Lehman Brothers
The Bankruptcy That Broke the World Economy
Lehman Brothers' September 2008 collapse — the largest bankruptcy filing in U.S. history at $691 billion in assets — triggered the global financial crisis. The 158-year-old investment bank had loaded up on subprime mortgage-backed securities, using repo transactions to temporarily hide leverage before quarterly reporting dates.
Key Figures
Timeline
Lehman Brothers founded as a dry goods store in Montgomery, Alabama.
Aggressively acquires subprime mortgage lenders and builds massive mortgage-backed securities portfolio.
Bear Stearns collapses. Lehman stock drops 48% in one week — but stabilizes after Fed intervention.
Lehman reports $2.8 billion Q2 loss, its first since going public in 1994.
Lehman reports $3.9 billion Q3 loss. Stock drops below $4. Korea Development Bank pulls out of acquisition talks.
Emergency meeting at NY Fed. Timothy Geithner tells banks to find a private solution — no government bailout.
Barclays and Bank of America both walk away. Bankruptcy preparations begin.
Lehman files Chapter 11 at 1:45 AM. Dow drops 504 points — largest single-day point drop at the time.
What Caused It
- 1Extreme leverage (30.7:1) with short-term funding on illiquid mortgage assets
- 2Repo 105 accounting trick: temporarily moved $50B in liabilities off the balance sheet before quarter-end
- 3Concentrated bet on subprime mortgages that management refused to hedge
- 4Regulatory failure: SEC and Fed knew Lehman's position but allowed it to continue
- 5Bankruptcy's cross-defaults froze the global commercial paper market overnight
Lessons Learned
- 💡Leverage kills — 30x on illiquid assets means a 3% drop wipes out equity
- 💡When a bank says 'this time is different,' run
- 💡Repo 105: if an accounting treatment has a number in its name, it's probably hiding something
- 💡Systemic risk isn't theoretical — one firm's failure can freeze global credit