The story
Founded by Emanuel Lehman, Henry Lehman and Mayer Lehman in 1850, in Montgomery.1
Under the Lehman family (1850–1969)
In 1844, 23-year-old Hayum Lehmann, the son of a Jewish cattle merchant, immigrated to the United States from Rimpar, Bavaria. He changed his name to "Henry Lehman" and settled in Montgomery, Alabama, where he opened a dry-goods store, "H. Lehman". In 1847, following the arrival of his brother Emanuel Lehman, the firm became "H. Lehman and Bro." With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded.
Cotton was one of the most important crops in the United States in the mid-19th century, and it was Alabama's highest-grossing cash crop. Before the American Civil War, nearly all U.S. cotton was produced by forced slave labor. In the 1860 U.S. census, slaves made up nearly 45 percent of Alabama's population. The 1860 census listed Mayer Lehman as the owner of seven enslaved people ("three males and four females ranging in age from 5 to 50").
Capitalizing on cotton's high market value, the three Lehman brothers began to accept raw cotton from forced labor plantations as payment for merchandise. They eventually began a second business trading in cotton. Within a few years, it grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855, the remaining brothers continued to focus on their commodities-trading/brokerage operations.
By 1858, the center of cotton trading had shifted from the South to New York City, where cotton factors and commission houses were based. Lehman opened its first branch office at 119 Liberty Street, and 32-year-old Emanuel relocated there to run the office. In 1862, facing difficulties as a result of the Civil War, the firm teamed up with a cotton merchant named John Durr to form Lehman, Durr & Co. Following the war the company helped finance Alabama's reconstruction. The firm's headquarters was eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870, commodifying the crop; Emanuel sat on the board of governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business.
Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887. In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company.
Despite the offering of International Steam, the firm's real shift from being a commodities house to a house of issue did not begin until 1906. In that year, under Emanuel's son Philip Lehman, the firm partnered with Goldman, Sachs & Co., to bring the General Cigar Co. to market, followed closely by Sears, Roebuck and Company. Among these were F.W. Woolworth Company, May Department Stores Company, Gimbel Brothers, Inc., R.H. Macy & Company, The Studebaker Corporation, the B.F. Goodrich Co., and Endicott Johnson Corporation.
Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. During Bobbie's tenure, the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered.
In 1924, John M. Hancock became the first non-family member to join the firm, followed by Monroe C. Gutman and Paul Mazur, who became partners in 1927. By 1928, the firm had moved to its One William Street location.
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In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont Laboratories, and helped fund the Radio Corporation of America (RCA). It also helped finance the rapidly growing oil industry, including the companies Halliburton and Kerr-McGee. In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation. Later, it arranged the acquisition of Digital by Compaq.
An evolving partnership (1969–1984)
Robert Lehman died in 1969 after 44 years in a leadership position for the firm, leaving no member of the Lehman family actively involved with the partnership. At the same time, Lehman was facing strong headwinds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973, Pete Peterson, chairman and chief executive officer of the Bell & Howell Corporation, was brought in to save the firm.
Under Peterson's leadership as chairman and CEO, the firm acquired Abraham & Co. in 1975, and two years later merged with Kuhn, Loeb & Co., to form Lehman Brothers, Kuhn, Loeb Inc., the country's fourth-largest investment bank, behind Salomon Brothers, Goldman Sachs and First Boston. Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment-banking industry.
By the early 1980s, hostilities between the firm's investment bankers and traders prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman's management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.
Upset bankers, who had soured over the power struggle, left the company. Stephen A. Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm.
Merger with American Express (1984–1994)
Shearson/American Express, an American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express.
From 1983 to 1990, Peter A. Cohen was CEO and chairman of Shearson Lehman Brothers, where he led the $1 billion purchase of E.F. Hutton to form Shearson Lehman Hutton. In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco, but were ultimately outbid by private equity firm Kohlberg Kravis Roberts, who was backed by Drexel Burnham Lambert.
Divestment and independence (1994–2008)
In 1993, under newly appointed CEO Harvey Golub, American Express began to divest itself of its banking and brokerage operations. It sold its retail brokerage and asset management operations to Primerica and in 1994 it spun off Lehman Brothers Kuhn Loeb in an initial public offering, as Lehman Brothers Holdings, Inc. After being spun off, Dick Fuld became CEO of the company. He led one of the United States and the world's bulge-bracket investment banks. Fuld steered Lehman through the 1997 Asian financial crisis, and when the Long Term Capital Management hedge fund collapsed in 1998.
In 2001, the firm acquired the private-client services, or "PCS", business of Cowen & Co. and later, in 2003, aggressively re-entered the asset-management business, which it had exited in 1989. Beginning with $2 billion in assets under management, the firm acquired the Crossroads Group, the fixed-income division of Lincoln Capital Management and Neuberger Berman. These businesses, together with the PCS business and Lehman's private-equity business, comprised the Investment Management Division, which generated approximately $3.1 billion in net revenue.
During the subprime mortgage crisis, Fuld kept his job while CEOs of rivals like Bear Stearns, Merrill Lynch, and Citigroup were forced to resign. In addition, Lehman's board of directors, which included retired CEOs like Vodafone's Christopher Gent and IBM's John Akers were reluctant to challenge Fuld as the firm's share price spiraled lower.
In May 2008, prior to going bankrupt, the firm had $639 billion in assets.
Response to September 11, 2001 attacks
On September 11, 2001, Lehman occupied three floors (38–40) of 1 World Trade Center, where one of its employees was killed in the terrorist attacks of that day. Its global headquarters in Three World Financial Center were severely damaged and rendered unusable by falling debris, displacing over 6,500 employees. Trading operations moved to Jersey City, New Jersey. When stock markets reopened on September 17, 2001, Lehman's sales and trading capabilities were restored.
In the ensuing months, the firm spread its operations across New York City in over 40 temporary locations. The investment-banking division converted the first-floor lounges, restaurants, and all 665 guest rooms of the Sheraton Manhattan Hotel into office space.
The bank also experimented with flextime (to share office space) and remote work via virtual private networking after the attacks. In October 2001, Lehman purchased a 32-story, 1,050,000-square-foot (98,000 m2) office building for a reported sum of $700 million. The building, located at 745 Seventh Avenue, had recently been completed, and not yet occupied, by rival Morgan Stanley. Lehman began moving into the new facility in January and finished in March 2002. The firm did not return to Three World Financial Center as its structural integrity had not been given a clean bill of health, and the company could not have waited for repairs to Three World Financial Center to conclude.
After the attacks, Lehman's management placed increased emphasis on business continuity planning. Aside from its headquarters in Three World Financial Center, Lehman maintained operations-and-backoffice facilities in Jersey City, space that the firm considered leaving prior to 9/11. The space was not only retained, but expanded, including the construction of a backup-trading facility.
Rise of mortgage origination (1997–2006)
Lehman was one of the first Wall Street firms to move into the business of mortgage origination. In 1997, Lehman bought Colorado-based lender, Aurora Loan Services (not a bank), an Alt-A lender. In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC. Lehman quickly became a force in the subprime market. By 2003 Lehman made $18.2 billion in loans and ranked third in lending. By 2004, this number topped $40 billion. By 2006, Aurora and BNC were lending almost $50 billion per month. By 2008, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its risky commercial real estate holdings were thirty times greater than capital. In such a highly leveraged structure, a 3 to 5 percent decline in real estate values would wipe out all capital.
From Wikipedia’s article on Lehman Brothers, shared under CC BY-SA 4.0.7