bankruptcy of Lehman Brothers

bankruptcy of Lehman Brothers, collapse of the investment bank Lehman Brothers that occurred on September 15, 2008. It was the largest bankruptcy in U.S. history at that time, and it was among the most significant events of the financial crisis of 2007–08.

Lehman Brothers was founded in 1850 by three brothers who emigrated to the United States from Germany, initially running a store in the South. But they soon turned to cotton trading and shifted operations to New York. Lehman remained a commodities house until the early 20th century, when its focus switched to public offerings, laying the foundations for a financial-services institution that would become one of the world’s most significant investment banks.

By 2008, after a short-lived merger with American Express, Lehman had reinvented itself as an independent asset-management company, with over 28,000 employees and more than $600 billion in assets. But there had been difficulties along the way: its World Trade Centre offices were destroyed in the September 11 attacks, and it had paid significant penalties to regulators over the way the bank’s investment division influenced the findings of its research analysts.

These episodes paled into insignificance during 2008. Lehman was heavily involved in the subprime lending business, an activity that was driving unsustainable economic growth. But these were by definition the riskiest of loans, to consumers with low income and poor credit histories. Despite suffering a $50 million loss by closing its own subprime mortgage lender in 2007, Lehman was still exposed. When securitizing vast mortgage packages for onward sale, the company sold the best mortgages and kept the worst, a decision that proved catastrophic.

Huge losses were reported, and Lehman Brothers stock lost three-quarters of its value—and then plunged again when rumours of a takeover came to nothing. A mass exodus of clients took place, the firm’s assets were drastically downgraded by credit agencies, and the U.S. federal government refused to take action to help prevent the firm’s collapse. Lehman Brothers was forced to file for bankruptcy in September 2008. Its failure had lasting negative effects on global markets and became a symbol of the chaos of the financial crisis of 2007–08.