Rise and Fall of Lehman Brothers

Topics: Subprime mortgage crisis, Subprime lending, Mortgage Pages: 30 (11224 words) Published: August 12, 2011
Submitted towards the partial fulfillment of
3rd Semester of MBA- LLM/MBL
Degree course, for
Financial Market and Regulatory Systems

Submitted to:Submitted By:
Mr. P.K. Jain Parinita Jhawar (261)
Mr. Sharad KothariRomi Kansara (267)
Faculty in-chargeSanjana Khanna (268)
M.B.A.-M.B.L. (III Sem)


In an increasingly interdependent financial world the recent Global Economic Crisis has had a cascading effect on the economies across nations. The crisis also impacted the Indian economy, though on the subdued scale and magnitude vis-à-vis the USA and other developed countries. This paper attempts to analyze the various issues and factors that led to the crisis in the US and its varied impacts on the Indian economy. The economy of the world seems to be recovering from the worst-ever crisis since the Great Depression of 1929. The sub-prime mortgage ignited the crisis in the United States in August 2007 and trapped the entire world by September 2008 following the collapse of Lehman Brothers. It is also dubbed as the greatest crisis in the history of financial capitalism because of the way it simultaneously propagated to other countries. The first section of the project will deal with the historical background of Lehman Brothers and the economic climate that prevailed in the years preceding the crisis followed by a detailed description of the genesis and development of the crisis. The next section gives an insight into the causes that led to the collapse of Lehman Brothers. The project will conclude by explaining the magnitude of the crisis and impact the fall of Lehman Brothers had all over the world.

The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers. The firm, thus, was founded in 1850. Cotton was the cash crop of the time, and the Lehmans accepted it from the local farmers as currency to settle accounts. The brothers traded the cotton for cash or merchandise, becoming brokers for buyers and sellers of the crop. In 1858, they opened an office in New York, which was the commodity trading center of the country. The Civil War disrupted the Lehmans' business. When hostilities ended, the brothers moved north and concentrated their operations in New York, where they helped establish the Cotton Exchange. The post-war period witnessed the rapid growth of railroads, sparking the transformation of the nation from an agrarian to an industrial economy. At the time, Lehman Brothers' future merger partner, Kuhn, Loeb, was underwriting much of the financing for railroad construction.Railroad bonds represented a significant advance in the development of capital markets. Their affordable price attracted a great number of individual investors and Lehman Brothers, recognizing a trend, expanded its commodities business to include the sale and trading of securities. The firm also moved into the area of financial advisory, which provided the foundation for underwriting expertise. During the vigorous economic expansion of the second half of the 19th century, Lehman Brothers broadened its expertise beyond commodities brokerage to merchant banking. Building a securities trading business, they became members of the New York Stock Exchange in 1887. Setting the stage for future global growth, Jacob Schiff, a Kuhn, Loeb partner, led the firm to...

Bibliography: * Alan Greenspan, The Age of Turbulence: Adventures in a New World, New York: Penguin, 2007, p. 231
* The Economic Outlook, October 20, 2005Warren Buffet: Chairman’s letter to share-holders of Berkshire Hathaway Inc
* Lehman Brother financial statement (2007) Page 114
* For Lehman, More Cuts and Anxiety http://www.nytimes.com/2008/08/29/business/29wall.html?em
* Financials slip as Korea snags weigh on Lehman and Merrill, MarketWatch (September 14, 2008).
* http://www.marketwatch.com/story/lehman-folds-with-record-613-billion-debt?siteid=rss
* Cochrane, John and Luigi Zingales. 2009. “Lehman and the Financial Crisis”, Wall Street Journal September 15.
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