LEHMAN BROTHERSLEHMAN BROTHERSThe Rise and Fall ofThe Rise and Fall of

1844-1850

1844 - 23-year-old Henry Lehman comes from Bavaria to Birmingham, Alabama. He opened a dry goods store, “H. Lehman”

1847 – Emanuel Lehman arrives and the company is renamed to “H. Lehman and Bro”

1850 – Mayer Lehman arrives. The company is renamed once more, to the “Lehman Brothers”

1850’s• Lehman Brothers began accepting cotton as payment and reselling. This became the most important part of their business.

• 1855 – Henry Lehman dies of the yellow fever. The other brothers continue with the business.

• 1858 – The Lehman Brothers create a branch at 119 Liberty Street in Manhattan in order to represent their business in the most central economic place in the country.

1960’s and the Civil War

• Due to stress on the company from the Civil War, the Lehman Brothers teamed up with John Durr, a cotton merchant. They formed Lehman, Durr & Co.

• The company helped in the Reconstruction of Alabama after the Civil war, giving financial aid.

1870’s• In 1870, the Lehman Brothers company played a major role in the creation of the New York Cotton Exchange, as well as the Coffee and Petroleum Exchanges.

• The company was also appointed as Alabama’s financier. The company took care of bonds, debts, and interest payments. This marked their entry into the railroad bond and finacial advisory businesses.

Railroad Bonds• As railroads became increasingly popular, bonds of the railroad companies became available for the individual.

• The Lehman Brothers began to trade bonds the same way they had begun to do with cotton in the 1850’s.

• The trading of these bonds and securities led the Lehman Brothers to join the New York Stock Exchange and give up commodities trading for the sake of merchant-banking and financial advisory.

Early 1900’s• Starting in 1906, the Lehman Brothers, now under Emanuel’s son Philip, began to partner with Goldman, Sachs & Co. in order to boost the economy and help new or faulty businesses.

• Philip Lehman retired and his son Robert took over in 1925.

The Great Depression• The Lehman Brothers company was able to survive the Great Depression by moving to venture capital. VC is the investment by non-government 3rd party in a risky enterprise that cannot get bank loans.

• In 1924, the family chain was broken and John M. Hancock joined the firm.

• By the end of the Depression, the Lehman Brothers had relocated to 1 William Street

1930’s-1970’s• The Lehman Brothers, over the years, began to help finance things such as television and oil, as well as many new technologies, even early computers.

• Robert Lehman died in 1969, and the company has been led by non-Lehman’s ever since.

• The company began to fail, and Bell and Howell CEO Pete Peterson was appointed to help save the company.

Power struggle/American

Express• Pete Peterson, in an effort to alleviate internal hostilites, promoted Lewis Glucksman to be his co-CEO. He was pressured out and Glucksman was left in charge.

• With this poor management in place, the firm was forced to merge with American Express and Shearson, one of its subsidiaries.

Divestment• American Express, in 1993, wished to divest and Lehman Brothers became its own company again.

• New CEO Richard Fuld went against all expectations and the company excelled for the coming years.

9-11• When the World Trade Centers collapsed, their one-floor office there was destroyed and debris rendered the Lehman Brothers main office unusable. They relocated to New Jersey temporarily, and ended up keeping that office as well as many more in Manhattan and the rest of New York.

Date Open High Low Close Avg Vol Adj Close*15-Sep-08 0.42 0.55 0.04 0.12 22,075,300 0.12

8-Sep-08 12.00 12.87 2.46 2.64 2,621,800 2.641-Sep-08 10.60 12.00 10.15 11.12 27,400 11.12

25-Aug-08 9.90 11.01 8.95 11.01 21,000 11.0118-Aug-08 10.88 11.20 8.40 10.08 28,100 10.0811-Aug-08 12.55 13.19 10.33 11.60 7,900 11.60

4-Aug-08 11.75 13.37 11.50 12.13 4,600 12.1328-Jul-08 10.93 11.60 9.50 10.80 6,900 10.8021-Jul-08 12.35 13.91 10.90 11.12 13,300 11.1214-Jul-08 9.40 12.63 7.40 12.50 56,200 12.50

