history of lehman brothers - lehman brothers collection – baker library _ bloomberg center,...

8/12/2019 History of Lehman Brothers - Lehman Brothers Collection Baker Library _ Bloomberg Center, Historical Collections

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3/17/14 History of Lehman Brothers - Lehman Brothers Collection Baker Library | Bloomberg Center, Historical Collections

www.library.hbs.edu/hc/lehman/history.html

Harvard Business School Baker Library Historical Collections

LEHMANBROTHERS COLLECTIONT wentieth-Century Business Archives

HISTORYOFLEHMANBROTHERSWith a special focus on recognizing the potential of promising industries and helping finance theexpansion of these enterprises, Lehman Brothers played an important part in the financial andcommercial history of the United States for more than 150 years. The history of the firm offersan inside look at the emergence and growth of American industry and technology as well as theestablishment of the modern corporation.

LAYINGTHEFOUNDATION

Mayer Lehman,

1867. Courtesyof the Rare Bookand ManuscriptLibrary atColumbiaUniversity.

EmanuelLehman.Courtesy of theRare Book and
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ManuscriptLibrary atColumbiaUniversity.

In 1844, Henry Lehman immigrated from Rimpar, Germany, to Montgomery, Alabama wherehe established a small shop selling groceries, dry goods, and utensils to the local cotton farmers.By 1850, his two brothers, Emanuel and Mayer, had joined him in the business, and they named

it Lehman Brothers. After Henry Lehman's death in 1855 at the age of 33, the two youngerbrothers headed the firm for the next four decades. During their tenure, only family memberssons, brothers, and cousinswere permitted as partners. T his was a policy that continued untilthe 1920s.

Soon after its founding, Lehman Brothers evolved from a general merchandising business to acommodities broker that bought and sold cotton for the planters living in and aroundMontgomery, Alabama. "King Cotton" dominated the economy of the southern United States inthe 1850s. As the business grew, a brief partnership was formed with cotton merchant John

Wesley Durr to build a cotton storage warehouse, enabling Lehman Brothers to engage in largersales and trades. A New York office was opened in 1858, giving the firm a stronger presence in

the commodities trading business as well as a foothold in the financial community.

Offices for Lehman Durr & Company,1874. Courtesy of the Rare Book andManuscript Library at ColumbiaUniversity.

With much of its operations tied to the southern economy, Lehman Brothers did not escape thehardship of the Civil War. The firm was rebuilt after the war, concentrating its operations in the

New York office. In 1870, Lehman Brothers spearheaded the formation of the New York CottonExchange, the first commodities futures trading venture. Mayer Lehman was appointed to itsfirst board of directors. As Lehman Brothers' commodities sales and trading business grew toinclude other goods, the company also helped to establish the Coffee Exchange and thePetroleum Exchange.

Because of its Southern heritage and Northern connections, Lehman Brothers was designated tobe the Alabama government's fiscal agent to help sell the state's bonds in 1867. This was nosimple assignment, given the credit rating of the Southern states at that time. The firm was alsoassigned to service the state's debts, interest payments, and other obligations, beginning a longtradition in municipal finance.
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BUILDINGTHEFINANCIALFIRM

Railroad stock certificate, ca. 1880.

The rapid development of the railroads helped transform the country from an agrarian to anindustrial economy in the years following the Civil War. The boom in railroad constructionresulted in tremendous activity on Wall Street, as companies turned to financial markets to raisefunds for expansion. Kuhn, Loeb & Co., which merged with Lehman Brothers nearly a centurylater, was one of the leading financial advisors and underwriters to the railroad industry. Thefirm was engaged in the financing of the Chicago and North Western Railroad, the PennsylvaniaRailroad, the Baltimore & Ohio, and the Great Northern, along with the reorganization of theUnion Pacific.

Railroad bonds were a milestone in the developing capital markets. To raise the huge amount ofmoney needed to fund the industry's expansion, underwriters began reaching beyond theirtraditional sources of financing. Bonds were structured at affordable prices and sold to individuainvestors, bringing masses of first- time investors into the market. Noting this trend, LehmanBrothers expanded its commodities business to include the sales and trading of securities. In1887 the firm became a member of the New York Stock Exchange, marking the evolution of

Lehman Brothers from a commodities business to a merchant-banking firm. The New Yorkoffice provided the presence to build a securities trading business, and Lehman Brothersaggressively pursued this area. The firm was also becoming more involved in financial advisory,

which provided the foundation for developing the underwriting business in the early 1 900s.

For a 20-year period beginning in 1906, Emanuel's son, Philip Lehman, and Henry Goldman, thedominant partner in the firm of Goldman, Sachs, formed an alliance to fund the emerging retailindustry . The two firms jointly underwrote securities issues for some of the most famous namesin the retailing industry, including Sears, Roebuck & Co.; F.W. Woolworth Co.; May DepartmentStores; Gimbel Brothers, Inc.; and R.H. Macy & Co.


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Robert Lehman.

