Lehman Brothers Collapse: A Case Study on the One That Wasn’t Bailed Out

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Lehman Brothers

On September 15, 2008, Lehman Brothers, the 164-year old investment banking firm, filed for the largest bankruptcy in history. 25,000 global employees, $639 billion in assets, and $613 billion in liabilities—such were the astronomic figures behind the collapse of the fourth-largest investment bank in the nation at the time.

The Zero Theft Movement looks back to the failure of Lehman Brothers for lessons on how we can prevent future economic crises. You aren’t powerless in preventing these catastrophes, and we’ll show you why after we examine the case of Lehman Brothers. 

Lehman Brothers Overview

Just a year before, in February 2007, Lehman Brothers’ stock reached a record high of $86 a share, boosting the company’s market value, or market capitalization, to nearly $60 billion. Lehman brothers also reported $4,192 million (or $4.192 billion) in net income, another record high for the company

But the high-flying Lehman Brothers soon experienced their Icarian fall the following year, immediately after another investment bank, Bear Stearns nearly failed. Lehman Brothers stock plummeted by almost 50% by June 2008, and the company reported a second-quarter loss of $2.8 billion.

The bankruptcy court’s 2,200 page postmortem revealed that Lehman’s value had plummeted by 93% by the time it declared bankruptcy. The failure of the firm triggered the subprime mortgage crisis, which nearly ruined the global economy for good.

The subprime mortgage crisis that followed the Lehman Brothers collapse reportedly cost $10 trillion in productivity, according to a Government Accountability Office report. Find out what role insurance giant AIG played in the crisis.

Understanding the Lehman Brothers’ Collapse

The Yale School of Management published a case study examining what caused the Lehman Brothers’ collapse. The authors argue that the bankruptcy had four primary causes:

  • Excessive risk-taking
  • Company culture
  • Overconfidence
  • Regulatory Inaction

Excessive Risk-Taking

The high-leverage, high-risk investment was the industry standard. According to the Yale study, “each of the largest investment banks took on more leverage leading up to the crisis. This strategy enabled them to pursue growth and increase profits while maintaining limited capital.” 

leverage ratios for major investment banks

Farcaster at English Wikipedia, CC BY-SA 3.0, via Wikimedia Commons

These high-risk investments (i.e.mortgage-backed securities) had generated the huge growth in revenue the Lehman Brothers experienced from 2000-2006. That’s why the U.S. experienced a housing bubble

But when the housing market burst and credit markets collapsed, the failing Lehman Brothers tried to create the illusion of invincibility. The University of Pennsylvania’s Wharton School of Business published an article, claiming: “A key step was to move $50 billion of assets off its books to conceal its heavy borrowing or leverage. The Repo 105 maneuver used to accomplish that was a twist on a standard financing method known as a repurchase agreement. Lehman first used Repo 105 in 2001 and became dependent on it in the months before the bankruptcy.”

In essence, the repo market typically involves overnight deals, where parties can either get short-term financing or make extra profits by taking on an asset. Lehman Brothers worked with its foreign subsidiary to sell its massive debt, include it as a sale on the books, and buy the leverage back after the quarterly report was due


But it wasn’t as if those running Lehman Brothers had no inkling of the risks they were assuming. The Chief Risk Officer for Lehman Brothers, Madelyn Antoncic, reportedly warned the brass about the dangers of these investments, but they ignored her. Executives did not want the company to fall behind competing investment banks, which, as the bar chart above shows, were all piling on leverage to generate as much profit as possible. 

This dismissal of risk trickled down to the management of the actual investors. They were rewarded for excessive risk-taking but did not get penalized for poor performance. The Harvard Business Review writes, “Another factor that spelled disaster for Lehman Brothers was the bonus system that compensated people for generating stellar returns. In general, the investment banks set up plans that paid a bonus when the firm performs well. But when the firm did poorly, employees weren’t asked to give any money back. The plan rewarded risk-taking for high returns but did not punish for low returns or losses. There was no personal downside to taking the risk.”


For all the company’s success, Lehman Brothers could not let go of their high-risk investments even when they had the option to do so. The housing market was slowing down, but the company could not sell at prices they desired.

The Yale study linked above argues, “In January 2008, Fuld instituted a deleveraging strategy to reduce Lehman’s real estate positions, but Lehman was unsuccessful at selling such assets at acceptable prices, given the slowing of the market. Also, Lehman was reluctant to sell such assets at discounted prices. Not only would it risk taking losses on the sold assets, but to do so would call into question the value of its remaining assets of similar type and compel it to mark them to market value, potentially recognizing losses.”

The concern of ‘recognizing those losses’ and the further damage it could cause to Lehman Brothers reputation and value sparked the reliance on Repo 105. 

Regulatory Failure 

The Securities and Exchange Commission (SEC) and other regulatory agencies failed to intervene before the collapse of Lehman Brothers and the subprime mortgage crisis. The government hearing revealed that the SEC knew, as early as 2007, that Lehman Brothers had been making dangerously high-risk investments. Also the examination exposed that the SEC opted not to publicly disclose to rating agencies that Lehman Brothers had exceeded leverage limits. 