7-Jul-08 14.51 15.00 8.50 8.74 13,600 8.7430-Jun-08 14.00 15.28 12.49 14.48 3,000 14.4823-Jun-08 15.50 16.40 14.12 14.30 2,900 14.3016-Jun-08 16.95 18.21 14.95 15.30 10,000 15.3010-Jun-08 19.00 19.00 14.25 16.34 9,200 16.34

2-Jun-08 23.34 23.71 18.40 21.09 10,400 21.0926-May-08 23.19 24.55 21.90 24.55 4,600 24.5519-May-08 27.67 28.80 23.33 23.33 1,100 23.3312-May-08 28.02 28.55 27.05 28.54 100 28.54

5-May-08 30.40 30.40 27.60 28.30 0 28.3028-Apr-08 29.81 31.26 29.63 31.26 100 31.2621-Apr-08 28.55 29.95 27.38 29.84 200 29.8414-Apr-08 25.06 30.02 24.72 30.02 700 30.02

7-Apr-08 28.00 29.08 24.85 25.70 1,000 25.7031-Mar-08 23.74 29.15 22.61 27.39 4,500 27.3924-Mar-08 29.55 30.29 24.66 24.99 1,400 24.9917-Mar-08 22.10 29.55 15.52 29.55 7,800 29.5510-Mar-08 29.78 30.83 26.50 26.72 300 26.72

3-Mar-08 34.40 34.40 29.52 31.41 1,100 31.4125-Feb-08 36.13 38.30 35.00 35.00 0 35.0018-Feb-08 36.86 37.87 35.97 36.50 0 36.5011-Feb-08 41.00 41.00 36.45 36.45 0 36.45

4-Feb-08 43.98 45.07 39.32 41.23 100 41.2328-Jan-08 38.94 43.60 38.94 43.22 100 43.2221-Jan-08 36.00 40.88 33.00 40.88 200 40.8814-Jan-08 38.65 39.99 36.80 37.20 300 37.20

7-Jan-08 39.25 40.20 36.51 40.20 100 40.2031-Dec-07 44.18 44.18 40.50 40.50 0 40.5024-Dec-07 42.74 44.44 42.74 44.18 0 44.1817-Dec-07 42.72 43.59 41.72 42.74 100 42.7410-Dec-07 42.81 44.35 41.00 42.25 100 42.25

3-Dec-07 42.16 42.69 40.05 42.69 100 42.6926-Nov-07 41.49 44.00 38.20 44.00 300 44.0019-Nov-07 42.11 42.11 38.02 39.47 200 39.4712-Nov-07 39.21 45.15 39.21 41.64 100 41.64

5-Nov-07 40.99 41.10 37.70 37.75 400 37.7529-Oct-07 41.52 43.85 41.10 41.10 100 41.1022-Oct-07 39.61 41.23 37.81 41.10 1,100 41.1015-Oct-07 45.75 45.88 41.23 41.60 300 41.60

8-Oct-07 44.86 45.80 44.38 45.62 200 45.621-Oct-07 43.82 45.86 43.82 45.10 700 45.10

24-Sep-07 45.02 45.30 42.25 44.10 400 44.1017-Sep-07 43.41 48.20 41.80 44.76 1,200 44.76

• Here are the stock prices of Lehman brothers at the start of each week going back to over a year ago.

• Date, Open, High, Low, Close, Avg Vol, Adj Close*• Take note of the incredible change over time of the stock

for this past year.

