved into one of the nation’s largest investment banking firms. And its demise on September 15, 2008, triggered the near destruction of the financial system and the worst recession since the Great Depression.
During the 1850s, as the firm changed its name to Lehman Brothers, cotton became one of the most important crops grown in the country. Lehman began to accept cotton from customers as payment for merchandise. The business eventually migrated to cotton trading. When the cotton business shifted to New York City, Lehman opened its first branch office there in 1858.
Shortly after the turn of the 20th century, the firm changed its focus to investment banking. It began underwriting the issuance of various securities. And that is what it remained until it collapsed.
In the years preceding its demise, Lehman borrowed large amounts, primarily to invest in housing-related assets. This made it vulnerable to the downturn in the housing market. ‘
The final nail in Lehman’s coffin was the subprime mortgage crisis. Prodded by Congress, financial institutions embraced subprime lending. This type of lending consisted of loans to those who would not normally qualify because of poor credit or lack of financial resources.
Subprime loans were characterized by high interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. Many subprime loans were packaged into mortgage-backed securities that ultimately defaulted.
Unfortunately, Lehman retained large positions in the subprime industry. Throughout the first two quarters of 2008, unprecedented losses occurred in these securities. Finally, unable to find a buyer or obtain a bailout from the federal government, the company filed for bankruptcy on September 15.
On the day of the bankruptcy filing, the Dow Jones Industrial Average fell over 500 points, the largest single-day decline since September 11, 2001. This marked the beginning of a three-day financial panic tied to Lehman’s collapse, the darkest moments of the ensuing financial crisis.
The subsequent fallout was devastating. During 2008 and 2009, 190 banks failed, and millions of investors lost all or substantial portions of their savings.
And it began with the failure of the firm with roots in Montgomery.
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Wayne Curtis, Ph.D., a former superintendent of Alabama banks and Troy University business school dean, is retired from the board of directors of First United Security Bank. He may be contacted at wccurtis39@gmail.com.
