How Lehman Went Bust
150 years ago, Henry Lehman built his reputation selling reliable goods to farmers. But in our time, his firm became known for its deceptive accounting.
The new book The Last of the Imperious Rich: Lehman Brothers, a href="http://viagragenericedpills.net/" style="text-decoration:none;color:#676c6c">pilule< 1844-2008, by Financial Times journalist Peter Chapman, gives a fairly cursory treatment to the once-great financial institution’s pathetic demise, with CEO Dick Fuld desperately phoning around Wall Street and Washington for a bailout that never came. Lehman Brothers’ bankruptcy — initially touted as free-market tough love — soon raised the prospect of banks collapsing like dominoes and thus ushered in an era of massive bailouts.
Chapman’s book takes a much longer view, tracing the bank’s history from its humble origins (it began as immigrant Henry Lehman’s peddling business in the mid-19th-century South) to soaring heights of wealth and power for much of the 20th century, and subsequently through a decline over several decades that culminated in the 2008 collapse.
Lehman Brothers did much to build the U.S. economy, funding and fostering such companies as Sears, Woolworth’s, Macy’s, RCA, Kerr-McGee, Pan Am and Digital Equipment. For decades, Lehman Bros. had a more prestigious name than, say, Goldman Sachs, a onetime collaborator that had not quite made it to Wall Street’s top tier.
Political connections were part of the Lehman culture. Herbert Lehman, once a partner at the firm, became New York’s New Deal Democratic governor and later a U.S. senator. Robert (Bobbie) Lehman, the bank’s top partner from the 1920s to the 1960s, was on good terms with presidents of both parties. The United Fruit Company, known to history for its embroilment in Central American and Caribbean politics, was a key Lehman client.
Throughout most of its history, Lehman Bros. struck a suitable balance between financial conservatism and financial innovation. The firm was a partnership, with the personal wealth of partners very much at stake. Moreover, Bobbie Lehman and others of his generation had vivid memories of the Great Crash and Depression and knew something about the dangers of borrowing huge amounts of money for speculative purposes.
But Bobbie’s death in 1969 began a period of drift, not made easier by the dismal economy and markets of the next few years. Pete Peterson, the former Commerce secretary, took over and built capital and profits through mergers. But tensions grew between Lehman’s traditional investment bankers, focused on long-term corporate relationships, and its ascendant traders, focused on making rapid gains in the securities and money markets; the latter group increasingly generated the venerable firm’s profits.
Peterson sought to smooth things over by making trading head Lewis Glucksman into his co-CEO, and Glucksman then paid back this gesture by pushing Peterson out of the firm. Under Glucksman in the early 1980s, the firm again was hit by a bad economy but now also had low morale and an exodus of partners weighing on it. In 1984, it was taken over by Shearson/American Express, which later became Shearson Lehman Hutton.
But by the early 1990s, American Express was spinning off its banking and brokerage operations, and Lehman Bros. reemerged from a 1994 public stock offering as an independent firm. The new CEO, Richard Fuld, was from the trading side, though he talked about restoring Lehman’s emphasis on banking relationships. The firm was hindered, though, by having less capital than major competitors such as Merrill Lynch.
Seeking to make its limited dollars go as far as possible, Lehman Bros. undertook an aggressive strategy in what was becoming a phenomenal growth area: subprime mortgages. The firm’s profits soared, along with Fuld’s bonuses. But Lehman thus set itself up to take a hard fall in the event that house prices were to turn downward and many home “owners” were to stop making payments on their underwater mortgages.
A century and a half earlier, immigrant Henry Lehman had built up a solid reputation as a seller of reliable goods to the farmers he served as a traveling peddler in the antebellum South. In our time, the firm that bore the distinguished Lehman name proved willing to sell junk — toxic financial instruments that flew in the face of both propriety and prudence — and to do so knowingly, with deceptive marketing and accounting.
Free-market proponents rightly point out that the government did much to foster the mortgage meltdown, incentivizing irresponsible lending and borrowing through policies such as the Community Reinvestment Act and Fannie and Freddie’s weakening standards. But that’s not the whole story. The private sector contributed greatly as well, selling and repackaging dubious mortgages in a spate of venality and shortsightedness.
Lehman Bros. did plenty to bring about its own demise, and its recklessness and malfeasance, while worse than that of many institutions, were hardly unique in the financial industry. The Last of the Imperious Rich tells a remarkable story of what Lehman once was and a somber story about what it became. Even with the convulsive consequences of Lehman’s failure, it is hard to regret that this firm bit the dust.
You can follow Kenneth Silber on Twitter:@kennethsilber