Born to serve cotton farmers in simpler times, Lehman Brothers grew into a financial high roller that succumbed to the recklessness that has immersed the world's financial markets in a morass of toxic mortgages and crumbling home values.
SAN FRANCISCO — Born to serve cotton farmers in simpler times, Lehman Brothers grew into a financial high roller that succumbed to the recklessness that has immersed the world’s financial markets in a morass of toxic mortgages and crumbling home values.
The company’s demise, sealed Monday with a record-setting Chapter 11 bankruptcy filing, served as another chilling reminder of the severity of a mortgage meltdown that began two years ago.
Founded 158 years ago in Alabama by three brothers, Lehman had survived the Civil War, two world wars, the Depression, a currency crisis and the 2001 attacks that destroyed its former headquarters in New York.
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But Lehman couldn’t overcome the deepening problems that saddled it with about $60 billion in rotten investments tied to the deteriorating real-estate market.
“They did this to themselves with their own greed,” said Anthony Michael Sabino, a St. John’s University business professor who specializes in bankruptcy. “People just got crazy and in their endless obsession to squeeze every penny of profit, they forgot about the perils of taking on too much risk.”
Lehman’s disintegration into the largest bankruptcy in U.S. history marked a stunning collapse for an investment bank that had been hailed as one of Wall Street’s best-managed firms as recently as a year ago.
“If I had my way, I would cry right now,” said Muriel Siebert, who has been working on Wall Street for 50 years and still runs her own brokerage. “Lehman was a firm that always stood for integrity.”
Chairman and Chief Executive Richard Fuld, who joined Lehman as a college student in 1969 and was the longest serving CEO on Wall Street, now has the dubious task of winding down the company’s $639 billion of assets.
Its thousands of employees worldwide will join the swell of unemployed bankers and traders hurt by the credit crisis.
Fuld masterminded Lehman’s transformation from a conservative bond-trading business to a high roller that raked in more than $15 billion in profits from 2003 through 2007.
But things quickly unraveled this year as the mortgage-market meltdown got worse than Fuld fathomed, forcing Lehman to record nearly $7 billion of losses in the past six months and to launch a frantic scramble for a buyer or a government bailout.
Treasury Secretary Henry Paulson adamantly opposed the government coming to Lehman’s rescue — a stance that made it even more difficult for the investment bank to find a buyer willing to roll the dice on a takeover.
One of Lehman’s potential buyers, Bank of America, instead snapped up a rival firm, Merrill Lynch, which had last year brought in a new CEO to purge many of its mortgage problems.
Lehman shares ended Monday at just 21 cents, a devastating descent from $67.73 just 10 months ago. The plunge wiped out more than $35 billion in shareholder wealth.
Shareholders of common stock all but get wiped out when a company files Chapter 11.
The pain is particularly acute for 28,600 employees, who are losing their jobs as well as a substantial chunk of their savings. Fuld had insisted that a significant portion of Lehman’s employee pay packages be tied to the stock.
If any good comes of Lehman’s downfall, it will be as a cautionary tale that discourages big banks from making big bets on shaky investments like the mortgage-backed securities and complex derivatives that sunk Lehman, said Steven Goldman, chief market strategist for Weeden & Co.
“Wall Street will be much different moving forward,” Goldman said. “Hopefully, we will never see banks buying instruments that didn’t exist 20 or 30 years ago. We are going back to basics.”
State Investment Board
to take $130 million hit
The Washington State Investment Board, which manages $78 billion for 38 different public pension funds and trust funds, estimated its loss from Lehman’s bankruptcy filing at $130 million.
In a statement, the board said it held $139 million in Lehman bonds and another $8 million of Lehman stock. The board said it believes the Lehman senior debt it continues to hold is worth more than current market value.
Seattle Times business staff