Robert Lehman, Philip's son, became a partner in the firm during the 1920s and quickly movedinto the leadership role. Robert Lehman led the firm from 1925 until his death in 1969, a periodof significant growth for the firm. His business philosophy centered on his belief thatconsumption, not production, would determine America's future prosperity. To that end, hesteered the firm to back emerging industries geared toward mass consumption. Hiscommitment to identifying growth industries led the firm to become active in the financing of

airlines and motion picture companies as well as continuing Lehman Brothers' substantialsupport of the retailing industry.

SUPPORTINGEMERGINGINDUSTRIES


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Shell Oil Company derrick.

Lehman Brothers was an early backer of the entertainment business, advising on theconsolidation of the Keith-Albee and Orpheum theaters in the 1920s. This merger created thenation's largest vaudeville circuit, with more than 700 theaters and a seating capacity of 1.5million. As the motion picture industry developed in the 1930s, Lehman Brothers helped fundRadio-Keith-Orpheum (RKO), Paramount Pictures, and 20th Century Fox.

The firm was also interested in the growth of the communications industry in the 1930s,underwriting the first public offering of the leading televised company at that time, Allan B.Dumont Laboratories. In addition, the firm helped fund the Radio Corporation of America

(RCA).

The Depression made it difficult even for strong companies to raise capital during the 1930s. Tohelp mediate risk and encourage investment, Lehman Brothers was one of the first firms todevise a new method of financing known as the private placement. These loans between blue-chip borrowers and private lenders included strict safeguards and restrictions for lender safety ,enabling borrowers to raise needed capital and lenders to receive an appropriate return with atolerable level of risk. Innovative at the time, the private placement is a standard financingtechnique today.

The first half of the twentieth century was also an era of immense expansion in the oil industry.Lehman Brothers became involved, financing Murphy Oil and the TransCanada pipeline, as wellas supporting the oil service business of Halliburton and the development of Kerr-McGee's oiland gas exploration and production business.

THEELECTRONICAGE


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Lab at Digital EquipmentCorporation, 1983.

Economic expansion in the 1950s was driven by the arrival of electronic and computertechnology. Lehman Brothers quickly sought investment opportunities in these areas, helping tolaunch Litton Industries as well as underwriting Digital Equipment Corporations first publicoffering.

In the 1960s the firm greatly expanded its capital markets trading capabilities, particularly incommercial paper. This led to the firm's designation as an official dealer for U.S. Treasuries. Inthe 1 960s and 1970s, when many U.S. companies began to expand internationally, LehmanBrothers inrceased its global presence as well, opening offices in Europe and Asia. The firmsinternational stature was further enhanced in 1977 through the merger with the distinguishedinvestment bank, Kuhn, Loeb & Co.

As significant advances in electronic technology and computer science contributed to economicexpansion during the 1970s, Lehman Brothers sought opportunities in applied science andtechnology. Among their new investments were future industry leaders such as QUALCOMM, adeveloper of digital wireless communication systems, and Loral Corporation, a manufacturer of

defense electronics.

In the 1980s, financial advisory centered on mergers and acquisitions as major corporationsmoved to expand both domestically and internationally. Lehman Brothers acted as an advisoron several large U.S. and cross-border transactions, including Bendix/Allied, Chrysler/AmericanMotors, General Foods/Philip Morris, and Genentech/Hoffman-LaRoche.

ESTABLISHINGNEWDIRECTIONS


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The Lehman Brothers trading floor in1985.

The development of personal computers and the elements that made them user-friendly gaverise to a field of related industries in the 1980s, ranging from microprocessors to video games.The fast pace of high-tech research and development enabled tiny start-up ventures withexpertise in design, programming, and engineering to become major international corporationsseemingly overnight. Lehman Brothers bought into these new markets by backing companieslike Intel, the company that introduced the worlds first microprocessor, raising funds to expandits business to meet the demands of the nascent personal computer market.

Advanced research techniques developed during the mid-1980s helped create a new healthcareindustrybiotechnology. Lehman Brothers was very active in assisting many new companies inthis industry , such as Cetus, obtain the capital base necessary to fund research anddevelopment.

In 1984, Lehman Brothers was acquired by American Express and merged with its retailbrokerage Shearson to form Shearson Lehman Brothers. American Express began to divest itsfinancial services by business lines in 1992 and eventually, in 1993, the firm was spun off andonce again became known solely as Lehman Brothers. In 2000, Lehman celebrated its 150thanniversary. The company's World Trade Center offices were destroyed by the 2001 terroristattacks, and eventually it moved into its new global headquarters in midtown Manhattan in2002. Lehman Brothers became entangled in the subprime mortgage lending crisis, which led toits demise in 2008. On September 15, Lehman Brothers Holdings Inc. filed a Chapter 1 1

bankruptcy petition in federal court. The company's assets were subsequently sold to severalother firms, including Barclays Bank, PLC and Nomura Holdings, Inc.

Historical Resources

Consult the Herbert H. Lehman Suite and Papers at Columbia University,http://www.columbia.edu/cu/lweb/indiv/lehsuite/.

Baker Library| Historical CollectionsContact Email: [email protected]

2012 President and Fellows of Harvard College
mailto:[email protected]://www.library.hbs.edu/hc/http://www.library.hbs.edu/http://www.columbia.edu/cu/lweb/indiv/lehsuite/http://www.library.hbs.edu/hc/lehman/pop-ups/pop_9.html

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