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Lehman Brothers: still too big to fail?

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Credit: Steve Crawley
Credit: Steve Crawley

No two words characterise the global financial crisis like 'Lehman Brothers' do. Memories of financiers being told of their redundancy in September 2008 echo through the popular conscious, as recognisable in financial history as images of the worst excesses of the potato famine.

We know why Lehman failed, it rode the tidal wave of the noughties boom like no other company, having such misplaced confidence in the markets that for every $31 Lehman held in loans or other products, it held only $1 in reserve. It had massive exposure to the sub-prime mortgage business, with continuous lending to those who could never hope to pay it back. When these customers inevitably defaulted, Lehman Brothers simply had too little money in reserve to even begin to recapitalise their balance sheet, or account for their overexposure in the lending business.

Lehman collapsed with a record $613bn held in assets, constituting to date the largest bankruptcy in American history. Here we see that, perhaps contrary to public opinion, Lehman Brothers still operates on quite a large scale. Not only was Lehman deemed 'too big to fail', but it is and continues to be too big and complicated to simply cease being a firm. The sheer size of Lehman's portfolio - the firm owned shares in everything from US Treasury securities to housing - combined with the practise of leveraging much of its business against its own assets, has resulted in an extremely complicated bankruptcy case. It has taken this long alone, and a suspected five years more for accountancy firm PwC to unravel the mess, and decide who gets what from the most extensive financial portfolio ever to be declared bankrupt.

Lehman owned and owed huge amounts to an incredible number of vested parties, and it is only this year that PwC have begun reimbursing creditors and private client funds with the money squandered. The administration of large investment banks has always been complicated - the Bank of Credit and Commerce International took 21 years to complete, earning Deloitte roughly £245 million for the trouble - but many industry analysts see Lehman as an extraordinary case. The administration here has given PwC over £100 million for the European arm of the bank alone, with many years of administration ahead for the remnants of the business.

Interestingly, PwC have chosen to maintain some of the senior staff who oversaw the collapse of the firm, with Tom Bolland, ironically previously in charge of Risk, heading Lehman staff employed by administrators. What this tells us is rather shocking: if it takes upwards of ten years to administer the end of Lehman, how could a corporation's board maintain a business of this size successfully, and without being overexposed to any number of markets.

After all, Lehman was only America's fourth investment house, so what do the JP Morgan's have for in store for them in the future? Surely their balance sheets (which are considerably larger than that of Lehman) could cause another crisis? Is the industry safe? Only time will tell if the lessons of Lehman have been comprehensively learnt.

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4 Comment

aa Posted on Wednesday 3 Jun 2020

Long life to LEHMAN, coming back from the ashes.


FFS Posted on Wednesday 3 Jun 2020

"It had massive exposure to the sub-prime mortgage business, with continuous lending to those who could never hope to pay it back." - Lehman brothers was an investment bank, not a retail bank, as a result it didn't offer mortgages. To consumers or to anyone, please get your basic facts right before you try to analyse the banking sectors history. It did indeed invest in debt through the form of mortgages, but your view that it failed due to offering mortgages to those that couldn't pay back is simply not true....this story is a classic example of the banking industry, everyone has an opinion, but most know very little about it


Andrew Brades Posted on Wednesday 3 Jun 2020

I love you


Rheanna Plowman Posted on Wednesday 3 Jun 2020

No one loves you Harry!


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