Specifically, in terms of Repo 105, the SEC released its testimony in response to the details revealed in the hearing. The testimony states that “regulators (including Commission staff), rating agencies and the Lehman Board, were unaware of Lehman’s use of Repo 105 transactions…the Commission did not perform an audit of Lehman’s balance sheet. Instead, the Commission depended on the integrity of the balance sheet information provided by Lehman’s management which was audited or, in the case of quarterly reports, reviewed, by Lehman’s auditors.”

The Savings and Loan Crisis in the 70s resulted in the failure of nearly a third of 3,234 S&Ls and reportedly cost taxpayers $132 billion. Was economic foul play involved?

To Bailout, or Not to Bailout, That is the Question

By September 2008, Lehman Brhothers had only $1 billion left in cash. The end was nearing, and many could clearly see it now. Since the company’s failure occurred prior to the passing of the Troubled Asset Relief Program (TARP), the U.S. Treasury did not have the authority to intervene as a lender of last resort.

Furthermore, the fact that Lehman Brothers was an investment bank limited the options even further. The government could not nationalize the company as it could its own Fannie Mae and Freddie Mac. Nor could a federal regulator take over its operations. On a different note but related note, the Lehman Brothers could not secure a loan because it didn’t have enough assets. 

Paulson attempted to find a buyer but could not reach a deal with Bank of America nor Barclays. Without any other apparent answers, Lehman Brothers would have to fail. 

Did Lehman Brothers Executives Get Jail Time? 

No. There weren’t even any criminal prosecutions.

The New York Times investigated why none on the Lehman Brothers board were charged. SEC Chief Mary Schapiro received orders from New York branch chief George Canellos to stand down for the following reasons:

  • Canellos’ team eliminated the option of suing Lehman Brothers because the company was bankrupt, and so instead shifted the focus to investigating individual investors.
  • The team looked into Repo 105, which a bankruptcy court examiner called “materially misleading,” and said Fuld was “at least grossly negligent.”
  • But the FBI decided Repo 105 was technically legal (however unethical it may have been) and ceased its investigations, leaving the SEC to make its own choice.
  • Canellos’ team argued that Repo 105 could not be viewed as “material” information to investors. Therefore, withholding information about use of the technique cannot be treated as a criminal offence. Schapiro and others pushed back against this line of reasoning, but ultimately acquiesced.
  • The SEC’s second-highest-ranking enforcement official advised drafting a document with all potential charges the agency could make against Lehman Brothers. Canellos rejected the idea.
  • Canellos, instead, wrote a report on why the SEC wasn’t filing charges and proposed the agency publish it. Schapiro contended that the report showed too much sympathy for Lehman Brothers.
  • Schapiro surrendered to Canellos’ judgment in part due to other SEC officials claiming that it would be improper for a political appointee like her to override his authority.

But some say, including Antoncic (the CRO of Lehman Brothers), that Lehman Brothers did nothing that demonstrably violated any laws. Rather it was a case of imprudence. She claims the Lehman Brothers board showed “poor judgment; [they were] not very smart…But there’s no law against not being smart.”

Antoncic’s perspective held up in court proceedings, as only one American-based banker served jail time for their role in the subprime mortgage crisis.

Standard Disclaimer

The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.  

The Fallout of the Lehman Brothers Scandal and the Eventual Crisis

The employees of Lehman Brothers filed a $5 million lawsuit in order to recover retirement savings lost due to the company’s collapse. Nevertheless, according to a MarketWatch article, it got dismissed. The article claims, “Hundreds of millions of dollars in retirement savings disappear[ed] when the bank filed for bankruptcy.”

Marketplace reported in 2018 that the expensive bankruptcy proceedings were finally coming to a close. The article states, “Lehman’s failure triggered roughly 80 bankruptcy proceedings involving hundreds of its subsidiaries in 16 different jurisdictions around the world, as well as a feeding frenzy among those subsidiaries as each tried to retain as many assets as it could.”

A Lehman Brothers Post-Mortem

What do you think about the Lehman Brothers collapse? Should the SEC have intervened as early as it could? And what about the Lehman Brothers board? Should they have been prosecuted at least? Do you think the company’s failure involved economic foul play that ultimately caused the public to suffer? 

We at the Zero Theft Movement are working to calculate the best estimate for the monetary costs of corruption in the U.S. Corporate, political, and everything in between. Our community isn’t trying to simplify corruption to a single score, nor are they using the definition of a few experts or business professionals. Each holon, or interpretive group, decides what they consider is ‘theft.’

The Zero Theft Movement provides a safe and independent platform where you and your fellow citizens work together to investigate and debate potentially rigged areas across the economy. Through blockchain voting, the way to make all your work permanent, public, and unchangeable, you decide whether (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically. 

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Beyond Lehman Brothers…

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