_Aug. 22, 2007: Announces plans to shutter its subprime mortgage business, eliminating 1,200 jobs._ Sept. 20: Chief Financial Officer Chris O'Meara steps down to head global risk management division. Erin Callan, head of the investment banking practice for hedge funds, succeeds him._ Dec. 13: Reports fiscal fourth-quarter profit of $870 million and full-year earnings of $4.2 billion._ Jan. 17, 2008: Lehman says it will stop originating mortgages through wholesale channels amid continued weakness in the housing and real estate markets._ March 16: The federal government and JPMorgan Chase & Co. bail out Bear Stearns Cos. Analysts question whether other investment banks might also collapse._ March 17: Reports suggest Southeast Asian bank DBS Group Holdings Ltd. instructed its traders to cease working with Lehman, though those instructions were later rescinded._ March 18: Announces it earned $489 million during its fiscal first quarter._ April 1: Raises $4 billion in capital._ April 15: Speaking at the investment bank's annual shareholder meeting, Chairman and Chief Executive Richard Fuld tells investors that the worst of the credit crisis is behind Wall Street, but that the environment "will remain challenging."_ May 16: Announces it is cutting 1,400 jobs, or about 5 percent of its work force._ June 9: Estimates it lost about $3 billion for the second quarter and that it is raising $6 billion in fresh capital._ June 12: Removes Callan as CFO and Joseph Gregory as chief operating officer. Herbert McDade replaces Gregory, while Ian Lowitt replaces Callan._ Aug. 29: The New York Times reports Lehman is preparing to cut 1,500 jobs._ Sept. 2: Reports indicate state-owned Korea Development Bank was considering buying a 25 percent stake in Lehman._ Sept. 8-9: Shares of Lehman plunge 52 percent amid worries the investment bank was struggling to find new investors and raise capital. Reports say the talks with KDB have ended._ Sept. 10: Lehman says it lost $3.9 billion during its fiscal third quarter and plans a number of moves to shore up its balance sheet. The announcement, coming a day after Lehman shares lost 45 percent, is an attempt to assuage market worries. Fuld says the firm will consider all "strategic alternatives."_ Sept. 11: Lehman shares skid another 42 percent as investors reject the plan, forcing Lehman executives to scour Wall Street for a financial lifeline._ Sept. 12: Late Friday night Wall Street executives and top U.S. financial officials convene at the New York Fed to discuss how resolve Lehman's situation before it shakes investor confidence in the U.S. banking system._ Sept. 13: The group reconvenes at the New York Fed as foreign finance ministers urge a solution before Asian markets open.

• The storied firm's decline occurred in slow motion this year. Heavily exposed to troubled real-estate investments, the firm tried to raise fresh capital, only to be thwarted. The most recent disappointment came last Monday when a possible deal with a Korean bank faded, sending Lehman's shares down 45% the next day. They had already fallen 80% since the start of 2008.

• Potential Buyers Bank of America and Barclays wanted government assistance to help with the bailout, so they could then buy Lehman, its stock was continuously believed to be overpriced and not representative of the company’s actual value thus turning away potential buyers.

• On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.

How Did Lehman Collapse?

Bought risky assets in form of warehouse and apartment real estate

Real Estate no longer worth what it was worth

NY Times places blame on President Robert Fuld for not recognizing the loss of value

Real Estate Crunch

Firms began reducing their exposure to Real Estate Mortgages

In the 3rd Quarter, Lehman reduced exposure from $39.8 B to $32.6 B, but was slower to do so than other firms

Richard Fuld

Joined Lehman in 1969

Became CEO in 1993

Chairman of the Board of Directors since 1994

Attachment to the company clouded his judgement

Potential Buyers

Korean Company, Barclay’s, Bank of America

Bank of America opted for Merrill Lynch, which was priced more reasonably

Barclay’s backed out of agreements, but then bought a portion of the portfolio AFTER the Chapter 11.

Why Not Save Lehman?

Saved Bear, but not Lehman

Didn’t save Lehman BECAUSE the gov’t saved Bear

Paulsen wanted to re-establish “Moral Hazard”

Moral Hazard

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk

Essentially, to reinstitute Moral Hazard, the government has to let companies reap the consequences of their actions, for the purpose of not making the same mistakes twice

Stocks• Lead to market prices slipping.

• Banking and investments stock prices plummet

• Followed by the Dow, NASDAQ, and S&P 500 having steep losses.

Effects on Short Selling

• Fed. put a freeze on selling stocks short

• Great Briton banned shot selling stocks

Further Connections

• AIG collapse

• Government bail out