Lehman Brothers Case

INTRODUCTION

Goldman Sachs Group, Morgan Stanley, Merrill Lynch (now as Subsidiary of Bank of America), Lehman Brothers and Bear Steams (sold to JPMorgan Chase) were the world top five investment banks in United States. They were the key players in the financial markets and make significant contribution to the economics. But when they failed, the consequences would also be extremely fatal. The 158 years old Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy on Sunday 1:45am, September 15, 2008 ("Wikipedia: Lehman Brothers", July 15, 2013). With a total assets of $639 billion and $619 billion in debts, Lehman Brothers' bankruptcy filing became the largest in history, It's assets far surpassed those of previous bankrupt giants such as WorldCom and Enron ("IInvestopedia: Case Study", April 02, 2009). The collapse of the Lehman Brothers is contagious and even triggered the Global Financial Crisis.

LEHMAN BROTHERS HISTORY

Three brothers - Henry Lehman, Emanuel Lehman and Mayer Lehman in 1850, founded Lehman Brothers. Started as a normal dry-goods store, the brothers grew the business by buying and selling cotton to planters living in and around Montgomery, Alabama ("History of Lehman Brothers", n.d). Eventually the brothers built a cotton storage warehouse together with a cotton merchant John Wesley Durr in a brief partnership form. Thereafter in 1858, an office in New York was opened to fulfill the needs of the growing sales and trades.

After Civic War, Lehman Brothers who already have a strong pressure in the cotton commodities trading moved their headquarters to New York City. They also did a part in financing Alabama's reconstruction. In 1870, Lehman Brothers together with a group of cotton merchants and traders founded the New York Cotton Exchange, which is still in operating today. Lehman brothers also start to deal with emerging market for railroad bonds and the financial advising industry ("Wikipedia: Lehman Brothers", July 15, 2013).

In 1877, Lehman Brothers become a member of the New York Stock Exchange and gradually become a merchant-banking company. From then on, Lehman Brothers focused on securities trading and financial advisory, which provided the foundation for developing the underwriting business in the early 1900s ("History of Lehman Brothers", n.d).

In 1906, Lehman Brothers form an alliance with Goldman Sachs & Co. and introduce the General Cigar Co. to the market. Lehman & Goldman continued to underwrite new securities issues over the next two decades, which included F.W. Woolworth Company, Gimbel Brothers (Gimbels), May Department Stores, Company, R.H. Macy & Company (Macy's) and Sears, Roebuck & Company. Beside the retail industry, Lehman Brothers also underwrote the initial public offering for the communication industry - DuMont Laboratories; and computer technology industry - Digital Equipment Corporation ("History of Lehman Brothers", n.d & "Wikipedia: Lehman Brothers", July 15, 2013).

Lehman Brothers introduced "private placement", a new financing method to aid the capital crisis caused by the Great Depression in the 1930s. Private placement financing has become a standard financing method today ("History of Lehman Brothers", n.d.).

In the 1960s, Lehman Brothers become an official dealer for the U.S. Treasuries. Lehman Brothers further expanded its business internationally with offices in Asia and Europe. Kuhn, Loeb & Co, the country's fourth largest investment bank at that time merged with Lehman Brothers, to create Lehman Brothers, Kuhn, Loeb Inc. in 1977. This further enhanced Lehman Brothers achievement globally. Lehman Brothers financing advisory business became more focused on mergers and acquisitions.

An American Express owned Securities Company, Shearson/American Express acquired Lehman Brothers, Kuhn, Loeb Inc. in 1984 to form Shearson Lehman/Lehman Brothers. In 1988, the firm merged with E.F. Hutton & Co. and was renamed as Shearson Lehman Hutton, Inc. After the many mergers, Lehman Brothers eventually become solely again when American Express began to divest its retail brokerage and investment banking business. In 1993 Shearson was sold to Primerica and in 1993 Lehman Brothers become independent and named as Lehman Brothers Holdings Incorporated ("Wikipedia: Lehman Brothers", July 15, 2013).

Lehman Brothers continued its investment banking and institutional business for almost fifteen years after independence and survive through many downsides including the 1997 Asian Financial Crisis and September 11, 2001 terrorist attacks was finally destroyed by the U.S. Subprime Mortgage Crisis in 2008 ("Wikipedia: Lehman Brothers", July 15, 2013).

RICHARD S. FULD JR.

Richard "Dick" Severin Fuld, Jr. (born April 26, 1946) also known as Dick Fuld or the Gorilla of Wall Street was ranked by TIME magazine as one of the "25 People to Blame for the Finance Crisis", number 9 on CNN "Ten Most Wanted: Culprits of Collapse" and first place on CONDE NAST PORTFOLIO (now known as Upstart Business Journal) "Worst American CEOs of All Time" ("Wikipedia: Richard S. Fuld, Jr.", June 28, 2013).

Dick Fuld joined Lehman Brothers in 1969 as a commercial-paper trader after his pilot career in the U.S. Air Force. He was an ambitions man and studied part-time for his New York University's MBA during his early years in Lehman Brothers. In 1982, Dick Fuld became a supervisor with 22 managers under him in both the fixed-income and the equities divisions. At that time, his division generated two-thirds of Lehman Brothers' profits ("Richard S. Fuld Jr. 1946-- Biography", n.d.).

By 1984, Dick Fuld was promoted to the Vice Chairman and 1990 the President and Co-CEO of Shearson/Lehman Brothers. After spun-off from American Express in 1994, Dick Fuld became the Chairman and Chief Executive Officer of Lehman Brothers Holdings Inc. until the shocking demise in September 2008.

Under his leadership, the company return on equity rose from 3 percent to 14 percent in just two years (1994-1996). Dick Fuld was aggressive, he desired for bigger profits therefore decided to change the firm's strategy. He focused on investment banking (mergers and acquisitions) and equities that generated much higher margin compare to fixed-income. In order to make such changes, Dick Fuld needed to recruit more people of related profession and provided them with the best remuneration package. In 1997, out of the $48 million additional